Finance Flashcards
1
Q
Current ratio
A
current assets / current liabilities
2
Q
Gearing ratio
A
(non-current liabilities/ capital employed) x 100
3
Q
gross profit margin
A
(gross profit / total sales revenue) x100
4
Q
receivables
A
(Trade receivables / revenue) x 365
5
Q
payables
A
payables/ cost of sales x365
6
Q
evaluation of receivables
A
7
Q
operating profit margin
A
(operating profit/ revenue ) x 100
8
Q
net profit margin
A
net profit for the year/ sales revenue ) x 100
9
Q
ROCE
A
(operating profit/ capital employed) x 100
10
Q
internal influences on financial objectives
A
- overall business objectives
- business status = new businesses may be more ambitious with objectives as they try to grow quickly. established businesses may be happy with smaller increases in revenue.
- other functions of the business= HR
11
Q
External influences on financial objectives
A
- competitors
- available finance
- the economy = boom ambitious profit targets, recession restrained targets and focus on cost minimisation
- shareholders
- environmental and ethical factors
12
Q
Ways of improving cash flow
A
- overdrafts (Short term) -
- holding less stock = less cash tied up in stock = more working capital
- reduce the time between paying suppliers and getting money = longer credit periods for suppliers, shorter credit period for customers
- credit controllers who keep debtors in control
- debt factoring= selling debts to an external party for cheaper than the actual debt
- sale and leaseback = selling of equipment to raise capital and then lease the equipment back.
13
Q
Reasoning for cash flow forecasts
A
- make sure the business always has enough money
- allows future prediction of when they won’t have enough cash and therefore prepare for this
- can show forecasts to banks to then allow venture capitalists and loans
- check they aren’t holding too much cash
HOWEVER - based on previous experience= no way to tell what the future holds
- need for a lot of experience and data which small businesses cannot provide
- false forecasts can lead to the business running out of cash and becoming insolvent
14
Q
Advantages of setting budgets
A
- helps achieve targets
- helps business keep control of expenditure/income
- helps managers review decisions
- helps focus on priorities
- lets head departments delegate authority to budget holder= motivational
- allow departments to coordinate spending
- helps persuade investors that the business will be successful
15
Q
Disadvantages of setting budgets
A
- Can cause resentment and rivalry amongst departments as they have to compete for money
- can be restrictive = stop firms accurately responding to shifts in the market
- time consuming
- inflation
- start ups may struggle to find information so their budgets may be inaccurate
16
Q
Favourable variances
A
- more profits than budgeted
- lower costs than budgeted
- can lead to the business setting more ambitious targets
- increase productivity= setting higher targets
- may need to increase production to meet demand
17
Q
Adverse variances
A
When budgets were off and this negatively impacts profits
- costs were more expensive than budgets
- profit margins were lower than budgets
18
Q
Impacts/Causes of variances
A
- competitors behaviour
- change in economy
- change in the costs of raw materials
INTERNAL: - improving efficiency = favourable variance
- overestimate of money that it can save through its production process
- underestimate the costs of making changes in organisation
suggest poor communication within the business
19
Q
Contribution per unit calc
A
selling price per unit - variable costs per unit
20
Q
Total contribution calc
A
Total revenue - total variable costs
OR
contribution per unit x number of units sold
21
Q
Break even point calc
A
fixed costs/ contribution per unit
22
Q
margin of safety
A
actual output - break even output
23
Q
advantages of break even analysis
A
- easy to do
- Quick
- allows businesses to forecast how variations in sales will affect costs, revenue, profits
- allow businesses to see how changes in price and costs will impact how much they need to sell
- can be used to persuade bank to give the business a loan
- influences on whether the business introduces a new product= if they would need to sell an unrealistic amount to break even they shouldn’t launch the product
24
Q
Disadvantages of break even analysis
A
- assumes variable costs rise steadily. NOT ALWAYS THE CASE = a business can get discounts from buying bulk
- simple for a single product but gets complicated when it is for a businesses whole product portfolio
- if data is wrong so too will the results
- ## assumes ALL products are sold with no wastage
25
Internal sources of finance
Retained profits = good for short term and long term
- however if the business isn't making enough profit this isn't possible
- shareholders may object due to them loosing out on dividends
Rationalisation=
- where managers reorganise the company to make it more efficient.
- this can be done by selling machinery and leasing it back (sale and leaseback)
- Don't need to pay interest
- however the business would loose out on their assets, also things like vehicles loose their value overtime and therefore won't be worth as much as what they initially paid
26
External sources of finance
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Overdrafts:
- short term
- high interest payments
- easy to arrange and flexible
Debt Factoring:
- instant cash
- however loose a percentage of the money that was owed to the business
Bank loans
```
27
Evaluation of bank loans
adv:
- guaranteed money for the duration of the loan
- only have to pay the loan interest back
- loan interest rates are usually lower than overdraft payments
Disadv:
- can be difficult to arrange
- keeping up with repayments can be difficult if cash issn coming into the business- the business may loose whatever the loan is secured on
- business may have to pay a charge if the decide to pay the loan back in one lump sum
28
Share capital (external source of finance)
- money doesn't need to be repaid
- new shareholders can bring additional knowledge and expertise
- loosing ownership of the business
- pay dividends
- also have a say in the running of the business
