Finance - 117-122 Flashcards
What is the role of the finance department?
-Controlling costs/budgeting
-Cash flow forecasting
-Calculate profits/profit margins/prepare financial document such as income statements
etc
Define direct and indirect costs
*Direct - a cost that is wholly attributable to the production of a specific item
*Indirect costs - not identifiable with a specific product e.g.overheads
Define a budget
A budget is a financial plan of action covering a specific time period, for example, six months or one year
Types of budgets
1)Income budget - shows the agreed, planned income for a business. Can be sales or revenue budget. Acts as a target against which the actual income an be measured
2)Expenditure budget - shows the agreed, planned expenditure. They can be separated into different areas e.g. marketing, production, hr
3)Profit budget - shows the agreed, planned profit for a business
what is included in an expenditure budget?
budget per month - the estimated spending on each item, both a plan and a target. It helps ensure costs don’t get out of control
-the actual expenditure, which can then be used to examine whether the costs were more or less than budget
Variance analysis
-assessing how accurate their budgeting is
*Favourable variance - the difference between the budget and actual will result in higher profits
*Adverse variance - difference between the budget and actual will lead to the firms profits being lower than planned
Evaluate the use of budgets to a business and its stake holders
(+)shareholders - lower costs, maximise profit margins and possibly a higher share price
(-) targets may be too high ->demotivated staff
(+)can be used as a motivation tool and a way of ensuring targets on met
(D)employees and managers attitudes towards the budget
(-)employees and managers may not follow the budget
(D)Prediction of the market
what is cash flow forecasting made up from?
1)revenue/income
2)expenses/outgoings
3)balances
Define a forecast cashflow statement
the expected flows of cash into and out of a business over a trading period in the immediate future e.g.six months. It predicts how much cash is, or will be, available in a business, or how much cash is needed to keep the business running.
debtors
goods sold on credit. The revenue is only entered when the payment will be made. (revenue may be divided into 2 types of income: debtors and cash sales)
formula for net cash flow and closing balance
net cash flow= total revenue - total expenses
closing balance = net cash flow+opening balance (the opening balance will be the closing from the previous month)
Explain the causes of cash flow problems
-sales are not at the expected level e.g. increase/decrease competition or government influences (e.g. increased/decreased taxation)
-costs increase
-internal factors
Explain the benefits and limitations of cash flow forecasts
(+)allows managers to be able to specify times when they may need additional funding
(+)plan ahead
(-)needs to be monitored
(-)inflation can impact it
Formula for gross profit
gross profit = sales - costs of sales
Formula for net profit
Net profit = gross profit - expenses
