Finance Flashcards
Financial objective
Monetary targets a business wants to achieve within a set period of time
Return on investment (ROI)
A measure of a business’s profitability and performance and how effectively its using the money to generate profit
Return on investment formula
Operating profit/ capital invested x100
What are the two sources of long term funding?
Equity
Debt
Gearing
The proportion of long term funding that is debt
(Highly geared businesses have more risk)
Formula for gearing
Debt / total long term funding x100
Sales revenue formula
Quantity sold x selling price
Gross profit formula
Sales revenue- cost of sales
Operating profit
Gross profit - expenses
Profit for the year
Operating profit - interest and taxation
Budgets
Forecasts or plans for the future finances of a business
Process of setting budgets
- Set clear objectives
- Carry out market research
- Produce a sales forecast
- Set income budget
- Set expenditure budget
- Set profit budget
- Set divisional targets
- Review against objective
Variance
The difference between the predicted outcome and what actually happened
(Can be favourable or adverse)
Break even
Point where a business is not making a loss or a profit
Break even formula
fixed costs/ selling price-variable cost
Contribution
The amount of “profit” made on a product only factoring in fixed costs
(Contributing to paying costs)
Contribution formula
Selling price - variable costs
How do you work out profit margins?
Divide the specific profit by the revenue and multiple by 100
Eg. Gross profit/ revenue x100
Debt factoring
Business sells their debt and the debt factoring company will chase up the debt from the customer
Fixed costs
Costs stays the same in the short term and doesn’t change dependent on output
What are the 3 types of budget?
*income
*expenditure
* profit
