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Business > Finance > Flashcards

Finance Flashcards

1
Q

Definition - financial objective

A

A specific goal or target of relating to the financial performance of a business

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2
Q

Benefits of using financial objectives

A

+ a focus for the entire business
+ a measure of success of failure
+ reduced the risk of failure
+ helps coordinate the business functions
+ context for making investment decisions

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3
Q

Definition - profit

A

The difference between total revenue and total costs

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4
Q

Definition - cash flow

A

Amount of money being transferred into and out of a business

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5
Q

What is the difference between cash flow and profit

A

Cash flow is calculated monthly, yearly etc
Profits are calculated annually

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6
Q

Different measurements of profit

A

Gross profit
Operating profit
Profit for the year

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7
Q

Definition - revenue

A

Capital from sales

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8
Q

Definition - cost of sales

A

Direct costs of making the product or service

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9
Q

Definition - gross profit

A

The profit on selling a product
Selling price - cost of making product

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10
Q

Definition - administration expenses

A

Operating costs in a business that aren’t related to the production of goods and services
E.g. marketing, transport

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11
Q

Definition - operating profit

A

Profit from sales after paying off all operating expenses (rent, equipment, insurance)

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12
Q

Definition - Finance expenses

A

Costs from borrowing from lenders or creditors
E.g. interest on bank loans

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13
Q

Definition - profit for the year

A

Total revenue - total costs

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14
Q

Calculate - net cash flow

A

Cash inflow - cash outflow

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15
Q

Calculate - revenue

A

Selling price x quantity sold

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16
Q

Examples of ‘revenue’ objectives

A
  • Revenue growth
  • sales maximisation
  • market share
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17
Q

Definition - cost minimisation objectives

A

Aim to achieve the most cost effective way of delivering goods and services at the required level of quality

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18
Q

Benefits of cost minimisation

A
  • lower unit costs
  • higher gross profit margin
  • higher operating profits
  • improved cash flow
  • higher return on investment
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19
Q

Examples of ‘profit’ objectives

A
  • a specific level of profit met
  • increase rate of profitability
  • profit maximisation
  • exceed industry or market profit margins
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20
Q

Examples of ‘investment’ objectives

A
  • return on investment
  • level of capital expenditure
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21
Q

Definition - return on investment

A

A measure of the efficiency of an investment, used to compare the financial returns on an investment

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22
Q

Calculate - return on investment

A

Profit / cost of investment x 100
Profit = current value - cost of investment

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23
Q

Examples of internal influences on financial objectives

A
  • high profit levels
  • good recruitment and training policy
  • zero hours contract
  • high profits targets
  • strong brand name
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24
Q

Examples of external influences on business objectives

A
  • local environmental concerns
  • economic growth
  • more people working flexible hours
  • cost of suppliers
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25
Q

Examples of cash inflows

A
  • interest on bank balances
  • loans
    -grants
  • sale of fixed assets
    -receipts from trade debtors
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26
Q

Examples of cash outflows

A
  • tax
  • wages
  • dividends
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27
Q

Why should a business monitor cash flow

A
  • advanced warning of cash shortages
  • make sure the business can afford to pay suppliers and workers
  • spot problems with customer payments
  • reassurance to investors
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28
Q

Calculate - closing balance (cash flow forecast)

A

Net cash flow + opening balance

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29
Q

What makes a good cash flow forecast

A
  • updated regularly
  • makes sensible assumptions
  • allows for unexpected change
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30
Q

What are common problems with cash flow

A
  • sales prove lower than expected
  • customers don’t pay on time
  • costs prove higher than expected
  • imprudent cost assumptions
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31
Q

Main causes of cash flow problems

A
  • poor credit control
  • too much production capacity
  • excess inventories held
  • allowing customers too much credit
  • overtrading
  • seasonal demand
  • inaccurate cash flow forecasting
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32
Q

How to improve cash flow

A
  • improve control of working capital
  • negotiate improved credit terms
  • offer less trade credit
  • debt factoring
  • arrange short term borrowing
  • sale and lease back
33
Q

Definition - debtor

A

Someone that owes money to the business

34
Q

Definition - creditor

A

Someone who has lent funds to a business and is owed money

35
Q

Definition - trade credit

A

An agreement where someone can purchase a product and pay for it at a later date

36
Q

Definition - variance

A

The difference between the actual and budget figures

37
Q

Definition - favourable variance

A

When the actual figure is higher (better) than expected

38
Q

Definition - adverse variance

A

When the actual figure is lower than the budgeted figure

39
Q

Causes of favourable variances

A
  • stronger market demand than expected
  • selling price increases higher than budget
  • cautious sales and cost assumptions
  • competitor weakness leading to higher sales
  • better than expected productivity
40
Q

Causes of adverse variances

A
  • Unexpected events lead to unbudgeted costs - - Over spends by budget holders
  • Sales forecasts prove over-optimistic
  • Market conditions (e.g. competitor actions) mean selling prices are lower than budget
41
Q

What should management do with a variance?

A
  • Act only if the variance is outside an agreed margin – don’t waste time
  • Investigate the cause of a significant variance - Was it avoidable or unavoidable?
  • Act to remedy the problem – if appropriate
42
Q

Definition - break even

A

When revenue equals the total costs

43
Q

Definition - contribution

A

Profit made on individual products

44
Q

Calculation - contribution per unit

A

Selling price - variable cost to make product

45
Q

Calculation - total contribution

A

1) total sales - variable costs
2) contribution per unit x number of units sold

46
Q

What are the 3 ways to calculate break even

A

1) a table
2) a graph
3) the formula

47
Q

Calculation - break even formula

A

Fixed costs / contribution per unit

48
Q

Definition - margin of safety

A

Difference between actual output and the break even output

49
Q

Strengths of break even analysis

A

+ Focuses on what output is required before a business reaches profitability
+ Helps management & finance-providers better understand the viability and risk of a business or business idea
+ Margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are incurred
+ Illustrates the importance of keeping fixed costs down to a minimum
Calculations are quick and easy

50
Q

Limitations of break even analysis

A
  • Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes
  • Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too
  • Variable costs do not always stay the same. For example, as output rises, the business may benefit from being able to buy inputs at lower prices (buying power)
  • Most businesses sell more than one product
  • A planning aid rather than a decision-making tool
51
Q

Definition - overdraft

A

An arrangement with the bank which allows you to spend more money than you have in your account

52
Q

Definition - debt factoring

A

The business sells their outstanding sales invoices to a third party at a discounted price

53
Q

Definition - retained profits

A

Profit that has been made by the company in previous years that is then reinvested back into the company

54
Q

Definition - share capital

A

Funds raised by a company through the shares to shareholders

55
Q

Definition - loans

A

Sum of money from the bank which needs to be repaid

56
Q

Definition - venture capital

A

Funding provided by investors

57
Q

Definition - long term bank loans

A

Paid back within a year

58
Q

Definition - short term bank loan

A

Paid back over an extended period of time (more than a year)

59
Q

Definition - mortgages

A

Loan secured by a property or an estate agent owned by a business

60
Q

Definition - sale of assets

A

Revenue from sales in the business

61
Q

Calculation - gross profit

A

Revenue - cost of sales

62
Q

Calculation - gross profit margin

A

Gross profit / revenue x 100

63
Q

What does gross profit margin allow a business to do

A
  • allows to compare performance yearly
  • compare with competitors
  • compare different sections of the business
64
Q

Calculate - operating profit

A

Revenue - total costs

65
Q

Calculate - operating profit margin

A

Operating profit / revenue x 100

66
Q

Why do businesses care about operating profit margins

A
  • allows a business to think about background costs
  • to see where they can be more efficient
  • to see how effectively a business turns its sales into profit
  • whether a business is able to add value during production process
67
Q

Ways to increase profit

A
  • reduce costs of production
  • increase prices
  • improve business efficiency
  • use full capacity
  • reduce number of sub standard products
  • improve methods of production
  • eliminate unprofitable aspects of production
68
Q

How can you improve cash flow problems

A
  • improve control of working capital
  • negotiate improved credit terms
  • offer less trade credit
  • debt factoring
  • arrange short term borrowing
  • sale and lease back
69
Q

Definition - ratio analysis

A

Analysing the relationships between financial data to assess the performance of a business

70
Q

What is profit in absolute terms

A

A specific number
E.g. 50,000 profit made in a year

71
Q

What is profit in relative terms

A

A percentage

72
Q

Definition : budget

A

A spending plan based on income and expenses

73
Q

What are the uses of a budget

A
  • establish priorities and set targets
  • provide a direction
  • assign responsibilities
  • allocate resources
74
Q

Limitations of a budget

A
  • there are likely to be unexpected costs which it doesn’t account for
  • competitor actions are difficult to predict
  • only as good as the data used to create it
  • takes time to complete
  • can result in other short term decisions to keep to the budget
75
Q

Examples of cash flow objectives

A
  • reduce bank borrowings and overdrafts
  • minimise the time taken by customers who pay on credit
  • extend the period taken to pay suppliers to the maximum (pay them on the final agreed day)
  • minimise the amounts paid out in interest charges
76
Q

Why set cash flow objectives

A
  • helps a business to maintain enough cash for day to day expenses
  • help to make future plans and decisions
  • help to prepare for unforeseen circumstances
  • helps provide funds for growth and expansion
77
Q

Definition : payables

A

Debts owed by a business
E.g. money owed to suppliers

78
Q

Definition : receivables

A

what the business is owed

Business (6 decks)

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