Finance Flashcards
The role of the finance department
its role is to have enough cash to keep going and to produce financial statements that will help the business plan and record its financial performance
Benefits
-improves business performance
-prevents bankruptcy and sales
financial management
Importance
financial management determines the success or failure of an organisation.
there has to be
-an amount of funds available to fund projects,and hit objectives
-ensure costs are controlled
-ensure adequate cash flow
tasks done by the financial department
-the maintenance of financial records-keeping annual accounts up to date
-payment of salaries and wages.
-payment of expenses
-reporting to management-use this financial information to make an informed decision
What do financial problems implicate
-court action by those owed money
-attempts to sell organisation as a going concern
-liquidation of the business(everything is sold to see what money can be paid back)
Owners personal finance
Advantages and disadvantages
includes personal savings and money borrowed from, family and friends
A
- owner to keep control of the business
-amount to be borrowed from other sources lower
D
- difficult to withdraw savings once they are invested in the business
- owner could lose their savings if their business fails
Bank loan
Advantages and disadvantages
This is money the bank agrees to lend a business for a specific purpose, for a fixed period of time, regular repayments instalments are put in place
Advantages
The business can budget for the repayments
purchases of essential equipment can be made in advance and paid back over a number of years
Disadvantages
Interest had to be repaid along with loan
small businesses may find it harder to secure a loan,often if they do its with extreme interest rates,hence they pay back more and are at greater risk
Grants
Advantages and disadvantages
money is given to a business from central or local governments,the EU or the princes trust.A grant doesnt need to be paid back
Advantages
These are often offers as an incentive and a way of helping a business get started or expand
The money does not need to be repaid
Disadvantages
They can be complicated to apply for and can require the business to meet certain requirements
Grants are usually one off payments that are not repeated
Bank overdrafts
Advantages and disadvantages
allows a bank to spend more money than in the bank account
Advantages and disadvantages
-This is usually easy for a business to arrange with its bank
-It allows a business to continue to pay business expenses,despite their being no money in the account
-high interest rates are usually applied when borrowing money from the bank this way
-The overdraft can be withdrawn by the bank at any TIME and then has to be repaid
Mortgage
Advantages and disadvantages
Large sum of money borrowed from the bank,to fund a property for a medium to long term basis
Advantages and disadvantages
It can be paid back over time
the interest rate charged is often lower than the bank loan
-Interest is repaid along with the loan amount
-can be repossed
Trade credit
Advantages and disadvantages
Allows a business to buy goods from suppliers,and pay for them at a later date
Advantages and disadvantages
This allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid
It helps a business to keep going when the cash flow is poor
Discount for prompt payment is lost
Suppliers will be reluctant to continue to offer credit if a business foes not pay within the agreed credit period
hire purchase
Advantages and disadvantages
an asset by paying deposit then monthly payments for
A
-expensive equipment can be bought with only an initial deposit
-The asset,is owned by the business at the end of the repayment period
-The business doesnt own the item last repayment is made
-expensive if interest rates are high
Share issue
Advantages and disadvantages
Selling stocks in the business.PLCS sell on the stock market and LTDS sell shares privately
A
- large sums of money can be raised through sale of shares
- money does not need to be repaid
D
-Dividiends paid to shareholders
-expensive to advertise and organise the sale of shares
sale of assets
Advantages and disadvantages
Selling of assets that the business no longer needs
A
money can be raised,boosting cash flow
the money does not need to be repaid
D
if the finance is required urgently,the business may have to sell the asset for less than its market worth
Could get bad prices for second hand goods if the money is needed quick
Sell and lease back
Advantages and disadvantages
selling an asset and leasing(renting) it back
A
asset is retained,could be an essential and leasing back the main shop/factory/office
-responsibility for maintaining and renewing equipment to the leasing company
D
-Leasing long time can be expensive,may pay back more than it received from the sale
-The business doesnt own equipment.Rental charges add up,paying more for lease
Debentures
Advantages and disadvantages
Loans borrowed from individual by PLCS through the stock market
(PLCS ONLY)
A
Control of business is retained
these can be paid back over a long period of time
D
interest must be paid annually,even if a loss is made,unlike with shares where dividends are only paid out if profits are made
The amount borrowed must be paid back
retained profit
Advantages and disadvantages
Profit reinvested into the business rather than being distributed as dividends
A
-Doesnt need to be repaid
D
-For profit to build up,could take long potentially missing business opportunities
debt factoring
Advantages and disadvantages
A business sells its unpaid customers invoices to a factoring company,The factoring company then collects and keeps customers debts
A
-Responsibility for collecting the debt is passed on to the factor,saving the company time and effort
-Cash flow is improved by receiving an advanced payment of the debts from the factor
D
-The business had to sell the customers debt for a reduced amount,recieves less than is actually owed
-Factoring companies are usually only interested in large amounts of debts
venture capitalists
Advantages and disadvantages
Organisations that invest in established businesses in return for equity(owning a percentage of the company)
A
-Large amounts of investment can be gained
-Venture capitalists are willing to take on more risky investments than banks
D
-venture capitalists have an equity stake, which means control and a share of profits are given up
crowd funding
Advantages and disadvantages
Small amounts of money from a large number of people are raised to fund a new business or a project
A
-Fianance can be raised from individuals,banks see business as to risky
- funds are donated,no repayment
D
-Privacy isnt respected,as ideas become public and can therefore be copied
-there is a low success rate.unlikelyto hit target
Cash flow
Cash is generated by a business through the sale of goods
must be able to
-Pay employees
-buy supplies
-cover expenses
Business has to avoid liquidation
Cash flow problems
Low sales
too much money in stocks
customers taking too long to pay their bills
an increase in expenses
Solutions too cash flow problems
-Low sales
-too much money in stocks
-Customers taking too long to pay their bills
-An increase in expenses,low cash flow
Increase expenses
look for ways to reduce expenses
too much money in stocks/inventory
Use JIT inventory system
Customers taking too long to pay their bills
charge higher interest rates
arrange overdraft where cash flow is low, this means an organisation would be covered
Impact of Cash flow problems
-Unable to pay supplier-stock isnt delivered stopping production>-sales lowered
-Costs a lot to borrow money
-sell unused assets,make staff redundant
-have to find lower quality supplier,reducing quality
What is as cash budget
A cash budget is a document produced to help a business manage their cash flow
it shows receipts and any payments leaving the business
Purpose of a cash budget
-shortage of cash,can get cash inject such as bank loan
-it aids decision making - as it provides cash flow information for
decisions to be based on
-shows the business if they will have a surplus of cash,therefore can plan ahead on purchases to help the business
Postives of a cash budget
-business has more cash than expected(surplus) or a decficit in cash>-business plans more effectively
- used to show lenders or investors,secure investments into the business
- set targets or budgets for individual departments,motivate employees as they have goals to achieve
Impact of using a cash budget on an business
-surplus,allows business to plan ahead for future purchases
-defecit means can plan ahead and get cash injection such as bank loan
- comparisons between predicted and actual figures-This will help monitor the performance of the business
it aids decision making,as it provides cash flow information on what decision to take
All cash budget terms
(opening balance,Closing balance,total receipts,cash available and total payments)
Opening Balance
money available at the start of the month,same as the closing balance of the month before
Closing balance
cash left at the end of the month-business receipts
Total receipts
the total cash coming into the business during the month, such as sales or rent received
total payments
This total amount expected to go out of your business each month,rent wages etx
Financial statements
A business keeps various types of financial records to monitor its performance and ensure that taxes are paid
Income statements
An income statement shows that the profit made from buying and selling,known as gross profit
the profit made after expenses are deducted from gross profit known as PROFIT FOR THE YEAR
purpose of an income statement
- business profit/loss made by the company buying and selling of goods
-compare gross profit and profit for the year overt years of trading identify any trends
-comparisons made to competition in the same industry
-compare expenses and sales over the years or between departments to if theyre areas that need to minimised or improved
Terms in an income statement
(Sales revenue,Cost of sales,Gross profit,Expenses,Profit for the year)
Sales revenue
The amount of money from selling goods or servces
Cost of sales
The amount of money spent on selling goods calculated by(Opening inventory+purchases)-closing inventory
Gross profit
Profit made from buying and selling
Sales revenue-Cost of sales
Expenses
costs incurred through the year
Profit for the year
The profit made after expenses are deducted from gross profit
Gross profit-Expenses
Users of financial statements
Owners
To assess profits and to inform decision making
Employees
jobs are secure
HMRC
business paying correct tax
Trade unions
To assess if members are due a pay rise
Statements of financial position
The statements of financial position shows a business their assets and liabilities(items they owe)
Non current assets
(terms in a statement of financial position)
. Non-current assets are usually owned for longer than a year.
Current liabilities
(terms in a statement of financial position)
items owed for a period of less than one year
Working Equity
(terms in a statement of financial position)
the ability to pay short term debts
Current assets-current liabilities
current assets
(terms in a statement of financial position)
items OWNED for a period of less than one year
Net assets employed
(terms in a statement of financial position)
a figure of non-current assets added to the working equity figure
Non current assets+- working equity
Ratio Analysis
obtain a indication of a firms financial performance in several key areas
Profitability,Liquidity,Effciency
Purpose of a Ratio Analysis
-aid decision making
-aid interpretation of financial information
-used by managers who need to monitor performance
-compare current performance to last years performance
limitations of Ratio Analysis
Ratio information is historical,so it is not releveant to the current or future position
- Dont take into account external factors
Dont take into account internal factors such as low staff morale
Dont take into consideration account product developmets
Gross profit Percentage
Ratio
Formula
Gross profit percentage works out the percentage of profit from the buying and selling of goods before all other expenses are deducted
Formula
Gross profit/sales revenue x 100
Gross profit percentage Ratio
(Indication)
-if the percentage is high,it indicates that the organisation has a good buying policy
Decreases to the ratio could be as a result of the selling price may be lower,cost of purchase is higher than in previous years
Ways to improve it could be monitor theft or damage to inventoryu,better management of inventory,cheaper suppliers
Profit for the year percentage ratio
Profit for the year percentage works out the percentage of profit made once all expenses are deducted
Formula
Profit for the year/sales recenue x 100
Profit for the year percentage ratio
(Indication)
ratio often controls costs
An increase in the ratio could indicate better trading conditions,better control over costs
a Decrease could mean an increase in expenses,lower gross profit or a reduction in sales
ways to improve include reducing expenses by finding cheaper suppliers
Return on Equity Employed Ratio
This measures the percentage of investment that is returned to investors such as shareholders
Formula
Profit for the year/Equity x 100
Return on Equity Employed Ratio
(indication
the higher the percentage the better
-can improve by attempting to increase profit for the year or reducing expenses or improving revenue
A reduction in ROEE could mean more shares were issued
Often gives a more accurate measure of performance than merely looking at the profit figure
Ways to improve the Ratio
(Return on Equity Employed Ratio)
Cutting costs/expenses
DIversify-produce/sell/products that give a greater profit
Improve sales/productivity ratio
Current ratio
Ability to rapay its short term debts without having to borrow money
Formula
Current assets:Current liabilities
Current ratio
(ways to improve)
Try to increase current assets
Decrease current liabilities relative to current assets
Reduce creditors
put in more capital-increases cash/bank balance
Acid test ratio
-measure the ability of the organisation to repay its short term debts in a crisis situation
-less than 1:1 the organisation needs to borrow money
Formula
Current assets-closing inventory:Current liabilities
Rate of inventory Turnover
This ratio measures the number of times than an organisation replaces its stock
Formula is cost of sales:Average inventory
Rate of inventory Turnover
(indication)
A high turnover rate comes with additional administration and delivery costs as well as a loss of access to bulk buying discounts
A decrease in the number could indicate a recession,poor sales and marketing
ways to improve ratio
Decrease in inventory held,sell slow moving or obsolete inventory off cheaply,
What ratios fall under Liquidity
Current ratio
Acid test Ratio
What ratios fall under
Profitability
Gross profit percentage
profit for the year
Return on equity
What ratios fall under
efficiency
Rate of inventory turnover
Spreadsheets
(finance)
produce graphs and charts of financial information
including in instant calculations,what IFS
Advantage
-Can be easily secured using a password
-Time can be saved in the finance department by using templates for financial statements and -spreadsheets can be easily updated
Presentations
(finance)
showcases the businesses financial data insights and future planning
Presentations can be used to attract audiences when presenting information through the use of animations of colour
Internet Banking
(Finance)
Internet banking will save the company time as it reduced the need for employees to take trips to the banks
instant transfer of funds
Finance department can be also used to import banking information into their accounting software
BACS payments
BACS payments allow a company to transfer money securely and quickly between bank accounts
They are used by the finance department to pay staff wages and suppliers
EFTPOS
paying goods exactly where you purchase them i .e card payer
done through debit,credit card
SAGE software
SAFE is a software package that is used by many businesses to manage and process financial information
done too track payments,income and to send invoices to customers
Finance department can use
Invoices
manage payroll
tax returns
LAN
used to share documents so that different employees can assess and share information
can be used to circulate financial information quickly
