finance Flashcards

1
Q

Benefits of setting financial objectives

A

-focus/coordinate
-measures success
- reduce risk of failure
-investment transparency

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2
Q

What is profit?

A

difference between total revenue and total costs

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3
Q

What is cash flow?

A

difference between total cash inflows and outflows

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4
Q

net profit=

A

sales- vc- fc

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5
Q

net cash flow=

A

inflow-outflow

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6
Q

How is cash flow different from profit?

A
  • timings
  • the way fixed assets are accounted for
  • cash flows come from sources of finance
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7
Q

Measures of profit-3

A

Gross profit
Operating profit
Profit for the year

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8
Q

Gross profit

A

revenue-cost of sales

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9
Q

gross profit margin

A

gross profit/revenue x100

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10
Q

operating profit

A

gross profit- admin costs

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11
Q

profit of the year

A

operating profit- finance/taxes

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12
Q

revenue objectives: 3

A

revenue growth
sales maximisation
market share

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13
Q

cost minimisation objectives

A

reduce cost without affecting quality

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14
Q

profit objectives

A
  • specific profit level
  • rate of profitability
  • profit maximisation
  • exceed market profit margins
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15
Q

cash flow objectives

A
  • reduce borrowings
  • reduce inventories held
  • reduce seasonal cash swings
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16
Q

investment objectives: 2

A
  • capital expenditure
  • profit from investment
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17
Q

debt

A

business owes money

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18
Q

equity

A

how much value you have over debt

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19
Q

Budgets

A

financial plan for future

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20
Q

creating budgets

A

prepared in advance
compare = variances
managers responsible

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21
Q

why do we use budgets

A
  • targets
  • direction
  • motivate
    -forecast
  • monitor
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22
Q

what is historical budgets

A

uses last years figures

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23
Q

what is zero budgeting

A

budget set to zero and needs authroisation to use

24
Q

main budget types

A

revenue
cost
profit

25
how is a budget constructed
analyse market draw up sales budget draw up cost budget
26
two key sources of info for budgets
previous financial performance and market research
27
variance analysis
difference between actual results and budget
28
adverse variance
actual is worse than budget
29
favourable varaince
actual is better tahn budget
30
cash inflows
- cash sales - sales/fixed assets - interest on bank balances - grants - bank loan -invested share capital
31
cash outflows
-payment to suppliers -wages/salaries -tax on profit -paying assets -loan repayment (interest) -dividends
32
features of cash flow forecast
- updated regularly - allow for unexpected changes - make sensible assumptions
33
common cash flow problems
lower sales then expected customers no pay on time costs higher than expected unrealistic cost assumption
34
main causes for cash flow problems
- losses -too much capacity -excess inventory held -allowing too much credit - overtrading -unexpected changes
35
debtors
people who owe business money
36
creditors
amounts owed to suppliers
37
inventories
cash tied up in stock
38
3 ways to credit control
- estbablish credit limits - checking credit - monitor and set realistic limits
39
improving cash position short term!
- reduce current assests - increase current liabilities - sell surplus fixed assets
40
improving cash flow long term!
increase equity increase long term liabilities reduce outflow on fixed assets
41
Contribution
profit made on an individual product
42
what does contribution show?
no of items needed to be sold to cover tc difference between sales and variable costs
43
Contribution formula
= total sales- total variable costs
44
Contribution per unit
=selling price per unit-variable costs per unit
45
total contribution
= contribution per unit x no of units sold
46
profit contribution formula
profit= contribution-fixed costs
47
break even output
= fixed costs/ contribution per unit
48
assumptions of break even
- selling price is the same -all items sold -fixed costs are constant - variable costs change with output
49
margin of safety
difference between actual output and break even output
50
break even strengths
- focus on output needed for profit - highlights risks - fixed costs to minimum - calculations quick - shows if sales forecast incorrect
51
break even weaknesses
-unrealistic assumptions -most sell more than 1 product -planning aid not decision tool
52
sources of finance
leasing hire purchase trade creditors selling fixed assets business angel overdraft bank loan gov grants debt factoring share capital venture capital retained profit mortgages crowd funding
53
absolute profit
the value of profit earned
54
relative profit
profit earned as a proportion of sales
55
how to increase profit
sales- increase quanitity and selling price variable- reduce vc per unit fixed- increase output and decrease fc
56
debenture
long term loan issued by company usually with fixed interest rates