finance Flashcards
Benefits of setting financial objectives
-focus/coordinate
-measures success
- reduce risk of failure
-investment transparency
What is profit?
difference between total revenue and total costs
What is cash flow?
difference between total cash inflows and outflows
net profit=
sales- vc- fc
net cash flow=
inflow-outflow
How is cash flow different from profit?
- timings
- the way fixed assets are accounted for
- cash flows come from sources of finance
Measures of profit-3
Gross profit
Operating profit
Profit for the year
Gross profit
revenue-cost of sales
gross profit margin
gross profit/revenue x100
operating profit
gross profit- admin costs
profit of the year
operating profit- finance/taxes
revenue objectives: 3
revenue growth
sales maximisation
market share
cost minimisation objectives
reduce cost without affecting quality
profit objectives
- specific profit level
- rate of profitability
- profit maximisation
- exceed market profit margins
cash flow objectives
- reduce borrowings
- reduce inventories held
- reduce seasonal cash swings
investment objectives: 2
- capital expenditure
- profit from investment
debt
business owes money
equity
how much value you have over debt
Budgets
financial plan for future
creating budgets
prepared in advance
compare = variances
managers responsible
why do we use budgets
- targets
- direction
- motivate
-forecast - monitor
what is historical budgets
uses last years figures
what is zero budgeting
budget set to zero and needs authroisation to use
main budget types
revenue
cost
profit
how is a budget constructed
analyse market
draw up sales budget
draw up cost budget
two key sources of info for budgets
previous financial performance and market research
variance analysis
difference between actual results and budget
adverse variance
actual is worse than budget
favourable varaince
actual is better tahn budget
cash inflows
- cash sales
- sales/fixed assets
- interest on bank balances
- grants
- bank loan
-invested share capital
cash outflows
-payment to suppliers
-wages/salaries
-tax on profit
-paying assets
-loan repayment (interest)
-dividends
features of cash flow forecast
- updated regularly
- allow for unexpected changes
- make sensible assumptions
common cash flow problems
lower sales then expected
customers no pay on time
costs higher than expected
unrealistic cost assumption
main causes for cash flow problems
- losses
-too much capacity
-excess inventory held
-allowing too much credit - overtrading
-unexpected changes
debtors
people who owe business money
creditors
amounts owed to suppliers
inventories
cash tied up in stock
3 ways to credit control
- estbablish credit limits
- checking credit
- monitor and set realistic limits
improving cash position
short term!
- reduce current assests
- increase current liabilities
- sell surplus fixed assets
improving cash flow
long term!
increase equity
increase long term liabilities
reduce outflow on fixed assets
Contribution
profit made on an individual product
what does contribution show?
no of items needed to be sold to cover tc
difference between sales and variable costs
Contribution formula
= total sales- total variable costs
Contribution per unit
=selling price per unit-variable costs per unit
total contribution
= contribution per unit x no of units sold
profit contribution formula
profit= contribution-fixed costs
break even output
= fixed costs/ contribution per unit
assumptions of break even
- selling price is the same
-all items sold
-fixed costs are constant - variable costs change with output
margin of safety
difference between actual output and break even output
break even strengths
- focus on output needed for profit
- highlights risks
- fixed costs to minimum
- calculations quick
- shows if sales forecast incorrect
break even weaknesses
-unrealistic assumptions
-most sell more than 1 product
-planning aid not decision tool
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
absolute profit
the value of profit earned
relative profit
profit earned as a proportion of sales
how to increase profit
sales- increase quanitity and selling price
variable- reduce vc per unit
fixed- increase output and decrease fc
debenture
long term loan issued by company usually with fixed interest rates
