Finance Flashcards
Objectives a business requires finance for:
Survival
Growth
Role of finance
See sheet
What financial information is used for:
See sheet
(Info used) to enable costs and expenditure to be controlled
See sheet
(Info used) to enable cash flow going in and out of the organisation to be monitored
See sheet
(Info used) to forecast what might happen in the future
See sheet
(Info used) to monitor the organisation’s performance
See sheet
(Info used) to provide management with information for decision making
See sheet
Interest HMRC have for financial information
Taxes, business profits - corporation tax
Interest employees have for financial information
Business profitability - to ensure salaries/wages can be paid
Interest banks have for financial information
To ensure firm will be able to repay debt on time
Interest supplier has for financial information
Won’t supply materials if bills aren’t paid
Final accounts consist of:
Balance sheet
Trading, profit and loss account
Debtors
Customers that owe the business money for goods sold on credit (trade credit: 30/60/90 days)
Creditors
Suppliers of goods purchased on credit by the business and to whom the business owes money (suppliers have offered your business trade credit)
Net current assets/working capital
Difference between the current assets and the current liabilities
Opening capital
Is the amount invested by the owner(s) of the business
Drawings
Are money taken out of the business by the owner for their own personal use
Ratio analysis is used to:
Compare current performance with that of previous years, of similar organisations, identify differences in performance to help decide future action, highlight trends over a period of time
3 types of ratios
Profitability, Liquidity, Efficiency
Profitability
To show how profitable a business is. Used to analyse organisation’s expenses, costs of stock, selling price
Liquidity
To show a business’ ability to pay short-term debts. Indicates if an organisation needs to arrange additional finance to pay its bills e.g. Overdraft
Efficiency
To show how efficiently and effectively the organisation is performing
Profitability ratios
Gross profit (as a % of sales) Net profit (as a % of sales) Mark up Gross profit (as a % of cost of goods sold)
Gross profit (as a % of sales)
Shows profit made from buying/selling stock. Any increase means more gross profit is being made from each £ of sales. The higher the better
Why gross profit changes
See notebook
Net profit (as a % of sales)
Shows profit made once expenses have been deducted by organisation. Increase means more net profit from each £ of sales. The higher the better
Why net profit changes
See notebook
Mark up Gross profit (as a % of costs of goods sold)
Shows how much profit has been added to the cost of goods sold. Increase means more profit has been made after cost of goods sold. The higher the better
Liquidity ratios
Current ratio ( Working capital ratio) Acid test ratio (quick ratio)
Current/Working capital ratio
Current Assets/Current Liabilities : 1. E.g. 2:1 For every £1 owed, business has £2 to cover it. Shows how able an organisation is to pay off its short-term debts. Increase means more able to pay off short-term debts
Why current ratio changes
See notebook
Acid Test/Quick ratio
(Current Assets-Stock)/Current Liabilities : 1. (Same as current). Shows how able organisation is to pay off its short-term debts without having to sell off its stock in a crisis situation. Increase means increased ability to pay.
Why acid test ratio changes
See notebook
Efficiency ratios
ROCE - Return on Capital Employed. (Often used as a profitability ratio as well)
Return on Capital Employed (%)
Net profit/opening capital (x100) Shows if organisation is performing effectively & efficiently & how well capital invested to organisation is being used. Should be compared with return offered by other investment opportunities
Limitations of ratio analysis
See notebook
Sales Budget
Forecasts no of units of each product that the business aims to sell next year, price level that will be charged, corresponding amount of sales revenue that is likely to be received
Production budget
Forecasts no of units of each product that business aims to produce over next year. Includes materials budget, which indicates raw materials that need to be purchased
Payroll/Staffing budget
Specifies the direct & indirect staff that are required throughout the business for forthcoming year, in terms of no of staff & their wages
(Production) Overhead budget:
Attempts to forecast the fixed overheads that the business will incur in the forthcoming year, which can be related to production.
Cash budget (Master)
The detailed budgets are then consolidated into the Master Budget. Thus also includes other forecasted documents: profit & loss account, balance sheet, cash flow, capital expenditure budget (shows fixed assets which business forecasts will purchase in forthcoming year)
Benefits of preparing a cash budget/forecast
See notebook
Reasons for cash flow problems
See notebook
To resolve a cash flow problem
See notebook
Management function of Cash Budgets
Plan, Organise, Command, Co-ordinate, Control, Delegate, Motivate
Management - Plan
Set aims & strategies. Decisions may be based on projected cash flow figures. By identifying where cash is going in/out, managers can plan to borrow for either short or long term finance
Management - Organise
Make arrangements for all resources to be in right place at right time in right quantities. Management ensures resources can be afforded & takes advantage of bulk-buying, trade credit etc.
Management - Command
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Management - Coordinate
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Management - Control
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Management - Delegate
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Management - Motivate
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Users of financial information
Managers, Owners, Creditors/Suppliers, Employees/Trade Unions, General public/Local community, Banks/Lenders, HMRC (Inland Revenue), Financial Journalists
Users of financial info: Managers
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Users of financial info: Owners
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Users of financial info: Creditors/Suppliers
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Users of financial info: Employees/Trade Unions
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Users of financial info: General Public/Local Community
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Users of financial info: Banks/Lenders
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Users of financial info: HRMC
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Users of financial info: Financial Journalists
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Why mark up gross profit changes
See notebook