Finance Flashcards
Why is it important that an organisation monitors its cash flow
Cash is a vital resource for an organisation it is needed to run the business on a day to day basis from achieving long term objectives to paying staff wages making a profit and having good cash flow are two different things
What factors should be considered to determine poor cash flow
- Are sales generating enough money?
- Are they giving customers a long credit period
- Is the credit period from suppliers not long enough
- Significant increase in operating expenses
- Have they purchased assets recently
- buying fixed assets which are not needed
- Do they have too much money in stock
- too many credit sales
- too long a payment period for credit sales
- high amounts of spending on non-current assets
- too many drawings by owners
- not enough sales revenue
What are the different ways an organisation could use to improve on poor cash flow
- Introduce a JIT stock management system
- Offer discounts to customers as an incentive to pay on time
- Selling any fixed assets that are no longer required
- Increase promotional activities
- adopt saving methods
- negotiate cheaper prices with suppliers
What will introducing a JIT stock management system to improve poor cash flow mean that
It will prevent money being tied up in stock as it is ordered only when it is needed
What will offering discounts to customers in improving poor cash flow mean that
This will encourage quick payment from customers so money van be used to fund other activities
What will selling any fixed assets that are no longer required mean that
It will generate money quickly and easily and will not impact the production
What will increasing promotional activities to improve poor cash flow mean that
It will increase awareness of products and could increase sales and therefore cash flow
What is the purpose of cash budgets
Cash budgets give a forecast of the money expect to be received (receipts) and the money expected to be paid out (payments) over a given period of time
What is the role of the finance department in large organisations
monitoring and controlling expenses monitoring cash flow forecasting future financial information checking performance providing information for decision making \
Name the 5 roles of the finance department
To monitor cash flow
To control Costs and expenses
To forecast what might happen in the future
To monitor performance
To provide information for decision making
What are the 6 sources of finance to an organisation
Bank overdraft Trade credit Retained profit Government grant Bank loan Share issue mortgage venture capitalist
What is a bank overdraft and explain the advantages and disadvantages of it
Allows organisation to withdraw more money than available
It is quick and easy to set up
Usually only for a short period of time / daily charges interest may apply
What is trade credit and the advantages and disadvantages of it
Allows an organisation an extended period of time to pay for purchases
Can sell products and receive money before paying for materials
Credit is at suppliers discretion not always guranteed
What is retained profit and explain the advantages and disadvantages of it
Portion of the previous years profit which has been re invested into the organisation
Belongs to the organisation
Relying on profit can be risky as may not always be available
What is a government grant and the advantages and disadvantages of it
This is given to a new organisation to help them start up
A- does not have to be re paid
d- usually only a one off payment
What is a bank loan and the advantages and disadvantages of it
This is a sum of the money from the bank to be repaid over an agreed period of time
Quick and easy to set up
Can be repaid over a long period of time
Intrest is expensive
What is a share issue and the advantages and disadvantages of it
Extra sharer are sold to me or existing shareholders
A-large amounts of capital can be obtained
it is not repaid in the same way as a loan
D-dilutes existing share value
Share issues can be expensive
other than spreadsheets describe modern technology methods that be used in the finance department
word processor to send letters and invoices to customers
powerpoint to present information in a staff meeting for example
online banking saves having to go to the bank to manage finance
email- to message people within the finance department effectively or the organisations employees regarding finance
video conferencing - finance manager can hold meetings with employees without leaving the office (home working for example)
apps - allow for portable use of accounting software e.g. sage
what are the advantages of using spreadsheets within the finance department
you can create graphs and charts in order to present the financial information to the employees of an organisation
calculations can be performed electronically so reduces the chance of human error as these changes once imputed to budget are changed automatically
what if scenario functions can be added to make future predictions
what is the definition of an income statement
shows money which has gone in and out of an organisation over the past financial year and it calculates whether the business has made profit or loss.
what is gross profit
money made from buying and selling
what is profit for the year
money made from buying and selling taking away expenses
what is the definition of a statement of financial position
shows the value (worth) of an organisation at one given point in time and it shows what the organisation owns (assets) and owes (liabilities)
what are non current assets
items owned by the organisation that will last longer than 1 year for example vehicles
what are current assets
items that are owned by the business which are likely to be used within a year (stock)
what are trade receivables
people who owe the organisation money likely to be a customer who has payed on credit (receivables = organisation receiving money)
what are trade payables
people who the organisation owe money too ( suppliers)
what are dividends
payments made to shareholders
what are drawings
money withdrawn by the owner of the organisation for themselves
describe the long term source of finance mortgage
this is a loan secured on a fixed asset, normally property
- this can secure a large amount of funds which the lender is happier to lend because of the security
- long period of payment
D- if payments are not made on time then the fixed asset will be sold to recover the debt
- interest rates are likely to change over a period of time going up as well as down
- often larger deposits are required by the borrower to secure best interest rates.
describe the long term source of finance venture capitalist
other organisations or wealthy individuals invest in a business for a return on their investment ( think of dragons den|)
A- finance can sometimes be available from venture capitalist when other lenders consider it too risky
- sometimes the money comes with expertise and
advice.
D- a return must be made to the investor
- often there are stipulations with the investment that will limit the freedom of the board of directors
what are accounting ratios
they are used as a tool in the decision making process and an aid in financial interpretation and planning
what are the benefits of accounting ratios
- you can compare an organisations performance with its own past. that is similar organisations and against the industries average.
- it helps to identify trends and irregulations over a period of time
- when the results give cause for concern action can be taken to try and improve the ratio
- to use the information for forecasting budgeting
- to assist in the decision making process
what are the limitations of accounting ratios
- external factors are not taken into consideration
- the workforce is not considered such as staff motivation or morale
- new product development or launching are not considered
- the accounting information used to calculate the ratios is historic i.e it is based on information that is out of date
- comparisons with other businesses can be difficult as many businesses publish only very limited financial information
- when comparisons are made with other businesses the comparison is only valid where the business is of the the same type and size and the same information is available to calculate the same ratios
what are the 3 types of accounting ratios
profitability
liquidity
efficiency
what are profitability accounting ratios and what ratios come under it
shows how profitable ( or not ) an organisation is gross profit ratio profit for the year ratio return on capital employed ratio profit mark up
what are liquidity ratios and what comes under it
shows how able the organisation is to pay its short term debts
current ratio
acid test ratio
what are efficiency ratios and what comes under it
indicates how efficient the business has been In using its resources including capital invested
rate of stock turnover ratio
what is gross profit ratio and the formula
the amount of profit the business makes from buying and selling
gross profit / sales x 100
what is profit for the year ratio and the formula
shows the amount of profit the business earns after paying its expenses
profit for the year/ sales x 100
what is return on capital employed ratio and the formula
calculates the maximum a shareholder will get back after period of time ( from their investment )
profit for the year / capital employed x 100
what is profit mark up ratio and the formula
calculates the percentage that is added up to the cost of sales to calculate their selling price
gross profit/ cost of sales x 100
what is current ratio and the formula
shows the ability of the organisation to pay back short term debts
current assets / current liabilities : 1
what is acid test ratio and the formula
shows the ability of the business to pay short term debts once inventory has been removed current assets - inventory / current liabilities : 1
what is rate of stock turnover ratio and the formula
shows the number of times that all inventory is sold during the year with the greater number normally regarded as better
cost of sales/ average stock = x times
how can gross profit be improved
gross profit ratio can be improved by charging a higher selling price and reducing the costs of purchases from suppliers by buying less
which statement is the gross profit calculated in
income statement
suggest a reason for an improvement in the profit for the year ratio
there has been an increase in the gross profit percentage
sales have risen more than expenses
what is the purpose of owners
to asses the profits and inform decision making of the organisation
what is the purpose of employees
to ensure that their job is secure
what is the purpose of inland revenue (HMRC)
to ensure that the business is paying the correct tax
What is the purpose of trade unions
to asses if their members are due a pay rise
what is the purpose of competitors
to measure their success against each other
what is the purpose of investors
to assess the potential for investment
what is a solution to increasing expense costs
charge higher interest on drawings to discourage owners from withdrawing money from the business
what is a solution to not enough sales revenue
adapt the marketing mix
what is a solution to too many unpaid debts
sell debts to debt factoring companies
what is the name for a positive cash flow situation
surplus
what is the name for a negative cash flow situation
deficit
why is a cash budget used
to allow investment to be planned during a surplus
to predict a surplus
to predict a deficit
to allow action to be taken to avoid a deficit
allows for figures to be compared and measure the performance of departments
why could cash sales be falling in a cash budget
could be caused by seasonal factors
or a recession
why might purchases be increasing in a cash budget
the businesses is tying too much money up in stock
why might expenses be increasing in a cash budget
the business is paying increasing costs for expenses for example rising rent costs
why might there be a negative closing balance in a cash budget
the business had a deficit which means their payments outweigh their receipts
