Finance Flashcards
What is the role of the finance department? (3)
- Prepare, keep and maintain financial records, e.g income statements
- Analyse financial performance of the business, helps managers’ inderstanding
- Pay creditors and wages of employees
What is meant by a budget?
A budget is a financial plan that is drawn up to help a business achieve its objectives
What are the purposes of a budget? (4)
- Plan
- Check progress
- Control expenditure
- Give managers a certain amount to spend within the budget
What is meant by cash flow? Give examples
The movement of cash in and out of a business.
Cash flow in through - customer payments, loans, investments from investors
Cash flow out through - payment of wages, raw materials, taxes
What is a cash flow forecast?
A prediction of cash flowing into and out of the business over a period of time
What is the calculation for net cash flow?
Net cash flow =
total receipts - total payments
Or
total income - total expenditure
What is the calculation for closing bank balance?
Closing bank balance =
Opening bank balance + net cash flow
What does a cash deficit mean?
More money has been sent than received
What is an income statement?
It is a record of the revenues and costs generated by a business over a specific period of time (normally 1 year).
It shows the profit or loss made by a business
What is gross profit with calculations?
Gross profit is revenue minus the cost to the business of the products or services being sold
Gross profit = revenue - cost of sales
Why is gross profit important?
It needs to be high enough to cover the fixed costs of operating, and leaving some net profit for shareholders
What is net profit? With calculation
Net profit is the amount remaking after all of the costs of the business have been subtracted from its revenue.
Net profit = gross profit - total costs
Give 3 ways in which a business can increase its profits: give 1 disadvantage for each
- Improve sales, through increasing promotion = expensive
- Reduce variable costs, find a cheaper supplier = could reduce quality
- Decrease fixed costs, cut administers of management payment = could demotivate staff
What is profitability?
Measured profits in relative terms, e.g in comparison with revenue
- looks at the capability of business making/earning profit
- can be measured by using gross profit margin and net profit margin
What does every company want their gross profit margin to be?
High, because the higher it is, the higher the efficiency of the business
What does it mean if a businesses gross profit margin is 20%?
For every £1 generated in sales the company makes 20p to cover other expenses of costs of sales
Give 1 benefit and 1 limitation to using a gross profit margin:
Benefit:
Shows business and investors how effective it is at selling its products
Limitation:
It doesn’t include all costs and it’s difficult to decide what a good % is as the business may have unique features that make it untypical
What is the calculation for gross profit margin?
Gross profit margin =
( Gross profit / revenue ) x 100
What is net profit margin?
Looks at profit after tax as a percentage of sales revenue
What is the calculation for net profit margin?
Net profit margin =
( Net profit / revenue ) x 100
What are the main 3 components of the income statement?
- The trading account
- The profit and loss account
- The appropriation account
What does a trading account show?
Shows income from sales and the costs of making those sales
And
Shows the stock at start and end of a time period
What does the profit and loss account show?
Summarises revenue and costs of a period
Aims to show whether or not a business has made a profit or a loss
What does an appropriation account show?
Shows what a business has done with any profits, e.g. dividends paid to shareholders
