FINANCE Flashcards
(81 cards)
1
Q
What is the finance department responsible for?
A
- budgets
- cash flow forecasting
- credit control
- paying suppliers
- production and analysis of year end accounts
2
Q
Define budget
A
A financial plan for the future that sets out
- targets for sales revenue
- targets for expenditure (covers costs)
3
Q
What are the types of budgets?
A
Income
Expenditure (money out)
Profit
4
Q
What is an income budget?
A
- target set for the amount of revenue to be achieved in a specific time period
- can be split by products, services or department
- informs predicted cash inflows in the cash flow forecast
5
Q
What are expenditure budgets?
A
- a limit placed on the amount to be spent in a given time period
- can be split by products, service or department
- informs predicted cash outflow in cash flow forecast
6
Q
What are profit budgets?
A
- a target set for surpluses between income and expenditures in a given period of time
- calculated upon the income and expenditure budget
7
Q
How are budgets set?
A
- set clear objectives
- carry out market research
- produce a sales forecast
- set income budget
- set expenditure budget
- set profit budget
- set divisional targets
- review against objectives
REPEATS
8
Q
What are problems of setting budgets?
A
- costs are likely to change
- actions of competitors are unknown
- dependent upon predictions and forecasts
9
Q
What is the purpose of budget setting?
A
Control costs- provides a quantifiable target against which actual targets can be measured
Coordination- encourages a more holistic view point of the department as part of a bigger entity
10
Q
What are limitations of budgets?
A
- over ambitious targets can be demotivating
- budgets can be restrictive as opportunities can’t be acted upon
- planned figures can be inaccurate due to unexpected changes (e.g. increased raw material costs)
11
Q
How does owners capital work?
A
Savings from owner that is transferred into business
12
Q
What are advantages and disadvantages of owners capital?
A
A: -do not have to repay so no interest -no debt -owner maintains control D: -likely to bee restricted amount -once used, less money left for emergencies
13
Q
What type of businesses are owners capital suitable for?
A
Sole traders
Partnerships
-start up
14
Q
How does retained profit work?
A
Profit saved over time and invested into business
15
Q
What are advantages and disadvantages of retained profit?
A
A: -instantly available for use -avoid interest and debt D: -restricted amount -only sufficient if they have enough profit
16
Q
What type of businesses are retained profits suitable for?
A
All expect new businesses
17
Q
How do sale of assets work?
A
Items of value are sold and the cash generates income
18
Q
What are advantages and disadvantages of sale of assets?
A
A: -avoid interest debt repayment D: -likely to be restricted amount -takes time to translate cash
19
Q
What type of businesses are sale of assets suitable for?
A
All types
20
Q
How do overdrafts work?
A
Spend more money than they have in their current bank account
21
Q
What are advantages and disadvantages of overdraft?
A
A: -continue over spending and paying bills -quick and easy to arrange -borrow when needed D: -high interest rates -limit on how much can be borrowed
22
Q
What type of businesses are overdrafts suitable for?
A
All as able to access larger overdrafts and arrange lower interest chargers as lower risk
23
Q
How do bank loans work?
A
Make regular payments
-long term
24
Q
What are advantages and disadvantages of bank loans?
A
A:
-repaid over time, more manageable
D:
-interest charged increases business costs
-business assets have to be put up as security
25
What type of businesses are bank loans suitable for?
All types
26
How does share capital work?
Limited companies can sell shares to raise finance
27
What are advantages and disadvantages of share capital?
A:
-large amount of finance can be raised
D:
-selling shares dilutes control of business in a PLC there is risk of a takeover
28
What types of businesses are share capital suitable for?
Limited companies
| -PLCs and LTDs
29
How does venture capital work?
Cash rich investors provides a business with finance for an agreed share in business
30
What are advantages and disadvantages of venture capital?
A:
-good source of finance if banks have turned down loan applications, venture capitalism often provide advice as well as finances
D:
-some venture capitalists may demand a high share of ownership reducing ownership share for the entrepreneur, leading to conflict between two parties
31
What types of businesses are venture capitals suitable for?
New entrepreneurs, SMEs that are expanding
32
How does leasing work?
Businesses pay monthly fee in return for the use of an asset
33
What are advantages and disadvantages of leasing?
A:
-affordable option
-opportunity for upgrade at end of leasing
D:
-more expensive than buying upfront one time
34
What type of businesses are leasing suitable for?
All but more established businesses find it easier to obtain the finance
35
How do trade credits work?
A business receives goods from a supplier but pays them later
36
What are advantages and disadvantages of trade credits?
A:
-eases cash flow as business has chance to sell the goods before paying for them
D:
-late payments incur a penalty new firms are unlikely to gain this credit
37
What types of businesses are trade credits suitable for?
All but new firms may find t very difficult to obtain as they are seen as too high risk
38
How does debt factoring work?
Businesses sell the debt that is owing to them at factoring company, often owned by the main banks
39
What are advantages and disadvantages of debt factoring?
A:
-cash immediately comes into business from sale of debts therefore easing cash flow problems
D:
-debt factoring company charges a fee
40
What type of businesses are debt factoring suitable for?
Businesses struggling to pay immediate debts
41
Define cash flow
Money moving the in and out of a business
42
What are examples of cash inflows?
- sales revenue
- shares capital
- loans
- income/investments
43
What are examples of cash outflows?
- over heads
- taxes
- research and development
- equipment
44
What is the purpose of a cash flow forecast?
- shows expected cash inflows and outflows of a business of a trading period and in the immediate future
- predicts how much cash will be available, or is needed to run the business
45
What is a cash flow forecast?
- shows revenue
- outflows/expenditures
- opening balance
46
What is the formula for NET cash flow?
Total revenue - Total expenditures
47
What is the formula for the closing balance?
NET cash flow + opening balance
48
What is the formula for the opening balance?
NET cashflow + closing balance
49
What is the benefits of cash flow forecast for managers?
- to identify timings and significance of potential shortfalls
- identify possible corrective action
50
What is the benefit of cash flow forecasts for owners?
Help secure external finance from potential investors or the bank
51
What is the benefit of cash flow forecasts for banks?
See how loans and overdrafts will be paid
52
What is the benefit of cash flow forecasts for employees and suppliers?
Give confidence about short term survival
53
How do you increase cash inflows?
- advertise to boost revenue
| - may include offering discounts for early payments or penalties for late payments
54
How do you slow down cash flow outflows?
- negotiate for longer payment terms from suppliers
| - spreading payments
55
What are causes of cash flow problems?
- unexpected fall in demand
- unforeseen expenditure (machine breaks)
- seasonal factors
56
Define sales revenue
Money coming in from sales
| Quantity sold x selling price
57
Define costs of sales
Cost directly linked to the production of the goods and services sold
58
What is the formula for gross profit?
Sales revenue - Cost of sales
59
What is the formula for operating profit?
Gross profit - Expenses
60
Define interest and taxation
Interest paid on debt or received plus tax payable of profit
61
What are exceptional items?
Any usually large or infrequent transaction
62
What is the formula for NET profit?
Gross profit - expenses
63
What does high profit quality mean?
Source of profits from normal trading, therefore likely to be repeated next year
64
Describe low profit quality
Source of profits from other activities than sales, therefore unlikely to be repeated next year
65
What are methods of improving profit?
1. sell same quantity but at a higher price (price inelastic only)
2. sell more at current price
3. sell same at same price but cut costs
66
What is the impact of selling the same amount at higher price?
-could lose customers (especially in competitive market)
67
What is the impact of selling more at current price?
- achieved through increased advertisement, which increases costs
- may gain new customers
68
What is the impact of selling at the same price but cutting costs?
- may lose customer as a potential decrease in quality
| - brand image may be damaged
69
Define profitability
Measures the financial performance of a business by comparing profits achieved to a second variable
70
What are the two profitability ratios?
1. gross profit margin
| 2. NET profit margin
71
What is a gross profit margin?
A measure of a firms profitability by looking at the relationships between gross profit and sales revenue
72
What does it indicate if a firms GPM is low or falling?
1. not managing its costs of sales effectively
| 2. sales are in decline
73
How do you calculate gross profit margin?
Gross profit/sales revenue x100
74
What is NET profit margin?
Measure of a firms profitability by looking at relationships between NET profit and sales revenue
75
What does it indicate if a NPM is low or falling?
1. gross profit or operating profit are I decline
2. interest rates have changed
- taxation rates have changed
76
What is the formula for NET profit?
NET profit/sales revenue x100
77
How can ratios be used?
1. calculated every year to show trend in business in performance
2. an increase in GPM and NPM reflects increasing sales revenue and/or decreased costs (vice versa)
78
What are ratios compared to?
1. compared over time to see the trend emerging
| 2. compared to competitors to see if a businesses performance is a good as, if. not better than competitor
79
How can managers use ratios?
See if they are meeting targets to improve profitability, to see if areas need focusing on
80
How can shareholders use ratios?
To judge how profitable the business is and whether they should continue to hold shares/buy more
81
How can workers/trade union use ratios?
To judge whether jobs are secure/whether pay ruse could be demanded
