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BUSINESS STUDIES (COMPONENT 1) > FINANCE > Flashcards

FINANCE Flashcards

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
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2
Q

Define budget

A

A financial plan for the future that sets out

  • targets for sales revenue
  • targets for expenditure (covers costs)
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3
Q

What are the types of budgets?

A

Income
Expenditure (money out)
Profit

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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
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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
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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
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7
Q

How are budgets set?

A
  1. set clear objectives
  2. carry out market research
  3. produce a sales forecast
  4. set income budget
  5. set expenditure budget
  6. set profit budget
  7. set divisional targets
  8. review against objectives
    REPEATS
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8
Q

What are problems of setting budgets?

A
  • costs are likely to change
  • actions of competitors are unknown
  • dependent upon predictions and forecasts
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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

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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)
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11
Q

How does owners capital work?

A

Savings from owner that is transferred into business

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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
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13
Q

What type of businesses are owners capital suitable for?

A

Sole traders
Partnerships
-start up

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14
Q

How does retained profit work?

A

Profit saved over time and invested into business

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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
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16
Q

What type of businesses are retained profits suitable for?

A

All expect new businesses

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17
Q

How do sale of assets work?

A

Items of value are sold and the cash generates income

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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
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19
Q

What type of businesses are sale of assets suitable for?

A

All types

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20
Q

How do overdrafts work?

A

Spend more money than they have in their current bank account

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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
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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

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23
Q

How do bank loans work?

A

Make regular payments

-long term

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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

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25
Q

What type of businesses are bank loans suitable for?

A

All types

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26
Q

How does share capital work?

A

Limited companies can sell shares to raise finance

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27
Q

What are advantages and disadvantages of share capital?

A

A:
-large amount of finance can be raised
D:
-selling shares dilutes control of business in a PLC there is risk of a takeover

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28
Q

What types of businesses are share capital suitable for?

A

Limited companies

-PLCs and LTDs

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29
Q

How does venture capital work?

A

Cash rich investors provides a business with finance for an agreed share in business

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30
Q

What are advantages and disadvantages of venture capital?

A

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

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31
Q

What types of businesses are venture capitals suitable for?

A

New entrepreneurs, SMEs that are expanding

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32
Q

How does leasing work?

A

Businesses pay monthly fee in return for the use of an asset

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33
Q

What are advantages and disadvantages of leasing?

A

A:
-affordable option
-opportunity for upgrade at end of leasing
D:
-more expensive than buying upfront one time

34
Q

What type of businesses are leasing suitable for?

A

All but more established businesses find it easier to obtain the finance

35
Q

How do trade credits work?

A

A business receives goods from a supplier but pays them later

36
Q

What are advantages and disadvantages of trade credits?

A

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
Q

What types of businesses are trade credits suitable for?

A

All but new firms may find t very difficult to obtain as they are seen as too high risk

38
Q

How does debt factoring work?

A

Businesses sell the debt that is owing to them at factoring company, often owned by the main banks

39
Q

What are advantages and disadvantages of debt factoring?

A

A:
-cash immediately comes into business from sale of debts therefore easing cash flow problems
D:
-debt factoring company charges a fee

40
Q

What type of businesses are debt factoring suitable for?

A

Businesses struggling to pay immediate debts

41
Q

Define cash flow

A

Money moving the in and out of a business

42
Q

What are examples of cash inflows?

A
  • sales revenue
  • shares capital
  • loans
  • income/investments
43
Q

What are examples of cash outflows?

A
  • over heads
  • taxes
  • research and development
  • equipment
44
Q

What is the purpose of a cash flow forecast?

A
  • 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
Q

What is a cash flow forecast?

A
  • shows revenue
  • outflows/expenditures
  • opening balance
46
Q

What is the formula for NET cash flow?

A

Total revenue - Total expenditures

47
Q

What is the formula for the closing balance?

A

NET cash flow + opening balance

48
Q

What is the formula for the opening balance?

A

NET cashflow + closing balance

49
Q

What is the benefits of cash flow forecast for managers?

A
  • to identify timings and significance of potential shortfalls
  • identify possible corrective action
50
Q

What is the benefit of cash flow forecasts for owners?

A

Help secure external finance from potential investors or the bank

51
Q

What is the benefit of cash flow forecasts for banks?

A

See how loans and overdrafts will be paid

52
Q

What is the benefit of cash flow forecasts for employees and suppliers?

A

Give confidence about short term survival

53
Q

How do you increase cash inflows?

A
  • advertise to boost revenue

- may include offering discounts for early payments or penalties for late payments

54
Q

How do you slow down cash flow outflows?

A
  • negotiate for longer payment terms from suppliers

- spreading payments

55
Q

What are causes of cash flow problems?

A
  • unexpected fall in demand
  • unforeseen expenditure (machine breaks)
  • seasonal factors
56
Q

Define sales revenue

A

Money coming in from sales

Quantity sold x selling price

57
Q

Define costs of sales

A

Cost directly linked to the production of the goods and services sold

58
Q

What is the formula for gross profit?

A

Sales revenue - Cost of sales

59
Q

What is the formula for operating profit?

A

Gross profit - Expenses

60
Q

Define interest and taxation

A

Interest paid on debt or received plus tax payable of profit

61
Q

What are exceptional items?

A

Any usually large or infrequent transaction

62
Q

What is the formula for NET profit?

A

Gross profit - expenses

63
Q

What does high profit quality mean?

A

Source of profits from normal trading, therefore likely to be repeated next year

64
Q

Describe low profit quality

A

Source of profits from other activities than sales, therefore unlikely to be repeated next year

65
Q

What are methods of improving profit?

A
  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
Q

What is the impact of selling the same amount at higher price?

A

-could lose customers (especially in competitive market)

67
Q

What is the impact of selling more at current price?

A
  • achieved through increased advertisement, which increases costs
  • may gain new customers
68
Q

What is the impact of selling at the same price but cutting costs?

A
  • may lose customer as a potential decrease in quality

- brand image may be damaged

69
Q

Define profitability

A

Measures the financial performance of a business by comparing profits achieved to a second variable

70
Q

What are the two profitability ratios?

A
  1. gross profit margin

2. NET profit margin

71
Q

What is a gross profit margin?

A

A measure of a firms profitability by looking at the relationships between gross profit and sales revenue

72
Q

What does it indicate if a firms GPM is low or falling?

A
  1. not managing its costs of sales effectively

2. sales are in decline

73
Q

How do you calculate gross profit margin?

A

Gross profit/sales revenue x100

74
Q

What is NET profit margin?

A

Measure of a firms profitability by looking at relationships between NET profit and sales revenue

75
Q

What does it indicate if a NPM is low or falling?

A
  1. gross profit or operating profit are I decline
  2. interest rates have changed
    - taxation rates have changed
76
Q

What is the formula for NET profit?

A

NET profit/sales revenue x100

77
Q

How can ratios be used?

A
  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
Q

What are ratios compared to?

A
  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
Q

How can managers use ratios?

A

See if they are meeting targets to improve profitability, to see if areas need focusing on

80
Q

How can shareholders use ratios?

A

To judge how profitable the business is and whether they should continue to hold shares/buy more

81
Q

How can workers/trade union use ratios?

A

To judge whether jobs are secure/whether pay ruse could be demanded

BUSINESS STUDIES (COMPONENT 1) (7 decks)

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