[finance] introduction Flashcards
liquidity, why is it an objective to financial management?
liquidity is….
Its an objective of financial management as it dhows the business how able it is to pay current debts as they fall due.
How can a business improve its management of its accounts receivable turnover??
The accounts receivable turnover measures how long it takes the business to collect money from its debtors.
A business would want to improve its management of accounts receivable turnover by improving its cash-flow, decreasing the length of time it takes to collect its debts thus reducing its financial costs..
The business also offering a shorter interest-free period will improve A-R-T…
Ethical issues related to the preparation of financial reports..
An ethical issue related to the preparation of financial reports can be the manipulation of financial reports. Businesses may do this to mislead stakeholders about the financial position of the business…
Ethical issues can be safeguarded by Audits, Professional accounting bodies and Accounting standards which establish general principles, and comply with the law and accounting standards whilst enforcing confidentiality.
What is debt financing?
What are some advantages and disadvantages?
Debt Financing is when a businesses raises their capital by selling off debt instruments (bonds) to individuals…
Some ADVANTAGES to debt financing are:
-efficiency (faster and simpler to arrange)
-It doesn’t change ownership structure of the business
-Increased funds should mean higher profits
DISADVANTAGES are:
- greater risk involved
- lenders have first claim on business assets
- need to pay interest…
What is Equity financing?
what are some advantages and disadvantages?
Equity financing is the process of raising capital through the sale of shares. This is for short term bills or require funds to invest in their growth.
some ADVANATGES to debt financing are:
-involves less risk
-no interest (is cheaper), no regular repayments
DISADVANTAGES are:
- Slower to set up
- Changes to ownership structure of the business
- ma mean lower profits
- dividends not tax deductible
What are Derivatives?
A hedging tool, a contract between 2 or more parties…
3 types are: Swaps (exchanging currency during a specific time), Forward Cover (locks in currency price for future use), Currency options (buyers buy or sell foreign currency in return for premium price up front..
What is distribution of payment?
spreading expenses over the whole year
What is Hedging?
The strategy designed to reduce investment risk in financial transactions by withholding a product during a certain time period, more cost efficent than the future….
What is the Cost Centre of a business?
The element of a Business where costs are separately figured.
3 Options in raising capital…
- equity (shares,, or selling off equity finance)
- debt (bank overdraft, for short term cash inflow)
- venture capital (money for start up businesses in exchange for %%%%% of business)
equity in raising capital?
can be external (shares) or internal.. selling off in equity finance may provide the business with shares in a private company selling for $$… raises capital. easier to pay off debt but is risky.
debt in raising capital?
short term or long term borrowing from external sources such as bank over draft…
Business may utilise short term benefits of an overdraft and pay of liability with profit made from new product.. business is in debt to an institution… very flexible.
venture capital in raising capital?
a function provided to start-up businesses in return for proportional ownership… risky and not worth it.
how to calculate gross profit
gross profit is.. sales - purchases…
how to calculate net profit
net profit is… gross profit - expenses….
current ratio (also is liquidity ratio)
current assets/ current libilities…
work out .. working capital
current assets - current liabilities
working capital ratio (WCR)
working capital ratio is.. Current Assets/Current Liabilities = :1
owners equity
total assets - total liabilities
debt to equity ration (solvency ratio)
current liabilities + nc liabilities / equity
why calculate debt to equity ratio
businesses calculate this ratio to test the businesses solvency, otherwise how geared.. which is the businesses ability to repay loans and function without fear of insolvency.
A reason why Gross profit changes…
A decrease or increase in companies sales..
ways a business can improve net profit
- cutting costs through monitoring expenses..
- increasing gross profit through sales strategies such as marketing.
Reasons why a business would be concerned with low working capital to 1…
- insufficient funds
- not enough liquid assets to pay back short term loans
