Financial Decisions Flashcards
What are financial objectives?
These are financial goals a business wants to achieve
What is overtrading?
Is when a business produces too much and has to pay suppliers so much that they will become insolvent before they have chance to get paid by customers
What is capital?
Capital wealth is wealth in form of money/other assets owned by a business
What does Return on capital invested measure & how do you calculate it?
- Measures how efficiency an investment is and compares money invested to what you get back
= Return on investment ÷ cost of investment x100
What is a creditor?
People owed money by a business
What is a payable?
Money the business owes
What is a debtor?
Someone who owes money to the business
What is a cash flow forecast?
Shows the amount of money managers expect to flow in and out of a business over a period in the future
-Used to show banks and venture capitalists when trying to get loans
Why is cash flow forecasting not always accurate?
- Can be based on false assumptions about whats going on
- Circumstances can change after forecasts have been made
What are the tricks of improving cash flow?
1) Overdrafts
2) Tried hold less stock so less cash is tied up
3) Debt factoring
4) sale and leaseback
What are the three types of budgets?
1) Income
2) Expenditure
3) profit
What is a variance?
A way of analysing budgets that shows id a business is performing worse or better than expected
Whats a favourable variance?
- If revenue is higher than budget says meaning there will be an increased profit
- If costs are lower than predicted
Whats an adverse variance ?
-when predicted revenue is higher than actual revenue
What does Break Even Analysis mean?
-Breaking even means covering your costs
What is BEO?
This is the level of sales a business needs to cover its costs
What is meant by contribution in BE?
This is the difference between selling price and the variable costs it takes to produce it
= Selling price-variable costs
What is the margin of safety?
The amount between actual output and BE output
What are examples of Internal sources of finance?
1) Retained profit
2) Rationalisation
What is rationalisation?
This is when managers re-organise the business to make it more efficient e.g selling assets and leasing them back
What are examples of ST sources of finance?
Overdrafts
Debt factoring
Retained profits
What is an overdraft?
When a bank lets a business have a negative amount in its bank account these are easy to arrange but mean that banks can charge high interest rates making them unstable in LT
What is Debt factoring?
When banks and other financial institutions take unpaid invoices off hands of business and give them instant cash payment
- However the disadvantage is that debt factors get to keep some of the money
Whats an example of a long term external source of finance?
Loan
