Financial Management Flashcards
Own capital
This investment is made by the owner of the business
Sole trader, partners, shareholders
Borrowed capital
Foreign capital. Money that is borrowed from a bank or external institution
(Has to be paid back with interest)
Fixed capital
- Long term
- tied up in the land and buildings, vehicles and equipment
- fixed assets remain in the business to earn an income
Working capital
- short term
- used to purchase stock or finance debtors
- covers the day-to-day running of the business and pays for expenses
Factors influences the demand for long and short term capital
- Size of the workforce
- Do you offer credit to your customers
- Do your suppliers offer credit to you
- Operational requirements
Tasks of a financial manager
- Draw up cash budgets and capital budgets
- Helps the general manager interpret financial statements
- Ensures that departments stay in their budgets
- Gross profit
- Net profit
- Profitability
- Sales - cost of sales
- Gross profit - expenses
- Net profit/capital X 100/1
Current capital ratio
Current assets : current liabilities
Should be 2:1
Acid test ratio
(Current assets - inventory) : current liabilities
Should be 1:1
Gearing ratio
Own capital : borrowed capital
Should be 2:1
Budgeting
- helps you organise your income vs expenses
- it is a financial plan
- establishes a healthy financial position
Cash
- generated through sale of inventory, increase in capital or borrowed funds
- utilised through the purchase of fixed assets
Profit
The difference between income and expenditure
Sources of long term capital
Fixed capital:
- Sell debentures
- Long term loans with mortgage bond as security
- Reserve funds
- Issue shares
Working capital
- trade credit
- short term loans
- factoring of debtors
- lease accounts
- overdraft facilities
- bills of exchange
- loans on security of warehouse receipts
NCA: granting credit to customers
- Establish creditworthiness by having a clear policy
- Ensure there is a debt collection policy
- Have strategies to encourage payment
NCA: asking for credit
The NCA encourages the debtor and to work together with the creditor to establish repayment plans
NCA: cash vs credit
- Requests discounts for cash purchases
- No interest on cash purchases
- Interest increases with repayment value
- Ensure you use your own capital optimally by making the correct choice for your business
