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Engineering Management > Financial Management > Flashcards

Financial Management Flashcards

1
Q

5 types of trading mechanisms

A

Sole Trader
Partnership
Limited Company (Ltd)
Public Limited Compant (Plc)
Unincorporated association

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2
Q

Sole Trader

A

Few formalities
Trader can make contracts and employ people
Trader owns all assets and liabilities
Profits are personal income and liable to tax

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3
Q

Partnership

A

2 or more sole traders
Should be governed by partnership agreement
Jointly and severally owned assets and liabilities
Profits are income of partners
Can create limited partnerships

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4
Q

Ltd

A

Separate legal person under law
shares distributed to directors
Legal formalities must be observed - company returns and house registration
Limited liability
Creates ‘image’
Profit is income of company

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5
Q

Plc

A
  • Separate legal person
  • Shares distributed/traded to public
  • Legal formalities observed
  • Limited liability
  • Creates ‘image’
  • Profits are income of company, shared betweeb shareholders
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6
Q

Unincorporated association

A
  • Formed by group of like people: sports clubs, charities etc
  • no formal legal requirements: charities commission for charitable status
  • Management committee holds trust of members
  • Not a legal body: committee liable for debts, cant borrow money
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7
Q

Purpose of Accountants

A

Look after business health:
- Cash forecast
- Balance sheets (current state of business finances)
- Profit and loss records

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8
Q

Profit and Loss report

A

Shows:
- where costs are
-what tax bills will be
-where you are in the profit cycle

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9
Q

Gross Profit & Loss

A

+ Income from product sales
- Basic cost of trading
= Gross profit margin (or loss)

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10
Q

Net Profit and Loss

A

+ Income from product sales
- Cost of sales (volume related - material costs, casual labour, machine powering, overtime etc)
- Overheads (Rent/leases, Interest on equipment, admin costs, heating costs, permanent staff)
- Depreciation
= Net Profit before tax

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11
Q

Non-linear variable costs

A
  • Things like raw material bulk purchase, which is susceptible to non-linear change
  • Stepwise costs like setup, extra shifts, additional equipment rental etc
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12
Q

Simple Linear Depreciation

A

Depreciation = (Cost - Residual Value)/Life

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13
Q

Balance Sheet

A
  • Shows the situation at a moment in time: assets. liabilities, difference
  • What you have - what you owe
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14
Q

Fixed vs Current Assets/Liabilities

A

Fixed - Over 1 year e.g. plant, machinery, buildings

Current - Within 1 year e.g. short term debtors, stock, prepayments

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15
Q

Types of accepted account adjustment (3)

A

Accruals - something in the works, but with no paperwork e.g. sent the product but no invoice received yet
Provisons - Allowance for possibility of something going wrong
Prepayments - paid for but yet used e.g. rent, IT service maintenance contract etc

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16
Q

What is stock worth (4)

A

Cash Price (what was paid for it)
Sale Price (What it would sell for)
Zero
Negative

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17
Q

Real Cash Forecasting

A

Educated guess of cash flow to minimise risk incorporating:
- Industry standards for timing
- Payments - good estimates of known costs e.g. staff, materials etc
- Income - market analysis and experience

18
Q

Accounting Ratios definition

A

Financial performance indicators that help analysing business financial health and operational efficiency.

Provides quick calculations and numbers for industry comparison

19
Q

Accounting ratios (4)

A

Profitability
Cash flow/ Liquidity
Efficiency
Capital structure and investment

20
Q

Profitability ratios (2)

A

Gross profit to sales (gross profit/ sales *100)
Net profit to sales (net profit/ sales *100)

21
Q

Return on Investment (ROI) or Return of Capital Employed (ROCE)

A

ROI = (net profit before tax and interest/capital employed) *100

how much you are making using your assets

22
Q

Cash flow ratios: current ratio

A

Current ratio = Current assets/ current liabilities

cushion available to short term creditors
normally approximately 2:1

23
Q

Cash flow ratios: Liquidity ratio (acid test)

A

LR = (cash + debtors)/ current liabilities

Measure of liquidity.
Should be 1:1
If over you’ve either got too many debtors or under-used cash
If under, difficulty meeting current liabilities

24
Q

Cash flow ratios (2)

A

Liquidity Ratio
Current Ratio

25
Q

Efficiency Ratios (5)

A

Average Collection Period
Credit Period
Stock Turnover
Sales to Fixed Assets
Sales per Employee

26
Q

Capital Investment Indicators (4)

A

Accounting Rate of Return (ARR)
Payback period (PP)
Net present value (NPV)
Internal Rate of Return (IRR)

27
Q

ARR

A

(Average annual profit/Average investment to earn that profit) *100

28
Q

PP

A

Cumulative sum of the net saving until the investment cost is met

29
Q

Net Present Value (NPV)

A

PV of cash flow in a year n = Actual cash flow of year n/(1+r)^n

Net PV = sum of PVs for each year

30
Q

ROI equation

A

Net profit before tax and interest / Capital employed

31
Q

Current ratio

A

Current assets / current liabilities

32
Q

Liquidity ratio

A

Cash + Debtors / Current liabilities

33
Q

Average collection period

A

(Average debtors / Sales) x 365
Taking too long to collect debts is risky in case the businesses go insolvent.

34
Q

Average credited period

A

Average credit/sales x 365
if credits paid off too quickly then full use of credit is not being used as short-term finance. Oppositely if the credit period is too long the company may be too dependent on credit for short-term finance.

35
Q

Accounting rate of return

A

Average annual profit / average investment to earn that profit

36
Q

What sources of finance could a company consider?

A

Bank loan
Investment grant
Share distribution
Cash reserves/ reinvestment of profit

37
Q

percentage value depreciation formula

A

Value = Cost(1-p)^T

p = value lost
T = year

38
Q

Sum of years digits

A

Value lost = (total life/ years!) * Original value

39
Q

By book price

A

Depreciation indicator for large market products only e.g. cars (a 2010 VW Golf has a standard price now of X)

40
Q

Benefits of a longer term loan

A

Lower cost per month/quarter,
Improved cash flow

41
Q

2 ways in which a buisness expansion could be funded

A

Share distribution of a company
Use of profits saved and cash reserves

42
Q

Fixed vs variable costs

A

Fixed are buisness overheads, they stay the same irrespective of quantity - rent, interest on equipment, admin costs, heating costs

Variable costs increase as production volume increases -material costs, casual labor, machine power costs

Engineering Management (3 decks)

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