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Business > Financial Objectives > Flashcards

Financial Objectives Flashcards

1
Q

What are the 4 main functional areas of a business?

A
  1. Finance
  2. Marketing
  3. Human Resources
  4. Operations
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2
Q

What is a business?

A

A business is defined as an organisation or enterprising entity. It can be for-profit entities or non-profit organizations

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3
Q

What is revenue?

A

The money coming in from the sales of goods and services

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4
Q

What is the equation for revenue?

A

Revenue= number of units sold x selling price per unit

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5
Q

What can revenue also be referred to as?

A

Turnover

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6
Q

What can the two costs be classified as?

A

Fixed cost and variable cost

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7
Q

What is fixed cost?

A

A cost that stays the same regardless of the output

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8
Q

Give examples of fixed costs

A

Rent
Managers salaries

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9
Q

What are variable costs?

A

Costs that change in relation to the number of items produced

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10
Q

What is the equation for total cost

A

Total cost= fixed cost + variable cost

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11
Q

What is profit?

A

Profit is the difference between the income of a business and its total costs

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12
Q

What is the equation for profit?

A

Profit = revenue- cost

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13
Q

What are the 2 ways profit can be improved by?

A

Increasing the revenue
Lower the cost of

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14
Q

What are the two types of cash flow?

A

Cash inflows
Cash outflows

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15
Q

What are examples of cash inflows?

A

Cash sales
Payments from debtors
Owners money invested
Sale of assets
Bank loan

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16
Q

What are examples of cash outflows?

A

Purchasing stock
Paying wages
Paying debts- bank loans
Creditors (lenders)
Purchasing assets

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17
Q

What is cashflow?

A

Cash flow refers to the money flowing into and out of a business over a period of time

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18
Q

Why might a profitable business be short of cash?

A

-holding too much stock
-good sold on credit (trade credit B2B)
-dividends (reward to shareholders)
-purchase of a fixed asset (factory)

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19
Q

What is trade credit?

A

A business to business arrangement where a buyer can purchase good or service without paying upfront

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20
Q

Why do seasonal businesses experience cash flow difficulties

A

-outflow will be greater than inflow during the less busy season
-sales will be lower
-will experience negative cash flow

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21
Q

What are the 3 types of profit?

A

Gross profit
Operating profit
Profit for the year

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22
Q

What is the equation for gross profit?

A

Sales revenue-
Cost of sales/ direct cost
=gross profit

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23
Q

What is the equation for operating profit?

A

Gross profit
-expenses/indirect cost
=operating profit

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24
Q

What is the equation for profit for the year?

A

Operating profit
-interest & taxation & one off items
=profit for the year

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25
Q

What are shareholders?

A

People who own shares of a company

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26
Q

What are dividends?

A

May be payed to a shareholder if the company makes profit

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27
Q

What is a budget?

A

A financial plan for the future concerning the revenues and costs of a business

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28
Q

What is variance?

A

The difference between budgeted and actual figures

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29
Q

What are the two types of variance?

A

Favourable and adverse

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30
Q

What are the three types of budgets?

A

Income
Expenditure
Profit

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31
Q

What are some reasons for using budgets?

A

-to improve efficiency
-to establish priorities
-to gain financial support
-to motivate staff
-avoid overspending

32
Q

What is favourable variance?

A

When the costs are lower than expected or the revenue and profit is higher than expected

33
Q

What is adverse variance?

A

When costs are higher than expected or revenue and profit is lower than expected

34
Q

What are some problems of setting budgets?

A

-general rise in price level
-limits may be imposed
-time consuming
-conflicts between departments

35
Q

What is an internal cause for variance?

A

Something within a businesses control

36
Q

What is an external cause for variance?

A

Something outside the control of the businesses controll

37
Q

Give some examples of internal causes of variance

A

-overestimating/underestimating
-changing the selling price
-improving efficiency
-poor communication

38
Q

What are some examples of external causes of variance?

A

-competitor behaviour
-cost of raw materials
-changes in the economy

39
Q

What can a business do to respond to an adverse profit variance?

A

-cut prices
-updating product
-enter new markets
-promotional strategies
-cut supplier costs
-conduct additional market research

40
Q

What is the break even point?

A

The point at which the business is not making profit or loss
-where the total revenue is the same as the total cost

41
Q

What is the formula for break even output?

A

=fixed cost/ contribution per unit

42
Q

What is contribution?

A

The difference between sales revenue and variable costs of production

43
Q

What is the equation for contribution per unit?

A

Selling price (per unit)- variable cost (per unit)

44
Q

What are the two equations for total contribution?

A

=contribution per unit x number of units sold
Or
=total revenue- total variable cost

45
Q

Does contribution include fixed costs?

A

No

46
Q

What is the equation for the margin of safety?

A

=actual output- breakeven output

47
Q

What does it mean if a business is operating with a positive margin of safety?

A

The business is profitable

48
Q

What are debtors?

A

People who owe the business money aka receivables

49
Q

What are creditors?

A

People or organisations that are owed money by a business aka payables

50
Q

What is trade credit?

A

The period of time given by suppliers before customers have to pay for goods and services

51
Q

What is cashflow forecasting?

A

Predicting the future flows of cash into and out of the firms bank account over a specific period of time

52
Q

Why is cashflow so important?

A

If a business runs out of cash it will fail even if it is profitable

53
Q

What are some main cash inflows?

A

Cash sales
Grants
Loans
Share capital invested
Receipts from debtors
Interest on bank balances
Sale of fixed assets

54
Q

What are some main cash outflows?

A

Payment to suppliers
Interest on loans & overdrafts
Wages and salaries
Payments for fixed assets
Dividends payed to shareholders
Repayment of loans
Tax on profits
Payment to creditors

55
Q

What is net cashflow?

A

Cash inflow -cash out flow

56
Q

What are the two categories of expenditure?

A

Capital expenditure and revenue expenditure

57
Q

What is capital expenditure?

A

Spending of money on assets that might be used again and again e.g. machinery

58
Q

What is revenue expenditure?

A

Spending on the day to day running of the business e.g. wages, raw materials

59
Q

What are the 7 main sources of finance?

A

-bank loans
-overdrafts
-crowd funding
-share capital
-venture capital
-debt factoring
-retained profit

60
Q

What are internal sources of finance?

A

Already exist within the business

61
Q

Give examples of internal sources of finance?

A

Selling assets
Retained profit
Entrepreneurs savings

62
Q

What are external sources of finance?

A

Funds injected from outside the business

63
Q

Give examples of external sources of finance?

A

-debt factoring
-share capital
-bank loan
-venture capital
-overdrafts

64
Q

What are the advantages and disadvantages of a bank loan?

A

Advantages:
-can last for 3-10 years
-interest rates are often fixed
Disadvantages:
-can lack flexibility and businesses may have to take out more money than they need
-have to pay a fee for early repayment

65
Q

What are the advantages and disadvantages of an overdraft?

A

Advantages
-flexible on short term
Disadvantages
-high interest rates

66
Q

What are the advantages and disadvantages of debt factoring?

A

Advantages
-receivables turned into cash quickly
Disadvantages
-quite a high cost (charge around 3%)

67
Q

What are the advantages and disadvantages of venture capital?

A

Advatages
-often provide advice and knowledge of market
-long term
Disadvantages
-loose some control over business
-venture capitalist may exert too much influence

68
Q

What are the advantages and disadvantages of retained profit ( profits left in the business)?

A

Advantages
-Doesn’t dilute ownership
-flexible
-cheap
Disadvantages
-restricts value of dividends

69
Q

What are the advantages and disadvantages of share capital?

A

Advantages
-shareholders are not promised dividends
Disadvantages
-dilutes control
-vulnerable to takeover

70
Q

What are the advantages and disadvantages of crowd funding?

A

Advantages
-access to large amount of investors
-fastest way
Disadvantages
-puts ideas public (ideas can be stolen)
-if the target amount is not reached money is returned to investors and business gets nothing

71
Q

Which sources of finance are long term?

A

Loans
Crowd funding
Share capital
Venture capital
Retained profit

72
Q

Why would a business need long term finance?

A

-purchase long term assets
-finance long term plans e.g. expansion

73
Q

What are examples of short term sources of finance?

A

Overdrafts
Retained profits
Debt factoring

74
Q

Why would businesses use short term sources of finances?

A

-to pay outstanding bills
-overcome cash flow shortages

75
Q

What do businesses have to consider when choosing a source of finance?

A

-the legal structure of a business (ltd?/plc?/sole trader?)
-the cost of the finance (rate of interest)
-flexibly
-control
-long term/short term

Business (3 decks)

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