management of finance Flashcards
1
Q
what is revenue
A
quantity sold x price. money made from selling goods
2
Q
what is total costs
A
fixed costs + variable costs.
3
Q
what is fixed costs
A
costs that DONT vary with output
4
Q
what is variable costs
A
costs that DO vart=y with output
5
Q
what is profit
A
revenue - total costs. money you have left over from deductions
6
Q
what is gross profit
A
sales revenue - cost of sales. profit made from buying and selling materials. money you have BEFORE deductions
7
Q
what is net profit
A
gross profit - expenses. calculated tax owned to HMRC. - Her Majesty’s Revenue and Customs
8
Q
what is a creditor
A
business who owes someone money
9
Q
what is a debtor
A
someone who owes money to business
10
Q
what is an asset
A
things that business owns eg vehicles, buildings
11
Q
what are liabilities
A
debts business owes to creditors
12
Q
what is cash flow/liquidity
A
refers to how readily company has access to finance to allow it to meet its financial obligations and operate successfully
13
Q
what is efficiency
A
refers to gaining maximum outputs from minimum inputs. refers to how well company uses money it has
14
Q
what is capital
A
provides good revenue ie will grow in value. views as money invested in business
15
Q
what is a budget
A
plan expenditure and projected income over period of time allows org to predict cash flow and profitability to as to allocate resources efficiently. projection where you are going to spend
16
Q
what are reciepts
A
money recieved by business
17
Q
what is a payment
A
money paid out by business
18
Q
what is a drawing
A
money owner takes out for own personal uses. must be recorded and replaced as has to be taxed
19
Q
what is a final/annual account
A
documents business must produce at end of each financial year. show how business is doing. comprised of Trading, Profit and Loss account and balance sheet
20
Q
what is a T, P + L
A
summary of sales and expenditure during course of year. calculates gross and net profit
21
Q
what is a balance sheet
A
worth of org at a particular point in time. shows assets, liabilities and capital invested
22
Q
what is an accounting ratio
A
different pieces of financial info and compare them to identify how well a business is doing
23
Q
what is a fixed asset
A
items business owns normally longer than a year
24
Q
what is a current asset
A
items business will own likely to change value during course of a year
25
what is a current liability
short term debts of business normally within course of year
26
what is working capital
measure of company's efficiency and short term financial health. calculated as current assets minus current liabilities
27
what is a dividend
payments to shareholders from share of business' profits
28
what is the role and importance of finance
control costs and expenditure - identifying areas of business where expenditure and costs will need be cut eg find cheaper supplier
monitor cash flow - biggest reason for business to fail each year therefore businesses should ensure to have sufficient cash to cover outgoings each months
forecast of what will happen in future - done by producing budgets for each department so business can allocate resources at efficiently as possible
monitor current performance - use accounting tactics to do this across various areas of org in order to produce best quality info for decision making
29
what are the different sources of finance
short term, medium term and long term
30
what are the short term sources
sale of asset, grant, bank overdraft, factoring and trade credit
31
what are the medium term sources
hire purchase, leasing, bank loan
32
what are the long term sources
debenture, venture capitalists, share issue, mortgage, owner's savings
33
what is a sale of an asset
firm sells off a piece of equipment they no longer need/using
34
what is a grant
fixed sum of money provided by government to business to be used for a specific purpose eg employing people from high area of unemployment. comes with a condition attached which you have to abide by. if don't then grant can be taken away
35
what is a bank overdraft
money business can take out of its account when balance is zero. required to agree to this with bank in advance. often cost more interest than bank loan
36
what is trade credit
supplier will deliver raw materials and allow firm to pay back at a later date
37
what is factoring
business gives trade credit to customer and customer fails to repay business. business can't get that money to pay back their supplier. business can sell off customer to a third party (usually a debt collecting business) for a cheaper price.
38
what is hire purchase
firm will hire equipment and pay for it in instalments. After last payment firm takes ownership of good
39
what is leasing
firm rents building of piece of equipment for an agrees amount of time
40
what is a bank loan
fixed sum of money given to business by bank which is to be paid pack in fixed instalments over a fixed period of time. fixed interest is to be paid back as well
41
what is a mortgage
a loan given to firm who wish to purchase premises and repaid in instalments with interest
42
what is owner's savings
funds saved by owner and invested in business
43
what is share issue
firm releases more shares in firm to existing/prospective shareholders. diluting value of existing shares
44
what is venture capital
private investors who provide finance where banks deem it as too risky
45
what is debenture
group of loans from number of organisations/individuals or finance institutions make an interest payment annually then you make the capital repayment at end of term.
lump sum up front to take over co. make smaller interest repayment at end you pay back capital at end
46
what is the standard list of sources of finance
bank loan, hire purchase, leasing, bank overdraft, trade credit, mortgage
47
what is a soletrader's sources of finance
standard list + owner's savings, gov grant
48
what is a partnership's sources of finance
standard list + partner's savings, gov grant
49
what is an LTD's sources of finance
standard list + share issue, gov grant
50
what is a PLC's sources of finance
standard list + tax revenue, fines
51
what is a charity's sources of finance
standard list + donations, fundraising
52
what is the equation of profit
profit = revenue - cost
53
what is another word for sales
revenue
54
what are the different types of cost
variable cost, fixed cost and total cost
55
what is total cost
= fixed costs + variable costs
56
what is an example of fixed costs
rent of factory/rental fee for photocopying machine
57
what is an example of variable costs
raw materials
58
what is a challenge for any manager
knowing which level of sales is producing a loss and which levels of sales is producing a profit
59
what is break even
when total costs is equal to total revenue
60
before breakeven what is happening
the firm is making a loss
61
after breakeven what is happening
the firm is making a profit
62
what is a margin of safety
number of actual sales above break even poiny
63
what are the benefits of using a break even chart
firm can determine minimum target level for sales
once sales target set firm can set target level of output
target can be communicated to rest of firm
break even chart acts like planning doc for firm
managers can pass judgement as to whether members of staff are performing well
64
what are annual accounts
comprised of Trading, Profit and Loss account and Balance sheet
65
what must LTD AND PLCs do
publish their annual accounts
66
where should LTDs lodge their accounts
with the companies house in edinburgh
67
where should PLCs lodge their accounts
stock market
68
what does a Trading, Profit and loss account show
profit/loss over period of time (usually a year)
69
what does a t,p+l account identify
how much money has come into firm and how much moeny has been spent and on what
70
what does a trading account do
calculates gross profit/loss. excludes firms internal expenditure
71
what is a profit and loss account do
calculates net profit/loss
72
what does a balance sheet show
value of business at a point in time
73
what does a balance sheet take into consideration
fixed assets, current assets, current liabilities, working capital, financed by, capital, net profit and drawings
74
what is fixed assets
items which business owns and will keep for more than a year
75
what is a current asset
business owns and keeps for less than a year
76
what is a current liability
item which business owes and pays for in short term
77
what is working capital
difference between current assets and current liabilities. shows funds available after short debts have been met
78
what is financed by
how the firm has been financed
79
what is capital
investment that owner has put into firm
80
what is net profit
profit made after all business expenses. tax to be paid is calculated using this figure
81
what is drawings
funds taken out by owner from firm for their own personal use
82
what does ratio analysis provide
a quick and relatively simple means of examining financial health of a business
83
what does a ratio analysis express
one figure appearing in financial statements with some other figure appearing in financial statements (net profit in relation to capital employed) or perhaps some resource of the business
84
what does a ratio analysis allow you to do
compare performance to previous years
85
how can ratios be grouped
into certain categories, each of which reflect particular aspect of financial position/performance
86
what is a profitability ratio
businesses come into being with primary purpose of creating wealth for their owners. Profitability ratios provide an insight to degree of success in achieving tyhis purpose
87
what is an efficiency ratio
ratios used to measure efficiency with which certain resources have been utilised within business
88
what is a liquidity ratio
vital for there to be sufficient liquid resources available to meet maturing obligations. ratios may be calculated which examine relationship betweeen liquid resources and creditors due for payment in near future
89
what are the uses of ratio analysis
compare current performance with past experiences
compare performance against similar organisations eg competitors
identify differences actual performance and planned performance. use this to help make decisions on future performance
highlight trends over period of time
90
what are the limitations of ratio analysis
info contained in annual accounts is historical as it related to last year's trading
inter-firm comparisons must be made with firms of similar size and same type of industry
findings may not take into account external factors PESTEC
findings do nit show implications of product developments/declining product ie product life cycle
findings do not reveal elements such as staff morale
91
what is the gross profit percentage
gross profit / sales x 100 = %
92
what does the gross profit percentage measure
profit being made from buying and selling stock
93
if gross profit %age needs improved then....
increase selling price
find cheap suppliers
negotiate discounts with suppliers
reduce theft (cost) or waste
94
what is the net profit percentage
net profit / net sales x 100 = %
95
what does the net profit percentage measure
profit being made after business has paid expenses
96
if net profit percentage needs improved then...
improve gross profit
| identify costs that can be reduced
97
what is the return on capital employed
net profit / opening capital x 100 = %
98
what does the return on capital employed measure
returm on capital invested in business by owner
99
if return on capital employed needs improved then
increase sales and gross profit
| decrease expenses
100
what is the current ratio/working capital ratio
current assets / current liabilities
101
what does the current ratio/working capital ratio show
shows ability of business to pay short term debts. answer of 2:1 is regarded as acceptable
102
if current ratio needs to be improved then...
increase assets by selling off current assets or decrease liabilities by discounts
103
what is the acid test ratio
current assets - stock / current liabilities (answer:1)
104
what does acid test ratio show
ability of business to pay short term debts in crisis situation
105
what is a generally acceptabke answer for the acid test ratio
1:1
106
what is a cash budget
forecast of all money coming into and out of the business over a period of time ie normally a year
107
why is a cash budget produced
used to predict recipets and payments of cash. can be produced for few months/year
108
what is a budget used for
highlight periods when cash flow problems may occur, allows org to take corrective action
secure potential investors
used to make comparisons between actual spending and targeted spending
show surplus cash which could be used for capital investment
used to give departments / managers a budget/target for capital investment
used as aid for future financial planning
help measure performance of org
109
how many businesses fail due to cash flow problems
80%
110
what can businesses be unless debtors pay.
very profitable on their annual accounts.
111
what are the reasons for cash flow problems
tying up too much cash in stock
allowing customers too much credit
customers not paying within agreed credit terms
borrowing too much finance at high interest payments
owners taking out too many personal drawings
low sales
112
how can you resolve cash flow problems
offer discounts and promotions to encourage cash sales and reduce stock levels
sell any unneccessary fixed assets
introduce JIT
encourage overdue customers to pay bills
arrange credit with suppliers
owners draw less
produce cheaper prods
seek another source of finance - bank loan
113
who uses financial info
employees/trade unions to make sure they are being paid fairly
shareholders/owbers - whether or not to invest more into business or not
HMRC - calculating how much tax org should pay
competitors - to measure org's market share, expenses
114
what can a spreadsheet do
construct cash budget, performs calculations and is for a more accurate and consistent than human.
allows graphs to be produced which allows finance department to spot trends eg rising wage costs
graphs and pie charts can be used as communication tools for management
115
what are databases used for
firm can use electronic filing systems to record prices and costs of suppliers
116
what is sage
firm of accounts software allows firms to complete bookkeeping on computers
117
what is pay pal
allows customers to pay on line which makes easier for firm to control cash flow
