management of finance Flashcards
what is revenue
quantity sold x price. money made from selling goods
what is total costs
fixed costs + variable costs.
what is fixed costs
costs that DONT vary with output
what is variable costs
costs that DO vart=y with output
what is profit
revenue - total costs. money you have left over from deductions
what is gross profit
sales revenue - cost of sales. profit made from buying and selling materials. money you have BEFORE deductions
what is net profit
gross profit - expenses. calculated tax owned to HMRC. - Her Majesty’s Revenue and Customs
what is a creditor
business who owes someone money
what is a debtor
someone who owes money to business
what is an asset
things that business owns eg vehicles, buildings
what are liabilities
debts business owes to creditors
what is cash flow/liquidity
refers to how readily company has access to finance to allow it to meet its financial obligations and operate successfully
what is efficiency
refers to gaining maximum outputs from minimum inputs. refers to how well company uses money it has
what is capital
provides good revenue ie will grow in value. views as money invested in business
what is a budget
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
what are reciepts
money recieved by business
what is a payment
money paid out by business
what is a drawing
money owner takes out for own personal uses. must be recorded and replaced as has to be taxed
what is a final/annual account
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
what is a T, P + L
summary of sales and expenditure during course of year. calculates gross and net profit
what is a balance sheet
worth of org at a particular point in time. shows assets, liabilities and capital invested
what is an accounting ratio
different pieces of financial info and compare them to identify how well a business is doing
what is a fixed asset
items business owns normally longer than a year
what is a current asset
items business will own likely to change value during course of a year
what is a current liability
short term debts of business normally within course of year
what is working capital
measure of company’s efficiency and short term financial health. calculated as current assets minus current liabilities
what is a dividend
payments to shareholders from share of business’ profits
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
what are the different sources of finance
short term, medium term and long term
what are the short term sources
sale of asset, grant, bank overdraft, factoring and trade credit
what are the medium term sources
hire purchase, leasing, bank loan
what are the long term sources
debenture, venture capitalists, share issue, mortgage, owner’s savings
what is a sale of an asset
firm sells off a piece of equipment they no longer need/using
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
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
what is trade credit
supplier will deliver raw materials and allow firm to pay back at a later date
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.
what is hire purchase
firm will hire equipment and pay for it in instalments. After last payment firm takes ownership of good
what is leasing
firm rents building of piece of equipment for an agrees amount of time
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
what is a mortgage
a loan given to firm who wish to purchase premises and repaid in instalments with interest
what is owner’s savings
funds saved by owner and invested in business
what is share issue
firm releases more shares in firm to existing/prospective shareholders. diluting value of existing shares
what is venture capital
private investors who provide finance where banks deem it as too risky
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
what is the standard list of sources of finance
bank loan, hire purchase, leasing, bank overdraft, trade credit, mortgage
what is a soletrader’s sources of finance
standard list + owner’s savings, gov grant
what is a partnership’s sources of finance
standard list + partner’s savings, gov grant
what is an LTD’s sources of finance
standard list + share issue, gov grant
what is a PLC’s sources of finance
standard list + tax revenue, fines
what is a charity’s sources of finance
standard list + donations, fundraising
what is the equation of profit
profit = revenue - cost
what is another word for sales
revenue
what are the different types of cost
variable cost, fixed cost and total cost
what is total cost
= fixed costs + variable costs
what is an example of fixed costs
rent of factory/rental fee for photocopying machine
what is an example of variable costs
raw materials
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
what is break even
when total costs is equal to total revenue
before breakeven what is happening
the firm is making a loss
after breakeven what is happening
the firm is making a profit
what is a margin of safety
number of actual sales above break even poiny
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
what are annual accounts
comprised of Trading, Profit and Loss account and Balance sheet
what must LTD AND PLCs do
publish their annual accounts
where should LTDs lodge their accounts
with the companies house in edinburgh
where should PLCs lodge their accounts
stock market
what does a Trading, Profit and loss account show
profit/loss over period of time (usually a year)
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
what does a trading account do
calculates gross profit/loss. excludes firms internal expenditure
what is a profit and loss account do
calculates net profit/loss
what does a balance sheet show
value of business at a point in time
what does a balance sheet take into consideration
fixed assets, current assets, current liabilities, working capital, financed by, capital, net profit and drawings
what is fixed assets
items which business owns and will keep for more than a year
what is a current asset
business owns and keeps for less than a year
what is a current liability
item which business owes and pays for in short term
what is working capital
difference between current assets and current liabilities. shows funds available after short debts have been met
what is financed by
how the firm has been financed
what is capital
investment that owner has put into firm
what is net profit
profit made after all business expenses. tax to be paid is calculated using this figure
what is drawings
funds taken out by owner from firm for their own personal use
what does ratio analysis provide
a quick and relatively simple means of examining financial health of a business
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
what does a ratio analysis allow you to do
compare performance to previous years
how can ratios be grouped
into certain categories, each of which reflect particular aspect of financial position/performance
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
what is an efficiency ratio
ratios used to measure efficiency with which certain resources have been utilised within business
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
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
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
what is the gross profit percentage
gross profit / sales x 100 = %
what does the gross profit percentage measure
profit being made from buying and selling stock
if gross profit %age needs improved then….
increase selling price
find cheap suppliers
negotiate discounts with suppliers
reduce theft (cost) or waste
what is the net profit percentage
net profit / net sales x 100 = %
what does the net profit percentage measure
profit being made after business has paid expenses
if net profit percentage needs improved then…
improve gross profit
identify costs that can be reduced
what is the return on capital employed
net profit / opening capital x 100 = %
what does the return on capital employed measure
returm on capital invested in business by owner
if return on capital employed needs improved then
increase sales and gross profit
decrease expenses
what is the current ratio/working capital ratio
current assets / current liabilities
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
if current ratio needs to be improved then…
increase assets by selling off current assets or decrease liabilities by discounts
what is the acid test ratio
current assets - stock / current liabilities (answer:1)
what does acid test ratio show
ability of business to pay short term debts in crisis situation
what is a generally acceptabke answer for the acid test ratio
1:1
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
why is a cash budget produced
used to predict recipets and payments of cash. can be produced for few months/year
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
how many businesses fail due to cash flow problems
80%
what can businesses be unless debtors pay.
very profitable on their annual accounts.
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
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
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
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
what are databases used for
firm can use electronic filing systems to record prices and costs of suppliers
what is sage
firm of accounts software allows firms to complete bookkeeping on computers
what is pay pal
allows customers to pay on line which makes easier for firm to control cash flow
