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Higher Business > Management of Finance > Flashcards

Management of Finance Flashcards

1
Q

What are four roles of the finance department in a business

A

Sourcing finance for business development

Maintaining financial records

Paying bills and expenses

Credit control - collecting money owed by customers

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2
Q

What four things does looking at the bigger picture involve

A

Potential for increased market share

The product portfolio and stages of the product life cycle

Staff skills and levels of motivation

Future product developments

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3
Q

What is debt factoring

A

When customers who buy on credit fail to pay on time or attempt not to pay at all the business can use a factoring service. The factor will buy debts of the business and they will then attempt to recover payment from the customers

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4
Q

What is an advantage of debt factoring

A

This saves the business time pursuing customers and ensures the business receives most of the money it is owed

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5
Q

What is a disadvantage of debt factoring

A

The factor charges the business a fee for their service and so this reduces the amount of cash they will actually receive

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6
Q

What is hire purchase

A

Hire purchase allows a business to buy non-current assets, such as a delivery van and pay it back over 36 months . A deposit is required followed by monthly payments over a few years.

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7
Q

What is an advantage of hire purchase

A

This allows the business to purchase items like vehicles with only a small initial outlay of money

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8
Q

What is disadvantage of hire purchase

A

The business does not legally own the asset bought until the last payment has been made

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9
Q

What is leasing

A

When a business uses a leasing system it never owns the asset. The business simply rents the asset

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10
Q

What is an advantage of leasing

A

The advantage is that the leasing system will replace the asset every couple of years and they are also responsible for any repairs

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11
Q

What is a disadvantage of leasing

A

Rental charges or leasing costs can build up over a long period of time and so it may actually work out cheaper to actually purchase the asset in the first place

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12
Q

What is venture capital

A

A venture capitalist is a person or group of people that will seek part ownership of the business in return for taking the risk of lending money

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13
Q

What are the three financial statements

A

Trading account
Income statement
Statement of Financial Position

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14
Q

What are the three accounts and what do they calculate

A 
Trading account(for gross profit)
Income statment ( for Profit for the year)
Appropriation account (for retained profit)
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15
Q

What is the formula to calculate profit

A

profit = sales - expenses

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16
Q

What is the formula for gross profit

A

revenue - cost of goods sold (cost of buying and storing)

17
Q

What is the formula for profit for the year

A

Profit for the year = gross profit - expenses

18
Q

What does the statment of financial position do

A

This account shows the value of the business at a particular date. It is a record of Assets and liabilities

19
Q

What three things does a statment of financial positions include

A

Non-current assets - items the business owns and will keep for longer than one year

current assets - items that a business owns that they will keep for less than a year

Current liabilities - items that a business owes and will pay back in the short term

20
Q

What is a budget

A

an estimate of income and expenditure for a set period of time.

21
Q

What are four areas a budget will include

A

profits

sales

production

purchases

22
Q

What are four uses of a budget for managementq

A

Planning - looking ahead to set aims and strategies which allows problem solving to be proactive rather than reactive

Organising - allows for the right resources to be in place at the right time

Commanding - due to having information on the future position of the business, informed decisions can be made and passed on to subordinates

Controlling - setting a budget and comparing it to actual performance means that changes can be quickly

23
Q

What four things can a cash budget be used to do

A

Identify cash flow issues

Forecast cash surpluses

Set targets for each department

Allow for actions to be taken to prevent overspending

24
Q

What are four methods to solve cash flow problems

A

Offer discounts and promotions to encourage customers to buy more and pay more promptly

Arrange better credit terms with suppliers

Find cheaper suppliers for purchases of supplies and overheads

Sell unecessary Non-current assets

25
Q

What are three areas of ratios

A

Profitability ratios

Liquidity ratios - to measure the ability of the organisation to pay its debts

Performance ratios - to measure how efficiently the organisation is running

26
Q

What is the gross profit ratio

A

formula = gross profit/sales * 100

This shows the percentage of gross profit for every £1 of sales

27
Q

What does gross profit ratio show

A

An increase in ratio means that more sales have been generated

A decrease in ratio means that the cost of materials may have gone up

28
Q

What is profitability ratio

A

formula = profit for the year/sales * 100

This shows the percentage of profit for year for every £1 of sales

The higher the figure the more profitable the business

29
Q

profit for the year analysis

A

An increase in ratio means that the business has better control over its expenses or it may be a ‘knock-on effect’ from an increase in the gp%

A decrease in this ratio means that expenses may have gone up or may be out of control or it may be because the gp% was decreased

30
Q

What is return on capital employed

A

Formula = profit for the year/capital employed * 100

This shows the percentage of profit for every £1 invested in the company

The higher the firgure the higher the profit for investors

31
Q

return on capital employed analysis

A

An increase in the ratio may be due to a higher profit for year caused by decreased expenses or increased sales

A decrease in the ratio may be due to a lower profit for the year caused by higher expense and lower sales. It may also be due to additional capital being invested into the business, but the same level of profit for year being maintained

32
Q

What is current ratio

A

formula = current assets/current liabilities

This shows the level of current assets to pay for every £1 of debt

2:1 is ideal

less than 2:1 is a cash flow problem

and greater than 2:1 it too many current assets

33
Q

What is the acid test ratio

A

current assets-stock/current liabilities

This shows the level of current assets (-stock) to pay for every £1 of debt

1:1 ideal

less than 1:1 there is too much capital tied up in stock

greater than 1:1 too many current assets

34
Q

What is rate of stock turnover

A

formula = cost of sales/average stock (inventory)

This ratio works out how many times stock is used up. This can be influenced by the type of stock held

35
Q

rate of stock turnover analysis

A

An increase in ratio over time means that more stock is being sold more quickly, which should result in higher sales. However, it may also be because there has been an increase in cost of sales

A decrease in ratio means that less stock is being sold. However,it may also be caused by a decrease in the cost of sales or an increase in average stock holding

36
Q

What are four problems with accounting ratios

A

The figures used to calculate the ratios is historic and therefore do not show what will happen in the future

Comparisons with other organisations must only be made with similar organisations or they may not be useful

Do not take external factors into account

Do not take new product development or declining products into account

37
Q

What are three advantages of software in finance department

A

A benefit of having dedicated software is that specialist reports can be embedded within the software meaning that reports relevant to the business’s needs can be produced quikcly and accuratley. This can also speed up decision making

Graphs and charts can be produced from the financial data

the software can link to external bodies such as HMRC to allow electronic submission of forms such as VAT Returns

38
Q

What is cloud accounting

A

when businesses do not have dedicated software in their premises but access it on a rental basis from a remote site.`

Higher Business (8 decks)

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