Management of Finance Flashcards
What are four roles of the finance department in a business
Sourcing finance for business development
Maintaining financial records
Paying bills and expenses
Credit control - collecting money owed by customers
What four things does looking at the bigger picture involve
Potential for increased market share
The product portfolio and stages of the product life cycle
Staff skills and levels of motivation
Future product developments
What is debt factoring
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
What is an advantage of debt factoring
This saves the business time pursuing customers and ensures the business receives most of the money it is owed
What is a disadvantage of debt factoring
The factor charges the business a fee for their service and so this reduces the amount of cash they will actually receive
What is hire purchase
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.
What is an advantage of hire purchase
This allows the business to purchase items like vehicles with only a small initial outlay of money
What is disadvantage of hire purchase
The business does not legally own the asset bought until the last payment has been made
What is leasing
When a business uses a leasing system it never owns the asset. The business simply rents the asset
What is an advantage of leasing
The advantage is that the leasing system will replace the asset every couple of years and they are also responsible for any repairs
What is a disadvantage of leasing
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
What is venture capital
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
What are the three financial statements
Trading account
Income statement
Statement of Financial Position
What are the three accounts and what do they calculate
Trading account(for gross profit) Income statment ( for Profit for the year) Appropriation account (for retained profit)
What is the formula to calculate profit
profit = sales - expenses
What is the formula for gross profit
revenue - cost of goods sold (cost of buying and storing)
What is the formula for profit for the year
Profit for the year = gross profit - expenses
What does the statment of financial position do
This account shows the value of the business at a particular date. It is a record of Assets and liabilities
What three things does a statment of financial positions include
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
What is a budget
an estimate of income and expenditure for a set period of time.
What are four areas a budget will include
profits
sales
production
purchases
What are four uses of a budget for managementq
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
What four things can a cash budget be used to do
Identify cash flow issues
Forecast cash surpluses
Set targets for each department
Allow for actions to be taken to prevent overspending
What are four methods to solve cash flow problems
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
What are three areas of ratios
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
What is the gross profit ratio
formula = gross profit/sales * 100
This shows the percentage of gross profit for every £1 of sales
What does gross profit ratio show
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
What is profitability ratio
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
profit for the year analysis
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
What is return on capital employed
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
return on capital employed analysis
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
What is current ratio
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
What is the acid test ratio
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
What is rate of stock turnover
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
rate of stock turnover analysis
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
What are four problems with accounting ratios
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
What are three advantages of software in finance department
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
What is cloud accounting
when businesses do not have dedicated software in their premises but access it on a rental basis from a remote site.`
