perry finance test Flashcards
what factors will influence the choice of finance?
-credit rating / history
-amount of money required
-amount of time
-company performance
-finance available
-percentage cost of debt
what are financial objectives?
refers to the money goals a business will set itself during a certain period of time
they will provide a target to work towards as well as a mechanism to measure performance
why set financial objectives?
-measure performance
-provide targets that can provide motivation-potential investors may be able to access the viability of the business
what is objective 1?
cost minimisation - when a business attempts to maximise profits by keeping costs low
what is objective 2?
cash flow target - a financial objective focused on maintaining a healthy cash flow position
what is objective 3?
revenue targets - involves setting minimum levels of revenue
what is objective 4?
profit targets - involves setting a satisfactory level of profit that the company would be happy to gain
what is objective 5?
return on investment - calculated by
return on investement/capital invested x 100
what is objective 6?
capital structure - refers to the long term finance of the business made up of equity and borrowing
what are some financial internal influences?
-owners and their motives
-industry sector and the current account
-position of the business
what are some financial external influences?
-economic factors (interest rates)
-political factors/government policy
-competition
-technological change
why do businesses need finance?
-growth and expansion
-start up funds
-running costs
internal sources of finance
-owners savings
-retained profits
-reducing the level of stock
-sale of existing assets
external sources of finance (short term)
-overdraft
-trade credit
-debt factoring
external sources of finance (long term)
-share capital(equity)
-government grants
-venture capitalists
-loans
-crowdfunding
what is an overdraft?
this is a service that lets you have money even if there is none available in your account, it is for an agreed amount of money and an agreed period of time
what is trade credit?
when a business will allow customers a period of time to pay their goods and services, buy now pay later
what is debt factoring?
when a business sells its customers outstanding debts in return for short term payments from a 3rd party company
what is a venture capitalist?
a business that invests in start up companies in return for a share of the business
what is share capital?
this is where a business will sell a % of the business in return for investment
what is crowdfunding?
an entrepreneur / business can attract investors who provide finance
what are government grants?
the business receives a sum of money from the government that does not need to be repaid
advantages and disadvantages of bank loans
adv: can spread large amounts over smaller more manageable payments
dis: interest and terms and conditions
advantages and disadvantages of overdrafts
adv: flexible and no interest
dis: interest and high charges if deadline is missed
advantages and disadvantages of venture capitalists
adv: large amounts, no debt, no interest
dis: can lose control and ownership, dividends
advantages and disadvantages of share capital
adv: large amounts, no debt, no interest
dis: can lose control and ownership, dividends
advantages and disadvantages of trade credit
adv: flexible and no interest if paid on time
dis: high costs if not paid on time and fees attached
advantages and disadvantages of debt factoring
adv: large amounts upfront and money can be accessed straight away
dis: high discounts expected, could potentially lead to a negative brand image
advantages and disadvantages of crowdfunding
adv: no debt repayments and good PR for the business
dis: can lose some equity depending on the deal and might be limited
advantages and disadvantages of government grants
adv: does not need to be repaid and no interest
dis: limited availability
what is a budget?
a forward financial plan that covers all the aspects of a business costs and revenues
why prepare a budget?
-to exercise financial control within a business
-to provide direction and coordination
-to ensure that no department has an overspend
-sets targets which can motivate workers
what is a variance?
the difference between the actual and the budget
what is a favourable variance?
better than expected
-costs are lower than expected
-revenue is higher than expected
what is an adverse variance?
worse than expected
-costs are higher than expected
-revenue is lower than expected
variance equation
variance = actual - budget
profit equation
sales income(revenue) - costs
how is budget allocated?
-the amount available
-inflation
-extrenal factors
what is zero budgeting?
-costs and revenue are set to 0
-based on new proposals for cost and sales
-time consuming but can ensure that funds are allocated properly
what is historical budgeting?
-adds a little for inflation
-quicker and simpler but doesn’t focus on problems
-not efficent
benefits of budgeting
-control and monitor costs
-inefficiency and waste can be identified
-can be used for motivation
-can be used to set targets and judge performance
-can improve internal communication
drawbacks of budgeting
-based on assumptions and are not exact
-external factors make it almost impossible to set accurate budgets
-could be demoralising if set incorrectly
-managers rake short term decisions in order to meet budgetary requirements
what is a cash flow?
a cash flow is the movement of money in and out of a business over a period of time
what is a cash flow forecast?
a cash flow forecast is the projection of money moving in and out the business
what is cash in?
money that flows into the business from sales
what is cash out?
money that flows out of the business via a range of costs
how can cash flow be improved?
-use a source of finance
-sale and leaseback
-cut costs
-delay payments
-remove any credit for customers
-increase revenue
what is break even?
the point at which total revenue equals total costs
what is break even analysis?
it helps a business to make decisions abut price, cost and level of sales
equation for total revenue
selling price x quantity sold
what is total revenue?
the money a business recieves from selling its goods or services
equation for total costs
fixed costs + variable costs
what are fixed costs?
costs that do not change if output changes
what are variable costs?
costs that change if output changes
what is margin of safety?
this is the number of units current output is above the break even point
equation for margin of safety
current output - break even point
break even formula
fixed costs / contribution per unit
break even formula
fixed costs / contribution per unit
total contribution equation
contribution per unit x output
contribution per unit equation
selling price - variable cost
profit/ loss formula
total contribution - fixed costs
why is break even useful
- helps business plan costs and identify any potential issues in advance
- it enables them to analyse the impact of different prices
- it states how viable the business is and if profits and achievable
