Processes Flashcards
Name the 5 Steps in the Planning and Implementing Process
- Determining Financial Needs
- Developing Budgets
- Maintaining Record Systems
- Identifiying Financial Risks
- Establishing Financial Controls
1) How do Businesses determine Financial Needs?
Financial needs will be determined by:
- The size of the bus.
- Current phase in bus. life cycle
- Future plans for growth
A situational analysis of the current financial position is the basis for effective financial planning.
2) Why do Businessess develop budgets?
A budget is a plan predicting revenue and expenses for a future time period.
Businesses will develop budgets to determine cash required for planned activities, use and cost of materials or number and cost of labour needed for production
2) List the different types of budgets and what they are used for
1) Operating Budget - relate to main activities of the bus. (Sales, labour costs, raw material costs, administrative costs)
2) Project budgets - relate to capital expenditure (purchasing additional machinery) and research and dvelopment
3) Financial budgets - relate to financial data of the bus. (cash flow, balance sheet, income statements)
2) What is a Variance Analysis and why is this important for finance managers
Variance analysis examines the gap between planned and actual budgeted outcomes. It allows managers to adjust for future planning of finances based on the feedback.
3) Why are Record Systems used by Businesses? and what makes them effective?
Record systems are employed to ensure that the data recorded is secure, accurate and reliable.
An effective record system:
- Will improve efficiency (minimise mistakes which cost time - “time is money”)
- Continuously monitors the business’s performance
- Will produce financial reports
- Identifies issues of concern and opportunity and responds quickly to these changes.
4) What do bus. owners have to consider when taking out a loan?
Bus. owners must consider the financial risk, they must also consider:
- The amount of debt affordable
- Cost of borrowing (interest rates)
4) what happeneds if a bus cannot cover their obligations and what are some strategies to reduce this risk?
if a bus is unable to repay loan:
- Legal action
- Repossession of assets to recover loan
- Bankruptcy
Strategies to reduce this risk:
- Credit Controls
- Management of Working Capital
- Hedging
- Taking out Long term loans
- Renogotiating payment terms
5) What are financial controls and what are some examples of controls?
Financial controls are the policies and procedures that ensures the plans of the bus. will be achieved in the most efficient way. –> keeps the business on track.
Controls include:
- Clear authorisation and responsibilities of tasks
- Seperation of Duties
- Control of cash (Cash registers, depositing cash daily)
- protection of assets ( security)
- control of credit
Describe 3 advantages of Debt Finance
1) Funds are readily avaliable and can be acquired at short notice (no need to save large amounts)
2) Flexible payment periods and types of debts are avaliable –> can be paid over certain time period
3) Will not dilute current ownership of the bus. –> Owner retains full control of the bus.
Describe 3 Disadvantages of Debt Finance
1) Debt burden –> regular payments have to be made even if cash flow is low (stress)
2) Debts must be paid with interest –> costs more than you borrowed
3) Secuirty is required by the bus. –> Assests can be repossessed.
Describe 3 Advantages of Equity Finance
1) No Debt Burden –> Less risk for owner
2) Low gearing - uses on equity –> appeals to investors as a save business
3) No Interest repayments –> increase capital gain w/o repayments
Describe 3 Disadvantages of Equity Finance
1) Ownership of the business is diluted –> selling parts of the business
2) Equity hard to obtain / timely –> Limits growth in the S/T
3) More expensive than debt in the L/T –> Dividends must be paid to shareholders.
List the Processes of Financial Mananagement
- Planning and Implementing -
- Monitoring and Controlling (Financial Statements)
- Financial Ratios
- Limitations of Financial reports
- Ethical issues related to financial reports
What do Cash Flow Statements show? and how do they help businesses?
Indicates cash balance position at the end of an accounting period e.g at the end of the month.
Highlights periods of high cash payments and low cash receipts
- Allows bus. to identify problems with cash flow i.e. Liquidity and WC problems
- Cash flow forecasts allow the bus. to plan for these times of too much or too little cash.
What do Income Statements show and why are they important?
Indicates the level of profit (or loss) for a bus. for a particular period.
They are important:
- in evaluating changes in profit level
- In Assessing increases in expenses
- For making comparisons with previous years
- Comparing profits with other businesses.
What do Balance Sheets show and why are they important?
Show financial position of a bus. at a particular point in time
Shows:
- S/T Liabilities and Assets
- L/T Liabilities and Assets
- Owners Equity
Essential in assessing the leve of liquidity, gearing and solvency and is important to shareholders –> Shows the value of their investment in the business itself
Important when the bus:
- Wants to borrow money
- Business is being sold
What is Owner’s Equity? and how is it calculated
The investment (Capital) contributed by the owners of the bus. -> Owner's share of the total value of the bus. once debts are payed
OE = Total Assets - Total Liabilities
What are people that own Accounts payable called?
Creditos
What are the people that own Accounts Recieveables Called?
Debtors
What is the Acounting Equation?
Assets = Liabilities + OE
What is Working capital and how is it calculated?
the capital of a business which is used in its day-to-day trading operations.
WC = CA - CL
List the Financial ratios:
- Liquidity ratio
- –> Curent ratio
- Gearing (Solvency)
- –> Debt to Equity ratio
- Profitability ratios:
- –> Gross profit ratio
- –> Net profit ratio
- –> Return on Equity ratio
- Efficiency:
- —> Expense Ratio
- —> Accounts Recievable Turnover
What is the Current Ratio and what does it measure
Current ratio = Current Assets : Current Liabilities
Measures a bus. ability to cover their curent liabilities with thier curent assets (2:1 is prefered)
–> For every $1 of Liabilities they have $2 of Assets to cover it
- > Anything below 1:1 indicate insufficient assests to pay liabilities
- > Anything too high e.g. 10:1 indicates there is missed oppotunity for Growth –> Money can be spent to expand the bus.
What is the Debt to Equity ratio and what does it measure
Gearring is the proportion of debt to equity used to finance activities of the bus.
DTER = Total Liabilities : Total Equity —-> NOT ASSETS
Measue ability to coverr L/T Financial Commitments
1:1 (100%) is prefered
=> For every $1 put in by owners, $1 is borrowed
–> Less % = more solvent, low risk, low gearing, more stability
However: Bus. not growing as Quickly as they could if they used more debt finance –> Inefficient use of Finance
High level (Above 100%) = High Risk, High Gearing, Less stable / solvent
- -> Bus. Open to influences of Changing interest rates
- -> Lower investor confidence
- -> Risk of bankruptcy
However: More oppotunity for Growth / Expansion
What is Gross Profit / Net Profit Ratios and what do they measure
Gross Profit ratio = Gross Profit/ Sales x100
Net Profit ratio = Net profit / Sales x100
Show amount of sales that result in Gross profit / Net Profit. “For everyr $1 of sales, how much is kept as Gross / Net proft”
–> The Higher the percentage the better (More profitabile)
relies on Strategies to reduce cost and increase revenue
–> If GPR increase –> COGs Decreased, therefore bus. is sourcing cheaper supplers ( and Vice Versa –> Suppiers increase cost)
What is Return on Equity ratio and what does it measure
Return on Equtiy = Net Profit / Total Equity
Shows how effective the funds contributed by the owners have been in generating profit
- > the higher the ratio, the better the return for the owner
- > e.g. 10% means for every $1 contributed by the owner, 10c in return
ratio needs to be batter than Banks which give 3 - 4 % return on investment (might be worth while puting money in a bank)
Usually 20% is good return
What is the Expense ratio and what does it measure
Expense ratio = Total expenses / Sales x100
Compares total expenses with sales as a percentage
-> should be kept as low as possible
Can be used in different departments to determine where most expenses are comming from
What is the Accounts receivable turnover ratio and what does it measure
Step 1: ARTR = Sales / Accounts Recievable (Larger rnumber the more often it gets payed)
Step 2: How Frequently collected = 356 / ARTR (Lower number the better –> Number of days between each payment)
Measures the effectiveness of a bus’s credit policy and how efficienctly it collects its debts.
It measures how many times the accounts receivable balance is converted into cash
Comparative Ratio Analysis: Where is it important to make comparisons?
- Over different time periods (Tends)
- Against industry standards (Bench Marks)
- With similaar businesses (comp. positioning)
List the Limitations of the Financial Report
- Normalised Earnings
- Capitalising Expenses
- Valuing assets
- Timing issues
- Debt Repayment
- Notes to financial statements
What is Normalised Earnings?
Removing one time influences such as sale of land / Asset which artificially inflate revenue which can be misleading to investos
-Shows more accurate profit level
What are Capitalising Expenses
When a bus. classifies an expense such as research and Dvelopment as asset –> Bus. builds the cost into the volume of the asset
Has immediate effcts on paper - Distorts the financial report (misleading)
- > Expenses are reduced (profits increased on paper)
- > Assets of Bus increase
- > Change to liabilities of the bus.
By changing the expense into a capital item the bus. can claim depreciation of capital item as a tax deduction
What are Valuing assets as a limitation
Valuing assets can be difficult as assets depreciate and gain value over time
- If asset is valued at historical cost, it may not reflect present day value (inflaction / change in dollar value)
- Value of intangibles e.g. Goodwill is subjective to owner and effects the balance sheet
What ae timing issues as a limitation
Accountants may adjust the timing of revenue inflows + cash outflows to Alter financial statements
Accural based accounting (accuate) - Records transactions at the time the transaction occurs
Cash based accounting -> records transactions when bus. actually recieves the cash (misleading) -> Bus can defer receiving cash until next financial year to recieve less income and pay less tax.
What are Debt repayments as a limtations
Report doesn’t have capacity to disclose information about repayments such as
- How long has the bus. had the debt
- How When is debt due?
- Capacity to repay debt
What are Notes to Financial statements as a limitation
Additional information attached to statements
- > useful for stakeholders
- > Explain financial satements
However -> confusing and not understandable to every day people.
List the Ethical issues of Financial reports
- Audits
- Budgets
- Tax Evasion
- Tripple Bottom Line
- Hidden Liabilities and Expenses
- Fraudulant Asset Valuation
What are Audits
An independent Examination of financial animation used to make sure information isn’t biased and transpaent / tuthful (accurate)
- Shareholders benefit from auditers
What are Ethics linked to Budgets
Bus should overestimate expenditure and understate revenue
-> Includes a margin for error and stops high expectation of revenue frrom shareholders -> less misleading therfore more ethical.
What is Tax Evasion
Bus. Avoid paying tax by not declaring cash sales therefore not accounted for in financial statements and not taxed
- > Goes staigh into pocket of the owner
- > large fines apply / prison time
What is the Tripple bottom line
Economic, Social, Environmental. –> Extention of CSR
Bus that are aware of all 3 are seen to be more thical
