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Business - Finance > Processes of Financial Management > Flashcards

Processes of Financial Management Flashcards

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1
Q

What are the 5 steps involved in Financial Planning and Implementing

A
  1. Determining Financial Needs
  2. Developing Budgets
  3. Maintaining Record Systems
  4. Identifying Financial Risks
  5. Establishing Financial Controls
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2
Q

Financial Needs

A

Identifying financial actions that need to be taken to achieve specific outcomes

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3
Q

What are financial needs determined by?

A
  1. Size of the Business
  2. Current Phase of the Bus. Cycle
  3. Future Plans for Growth and Development
  4. Capacity to source debt and/or equity finance
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4
Q

Examples of Financial Needs

A
  • Purchase new equipment
  • Renting a new premesis
  • Hiring new staff
  • Changing the marketing mix
  • Increase in utility bills
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5
Q

Budgets

A

Provide information in quantitative terms to achieve a particular goal

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6
Q

What do Budgets show?

A
  • Cash required to achieve goal
  • Cost of capital and other expenses against their potential earning capacity
  • Cost of raw materials
  • # and cost of labour hours required for production
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7
Q

Potential Earning

A

How much money borrowed is going to make in return

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8
Q

Operating Budgets

A

Relate to the main activities of a business such as raw materials and production.

Keeping day-to-day running of the business

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9
Q

Project Budgets

A

Relate to the more strategic goals such as capital expenditure & research and development.

Weigh costs of expenses against potential revenue

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10
Q

Financial Budgets

A

Relate to the financial data of a business. Includes a combination of financial statements such as:
- Income Statement
- Cash Flow Statement
- Balance Sheet

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11
Q

Record Systems

A

Systems used by a business to record & file all data

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12
Q

What should record systems be?

A

Accurate, Reliable & Accessible -> ensures that managers are able to make informed decisions based on past data

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13
Q

Financial Risk

A

The risk of being unable to cover its financial obligations

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14
Q

Financial Control

A

Policies and procedures that ensure that parts of the plans of business will be achieved in the most efficient way.

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15
Q

Policies of Financial Control

A
  • Separation of Duties
  • Rotation of Duties
  • Control of Cash
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16
Q

Cashflow Statements

A

Indicate the movement of cash receipts & cash payments from transactions over a period of time

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17
Q

What is the purpose of cash flow statements?

A

Potential investors can assess a business’s cashflow, or finance managers can identify trends and cashflow problems

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18
Q

What are the three main areas of cash flow?

A
  • Cashflow from Operating Activities
  • Cashflow from Investing Activities
  • Cashflow from Financing Activities
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19
Q

Operating Activities (Cash Flow)

A

Inflows & outflows relating to the main activity of the business

Inflows: Sales (cash & credit)
Outflows: Payment to suppliers, wages

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20
Q

Investing Activities (Cash Flow)

A

Inflows & outflows relating to the purchase and sale of non-current assets and investments

e.g: buying and selling vehicles, property, equipment

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21
Q

Financing Activities (Cash Flow)

A

Inflows & outflows relating to the debt and equity financing of the business

Inflows: Capital contribution, shares, loans
Outflows: Repayment of loans

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22
Q

Opening cash flow

A

Opening Cash Flow = Opening Balance + Cash Inflow - Cash Outflow

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23
Q

Income Statements

A

A summary of the income earned, expenses incurred and the final net position of a business over a certain period of trading

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24
Q

Cost of Goods Sold

A

COGS = Opening Stock + Purchases - Closing StockF

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25
Q

Gross Profit

A

Gross Profit = Sales - COGS

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26
Q

Net Profit

A

Net Profit = Gross Profit - Expenses

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27
Q

Balance Sheets

A

Show the financial stability of a business at any given point in time, displaying assets and liabilities

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28
Q

Accounting Equation

A

Assets = Liabilities + Owners Equity (ALOE)

29
Q

Assets

A

Items that can be given a monetary value that the business owns

30
Q

Current Assets

A

Value expected to turn over within 12 months

e.g: Accounts receivable, cash, inventory

31
Q

Non-Current Assets

A

Items with an expected life of 1-5 years or more

e.g: buildings, land, machinery, vehicles

32
Q

Liabilities

A

Items of debt owed to other organisations

33
Q

Current Liabilities

A

Items of debt that are expected to be repaid within 12 months

e.g: Accounts payable, Overdraft, short-term loans

34
Q

Non-Current Liabilities

A

Items of debt that are repaid over a period of time greater than 12 months

e.g: mortgage, loans, leases

35
Q

Liquidity

A

The extent to which the business can meet its financial commitments in the short term ( < 12 months)

36
Q

Current Ratio (Financial Ratio)

A

Current Ratio = Current Assets / Current Liabilities

37
Q

Liquidity - Rule of Thumb (Financial Ratio)

A

Should aim for 1:1 OR 2:1

< 1:1, not liquid enough -> cannot satisfy short-term debts
> 2:1, too liquid -> consider investing

38
Q

Solvency

A

The ability of a business to meet its financial obligations in the long term

39
Q

Gearing

A

The proportion of debt finance & equity finance that is used in the business’s overall finance

40
Q

If a business had more borrowed funds than contributed funds, what does it mean?

A

There is less certainty that a business’s long-term debt can be repaid

41
Q

If a business had more contributed funds than borrowed funds, what does it mean?

A

There is more certainty that a business’s long-term debt can be repaid

42
Q

Debt-to-Equity Ratio

A

Debt-to-Equity Ratio = Total Liabilities / Total Assets

43
Q

Profitability

A

Earning performance of a business & an indication of its ability to use resources to maximise profits

44
Q

Gross Profit Ratio

A

Indicates what % of overall sales revenue has resulted in gross profit

Gross Profit Ratio = Gross Profit / Sales

45
Q

Net Profit Ratio

A

Indicates what % of overall sales revenue has resulted in net profit

Net Profit Ratio = Net Profit / Sales

46
Q

Return on Equity Ratio

A

Shows the effectiveness of owner equity in generating profit for the business

Return on Equity Ratio = Net Profit / Total Equity

47
Q

Return on Equity - Rule of Thumb

A
  • 10% = not bad
  • 15% = good
  • Higher ratio = better return for owner + High % will attract investors
48
Q

Efficiency

A

the extent to which a business uses its resources to achieve profit maximisation.

49
Q

Expense Ratio

A

Total Expenses / Sales

50
Q

Accounts Receivable Turnover Ratio

A

Sales / Acc. Receivable

51
Q

Average Length of Time for Debts to be Paid

A

365 / Acc. Receivable

52
Q

Comparative Ratio Analysis

A

Indicates a business’s financial wealth & identifies areas for improvement

53
Q

Comparing Overtime

A

Ratios can be used to compare a business’s current results with previous performance to identify trends

54
Q

Comparing to a Budget

A

Financial figures can be compared with predicted/budgeted figures to assess and measure whether or not performance is hitting expectations

55
Q

Comparing to Competitors

A

Compare current results against key competitors to give the business an idea of its performance in the market

56
Q

Comparing to Industry Standards

A

Compare current results against standards developed for a particular industry -> benchmarks

57
Q

Normalised Earnings

A

Processes of removing one-time/unusual influences from the balance sheet to show the true earnings of a company

(e.g: removal of land sale -> large capital gain)

58
Q

Capitalised Expenses

A

Process of adding capital expense to the balance sheet, to be regarded as an asset

59
Q

Valuing Assets

A

The process of estimating the market value of assets/liabilities

60
Q

Discounted Cash Flow Method

A

A type of method used for valuing assets:

Estimates the value of an asset based on future cash flows which are discounted to the present

61
Q

Guideline Company Method

A

A type of method used for valuing assets:

Determines the value of a firm by observing the prices of similar companies that sold in the market

62
Q

Timing Issues

A

Financial reports cover activities over a period of time, therefore the business’s financial position may be inaccurate and therefore misrepresented

63
Q

Debt Repayments

A

Financial reports can be limited as they cannot disclose information on debt repayment such as:
- How long had/has been recovering the debt
- Capacity of the business/debtor to repay

64
Q

Notes to Financial Statements

A

Notes have additional information that is left out of the main documents

65
Q

Australian Securities & Investments Commission (ASIC)

A

the official regulating body that enforces business laws to protect investors

66
Q

Audited Accounts

A

An independent check of the accuracy of financial records and accounting procedures

67
Q

Record Keeping

A

Accurately record transactions by providing receipts & invoices

68
Q

Reporting Practices

A

Provide reports to investors & other stakeholders about the business’s financial position

Business - Finance (4 decks)

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