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business > topic 5 (finance) > Flashcards

topic 5 (finance) Flashcards

1
Q

a financial target is

A

a goal or objective to be pursued by the finance department

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2
Q

financial aims are

A

broad goals for the financial department

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3
Q

financial objectives are

A

specific SMART targets for the departments to achieve their aims

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4
Q

financial strategies are

A

long-term/medium-term plans, devised at a senior management level; designed to achieve objectives

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5
Q

financial tactics are

A

short-term financial measures adopted to meet needs of a short-term threat or opportunity.

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6
Q

cash flow is

A

the total amount of cash flowing into the business (inflows) minus all the cash leaving (outflows) of a business over a period of time

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7
Q

cash inflows are

A

receipts of cash into the business such as: those from customers from sales, loans taken out, rent charged, selling assets.

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8
Q

cash outflows are

A

payments of cash leaving the business such as for purchasing raw materials from suppliers, purchasing other goods or equipment, repaying loans and interest

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9
Q

gross profit =

A

revenue – cost of sales

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10
Q

net profit =

A

operating profit – tax

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11
Q

net profit =

A

Qoperating profit – tax

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12
Q

cash is

A

the actual money held within a business in the short term that is able to use to pay debts

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13
Q

profit is

A

the final result at the end of a financial period where the revenue is greater then the total cost.

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14
Q

sales growth and maximisation happens through

A

better promotion, changing prices etc

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15
Q

profit growth and maximisation can be done through

A

charging higher prices, generating higher sales, minimising cost ect.

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16
Q

Cost minimisation is

A

reducing things such as raw material costs, wage levels, rent ect

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17
Q

cost leadership is

A

minimising cost to charge low prices to differentiate the business and develop sustainable competitive advantage (porters generic strategies)

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18
Q

cashflow objetives may include

A
  • Maintaining a minimum closing monthly cash balance
  • Improving inflows
  • Minimising outflows
  • Spreading its cash inflows and outflows more evenly over the year
  • Improving liquidity
  • Reduce borrowings to target level
  • Minimising interest costs
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19
Q

ROCE targets

A

profit is the ultimate measure of success and needs to be compared with the size of the business

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20
Q

ROCE =

A

profit / capital employed x 100

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21
Q

ROCE can be used to

A
  • To help evaluate the overall performance of the business
  • To provide a target return for individual projects
  • to benchmark performance of competitors
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22
Q

to pay for the capital investments that are measured by ROCE, businesses can raise the money two ways they are

A
  1. they can borrow money – bank loans this is called debt finance
  2. companies may decide to sell shares this is equity finance
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23
Q

capital structure is

A

capital structure is how firms finance its overall operations and growth by using different sources of funds

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24
Q

reasons for setting financial objectives

A
  • acts as focus for decision making and effort
  • can be used to measure success/ failure of the department
  • Will help to improve efficiently and performance in the future by analysing the reasons for success or failure in different areas.
  • Will help improve co-ordination of staff by giving teams and departments a common purpose and direction
  • Informs investors/owners of company’s future intentions
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25
Q

internal Influences on financial objectives and decisions

A
  • Managers attitudes to risk and finance
  • Owners views
  • HR issues
  • Type of products sold
  • Legal strutter of firm
  • Operational issues
  • Resources available
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26
Q

external influence on financial objectives and decisions

A

CCPESTEL

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27
Q

income statments are

A

a historical record of the trading of a business over a specific period

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28
Q

revenue is

A

revenues (sales) during the period sometimes referred to as the “top line”

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29
Q

cost of sales is

A

direct costs of generating revenues go into “cost of sales” includes the cost of raw materials, components, goods bought for resale and the direct labour costs of production

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30
Q

gross profit is

A

the difference between revenue and costs of sales

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31
Q

finance expenses are

A

interest paid on bank and other borrowings, less interest income received on cash balances.

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32
Q

tax is

A

an estimate of the amount of corporation tax that is likely to be payable on the record before tax

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33
Q

profit attributes to shareholders is

A

the amount of profit that is left after the tax has been accounted for. Shareholders decide how much to pay out as dividends.

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34
Q

distribution & administration expense is

A

operating costs and expenses that are not directly related to producing the goods or services record

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35
Q

operating profit is

A

a key measure of profit. Records how much profit has been made in total from the trading activities of the business

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36
Q

you can use accounts to assess performance to

A
  • Compare performance over time
  • Compare against competitors/industry
  • Benchmark against other industries
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37
Q

effective budgets

A
  • Estimate sales reasonably accurate
  • Estimate costs prudently and precisely
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38
Q

income budgets

A

sets a minimum target or the desired revenue level to be achieved over a period of time

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39
Q

expenditure budgets

A

sets a maximum target for costs.

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40
Q

profit budgets

A

this is a function of the other two budgets.

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41
Q

income budgets will

A
  • Show budgeted income for a business and the sources
  • Will help a firm to plan its workforce and operations
  • Will allow a firm to plan its expenditure based on requirements to meet demand
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42
Q

expenditure budgets will

A
  • Show the budgeted expenditure for a business
  • Will include a range of different expenditure including: raw materials, staff, marketing ect
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43
Q

profit budgets =

A

income budget – expenditure budget

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44
Q

prudence budgets

A
  • Budget should make sensible, cautious assumptions
  • Don’t be too optimistic on sales; allow some contingency for budgeted costs
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45
Q

completemess budgets

A
  • Budget should include all know costs categories
  • Ideally prepared in as much detail as possible
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46
Q

methods of setting budgets can be

A
  • Budgeting according to company objectives
  • Budgeting according to competitors spending
  • Setting the budget as a percentage of sales revenue
  • Budgeting according to last year’s budget allocation
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47
Q

what is zero budgeting

A

All budgets start at zero and budget holders must justify why any expenditure is necessary before it approved. Budgets are then set based on strength of justification linked to company objective

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48
Q

advantages of zero budgeting

A
  • Encourages more thorough planning and considering about spending
  • Helps to identify changes in an organisation needs and ensures those areas of the business that are growing and need more finance get it
  • Helps to save money by cutting costs where managers are unable to justify their spending.
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49
Q

disadvantages of zero budgeting

A
  • It can be very time consuming for budget holders
  • Managers who are better at negotiating or presenting may acquire bigger budgets needs of other departments
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50
Q

reasons for setting budgets are

A
  • Help to gain investment or finance
  • Financial control
  • Monitoring and review
  • Allows firms to establish their priorities
  • Improving staff performance and better accuracy
  • Assign responsibility
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51
Q

problems with setting budgets are

A
  • Imposed budgets
  • Research problems and accuracy
  • Unforeseen changes
  • The time taken in setting budgets.
52
Q

limitations of budgets are

A
  • Budgets are based on estimates and assumptions – actual results turn out differently
  • Start-ups have no trading history
  • Setting and monitoring budgets takes time – it shouldn’t get in the way of building the business
  • Limited motivational effect, particularly if the start-up doesn’t have any employees
53
Q

problems setting budgets

A
  1. Managers may not know enough about their department or division
  2. Gathering information can be difficult for start-up business
  3. There may be unforeseen changes
  4. The level of inflation is not easy to predict
  5. Setting budgets can be time consuming
54
Q

drawacks of budgets

A
  • Allocations may be incorrect and unfair – particularly if imposed
  • Short-term saving may be made to meet budgets that are not in the interest of the firms in the long term
  • They are difficult to monitor fairly
  • They may be inflexible
55
Q

variance is

A

The management process of examining the actual outcomes of budgets compared with the budgeted figures. Any differences can be investigated and are known as variances

56
Q

variance =

A

budget figure - actual figure

57
Q

Favourable variance is

A

when costs are lower than expected or revenue is higher

58
Q

Adverse variance is

A

when costs are higher than expected or revenue is lower

59
Q

price is

A

the amount paid by a consumer to purchase 1 unit of a product

60
Q

total revenue is

A

the income received from and organisations activities (P x Q)

61
Q

total cost is

A

all the costs that the business must pay (fixed costs + variable costs)

62
Q

profit is

A

the difference between the income of a business and its total costs (total revenue – total cost)

63
Q

total sales =

A

volume sold x average selling price

64
Q

what are some factors that effect the price that can be charged

A
  • Prices charged by competitors
  • How loyal customers are to their existing suppliers
  • Product quality
  • Product availability
  • Economic condition
  • Alternatives
65
Q

fixed cost in relation to output

A

cost that doesn’t change directly with output

66
Q

variable cost in relation to output

A

costs that change with output

67
Q

breakeven calulation is

A

fixed cost/ contribution per unit

68
Q

contribution per unit =

A

selling price – variable cost per unit

69
Q

contribution calculation is

A

price – variable cost

70
Q

how can you chnage the break even point

A
  • Increase/ decrease fixed cost
  • Increase/ decrease variable cost
71
Q

what are the use and benifits of break-even

A
  • Break-even charts are quick and simple
  • Shows when a business will start to make profit and what profit they will make at each output level
  • It will help a firm plan its sale level I will need to ensure profit
72
Q

limitations of breakeven could be

A
  • Dependant on accuracy of forecasts
  • Forecasted data may be unreliable
  • Break-even shows the short-term situation for business.
73
Q

cash flow is

A

the amounts of money flowing in and out of a business over a period of time

74
Q

receivables are

A

receipts of cash, typically arising from sales of items, payments by debtors, loans received, rent charged, sale of assets and interest received

75
Q

payables are

A

payments of cash, typically arsing from the purchase of items, payments to creditors, loans repaid or given, rental payments, purchase of assets and interest payments

76
Q

net cash flow is

A

the sum of receivable to an organisation minus the sum of payables over a period of time

77
Q

cash flow cycle is

A

the regular pattern of inflows and outflows of cash within a business

78
Q

what are the reasons of producing a cashflow forcast

A
  • Identify potential shortfalls in cash balances in advance
  • make sure that the business can afford to pay suppliers and employees
  • spot problems with customer payments
  • as an important part of financial control
  • provide reassurance to investors and lenders that the business is being managed properly.
79
Q

what infomation does a cashflow show

A
  1. cash inflow
  2. cash outflow
  3. net cash flow
  4. opening balance
  5. closing balance
80
Q

liquidity is

A

the ability of a firm to pay its short-term debts

81
Q

factors that affect cash flow are

A
  • amount of cash invested into the firm and held at the start of trading
  • the length of time taken to produce the product/service by converting inputs into outputs
  • the amount of stock held by a firm
  • goods sold on credit
  • the amount of credit given by suppliers
  • seasonality
82
Q

deficit is

A

when you have a negative closing balance at the end of the month

83
Q

some options to deal with defecit are

A
  • arrange an overdraft with the bank
  • arrange a short term loan with the bank
  • delay paying some of the bills
  • spread payments over a longer time span
84
Q

two ways to measure profit are

A
  • profit in absolute terms (the £ value of profit earned)
  • profit in relative terms ( profit earned as a proportion of sales achieved or investment made)
85
Q

capital is

A

the amount invested into a business or project

86
Q

net proft margin is

A

the percentage return made in sales; calculated as net profit divided by sales

87
Q

profit is

A

the differences between income and total costs of a business

88
Q

profitability is

A

the EFFICENCY of a business at generating profits in RELATION to the size of the business and the REVENUE is received

89
Q

difference between profit and profitablility

A

profit is just the sum of money whereas profitability relates the sum to the size of the business

90
Q

two main ways to measure the size of a business are

A
  • sales revenue
  • capital employed
91
Q

gross profit is

A

the profit made once the firm’s direct costs have been paid

92
Q

operating profit is

A

profits made directly from trading

93
Q

profit for the year (net profit) is

A

the profit made from all activities once all once all costs and income from the business have been paid and revenue received from the firm’s main and additional activities.

94
Q

gross profit margin =

A

gross profit / sales(turnover) x 100

95
Q

operationn profit margin =

A

operatig profit / sales(turnover) x 100

96
Q

profit for the year margin =

A

profit for the year/ sales(turnover) x 100

97
Q

net profit margin =

A

net profit(before tax) / sales revenue x 100

98
Q

Internal sources of finance is

A

ways of raising finance from within the business e.g retained profit

99
Q

External sources of finance is

A

ways of raising finance from outside the business from private companies e.g banks loans

100
Q

Short term finance is

A

finance intended for repayment within 12 months, usually intended for revenue expenditure

101
Q

Long term finance is

A

finance intended for repayment usually after 3 years or more, usually intended for capital expenditure

102
Q

revenue expenditure is

A

spending on day-to-day costs, for example purchasing raw materials

103
Q

capital expenditure is

A

spending on assets that will be used repeatedly longer than a year by firms in their main operations

104
Q

internal sources of finance are

A
  • retained profits
  • working capital
  • sales of assets
105
Q

external sources of finaces are

A
  • loans
  • share capital
  • crowd funding
  • debt factoring
  • overdrafts
  • venture capital
  • hire purchases
  • mortgages
  • trade credit
  • government grant
106
Q

working capital is

A

the day to day cash that the business has at its disposal (internal/short and long term)

107
Q

retained profits are

A

profits that are kept and reinvested from previous years (internal/short and long term)

108
Q

sales of assests are

A

non-current assets a business owns and can sell for capital (internal/ long term)

109
Q

debt factoring is when

A

a business sells its debts or invoices which have not been collected to a third party in exchange for immediate cash with which to finance continued business (external/ short term)

110
Q

an overdraft is

A

a bank allows a business to overspend on its current account up to an agreed limit( external/ longterm)

111
Q

share capital is

A

money given to a company by private individuals in exchange for a share certificate which gives them part ownership of a limited company (external/long term)

112
Q

loans are

A

a sum provided to an individual or business for an agreed purpose (external/long term)

113
Q

mortgages are

A

a long term loan taken out on property (external/ long term )

114
Q

debentrue is

A

long term loans with fixed interest rates which may no have specific repayment date. Issued by firms to raise capital from private investors and acts as a from of IOU (external/ long term)

115
Q

venture capital is

A

finance provided to small to medium sized enterprises that seek growth or initial investment and may be considered as risky investment by shares buyers or banks (external/longterm)

116
Q

crowdfunding is

A

a method of raising finance by asking large number of people each for a small amount of money, often via the internet (external/ long term)

117
Q

improving cash flow can be done by

A
  1. cashflow management
  2. cashflow forecasts
  3. the cash cycle
  4. causes of cash flow problems
  5. solutions to cash flow problems
118
Q

causes of cash-flow problems can be

A
  • poor sales and low profits
  • high costs and underestimating spending
  • unexpected increases in cost or falls in demand
  • seasonal demand
  • over investment
  • overtrading
119
Q

overtrading is

A

where a business expands too quickly putting pressure on short-term finance

120
Q

unexpected events are

A

events that are not included in the cash flow forecast

121
Q

features of a good cash flow are

A
  • updated regularly
  • makes sensible assumptions
  • allows for unexpected changes
122
Q

working capital is

A

the cash needed to pay for the day-to-day trading of the business

123
Q

improving the cash postion in the short term can be done by

A
  • Reduce current assets
  • Increase current liabilities
  • Sell surplus fixed assets
124
Q

improving the cash postion in the long term can be done by

A
  • Increase equity finance
  • Increase long term liabilities
  • Reduce net outflow on fixed assets
125
Q

Difficulties improving cash flow are

A
  • Difficult to re-negotiate
  • May Not be able to reduce their stock levels
  • Getting access to sources of finance
  • Cost of finance
126
Q

methods of improving profits and profiability

A
  1. Increasing price
  2. increasing cost of production
  3. increase sales volume
  4. investment in non-cureent assests
127
Q

difficulties improving profits could be

A
  • Cost of implementation methods
  • Impact on brand image
  • Reaction of customers
  • Impact and reaction from staff
  • Keeping up with rival firms

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