topic 5 (finance) Flashcards
a financial target is
a goal or objective to be pursued by the finance department
financial aims are
broad goals for the financial department
financial objectives are
specific SMART targets for the departments to achieve their aims
financial strategies are
long-term/medium-term plans, devised at a senior management level; designed to achieve objectives
financial tactics are
short-term financial measures adopted to meet needs of a short-term threat or opportunity.
cash flow is
the total amount of cash flowing into the business (inflows) minus all the cash leaving (outflows) of a business over a period of time
cash inflows are
receipts of cash into the business such as: those from customers from sales, loans taken out, rent charged, selling assets.
cash outflows are
payments of cash leaving the business such as for purchasing raw materials from suppliers, purchasing other goods or equipment, repaying loans and interest
gross profit =
revenue – cost of sales
net profit =
operating profit – tax
net profit =
Qoperating profit – tax
cash is
the actual money held within a business in the short term that is able to use to pay debts
profit is
the final result at the end of a financial period where the revenue is greater then the total cost.
sales growth and maximisation happens through
better promotion, changing prices etc
profit growth and maximisation can be done through
charging higher prices, generating higher sales, minimising cost ect.
Cost minimisation is
reducing things such as raw material costs, wage levels, rent ect
cost leadership is
minimising cost to charge low prices to differentiate the business and develop sustainable competitive advantage (porters generic strategies)
cashflow objetives may include
- 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
ROCE targets
profit is the ultimate measure of success and needs to be compared with the size of the business
ROCE =
profit / capital employed x 100
ROCE can be used to
- To help evaluate the overall performance of the business
- To provide a target return for individual projects
- to benchmark performance of competitors
to pay for the capital investments that are measured by ROCE, businesses can raise the money two ways they are
- they can borrow money – bank loans this is called debt finance
- companies may decide to sell shares this is equity finance
capital structure is
capital structure is how firms finance its overall operations and growth by using different sources of funds
reasons for setting financial objectives
- 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
internal Influences on financial objectives and decisions
- Managers attitudes to risk and finance
- Owners views
- HR issues
- Type of products sold
- Legal strutter of firm
- Operational issues
- Resources available
external influence on financial objectives and decisions
CCPESTEL
income statments are
a historical record of the trading of a business over a specific period
revenue is
revenues (sales) during the period sometimes referred to as the “top line”
cost of sales is
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
gross profit is
the difference between revenue and costs of sales
finance expenses are
interest paid on bank and other borrowings, less interest income received on cash balances.
tax is
an estimate of the amount of corporation tax that is likely to be payable on the record before tax
profit attributes to shareholders is
the amount of profit that is left after the tax has been accounted for. Shareholders decide how much to pay out as dividends.
distribution & administration expense is
operating costs and expenses that are not directly related to producing the goods or services record
operating profit is
a key measure of profit. Records how much profit has been made in total from the trading activities of the business
you can use accounts to assess performance to
- Compare performance over time
- Compare against competitors/industry
- Benchmark against other industries
effective budgets
- Estimate sales reasonably accurate
- Estimate costs prudently and precisely
income budgets
sets a minimum target or the desired revenue level to be achieved over a period of time
expenditure budgets
sets a maximum target for costs.
profit budgets
this is a function of the other two budgets.
income budgets will
- 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
expenditure budgets will
- Show the budgeted expenditure for a business
- Will include a range of different expenditure including: raw materials, staff, marketing ect
profit budgets =
income budget – expenditure budget
prudence budgets
- Budget should make sensible, cautious assumptions
- Don’t be too optimistic on sales; allow some contingency for budgeted costs
completemess budgets
- Budget should include all know costs categories
- Ideally prepared in as much detail as possible
methods of setting budgets can be
- 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
what is zero budgeting
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
advantages of zero budgeting
- 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.
disadvantages of zero budgeting
- 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
reasons for setting budgets are
- 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
problems with setting budgets are
- Imposed budgets
- Research problems and accuracy
- Unforeseen changes
- The time taken in setting budgets.
limitations of budgets are
- 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
problems setting budgets
- Managers may not know enough about their department or division
- Gathering information can be difficult for start-up business
- There may be unforeseen changes
- The level of inflation is not easy to predict
- Setting budgets can be time consuming
drawacks of budgets
- 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
variance is
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
variance =
budget figure - actual figure
Favourable variance is
when costs are lower than expected or revenue is higher
Adverse variance is
when costs are higher than expected or revenue is lower
price is
the amount paid by a consumer to purchase 1 unit of a product
total revenue is
the income received from and organisations activities (P x Q)
total cost is
all the costs that the business must pay (fixed costs + variable costs)
profit is
the difference between the income of a business and its total costs (total revenue – total cost)
total sales =
volume sold x average selling price
what are some factors that effect the price that can be charged
- Prices charged by competitors
- How loyal customers are to their existing suppliers
- Product quality
- Product availability
- Economic condition
- Alternatives
fixed cost in relation to output
cost that doesn’t change directly with output
variable cost in relation to output
costs that change with output
breakeven calulation is
fixed cost/ contribution per unit
contribution per unit =
selling price – variable cost per unit
contribution calculation is
price – variable cost
how can you chnage the break even point
- Increase/ decrease fixed cost
- Increase/ decrease variable cost
what are the use and benifits of break-even
- 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
limitations of breakeven could be
- Dependant on accuracy of forecasts
- Forecasted data may be unreliable
- Break-even shows the short-term situation for business.
cash flow is
the amounts of money flowing in and out of a business over a period of time
receivables are
receipts of cash, typically arising from sales of items, payments by debtors, loans received, rent charged, sale of assets and interest received
payables are
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
net cash flow is
the sum of receivable to an organisation minus the sum of payables over a period of time
cash flow cycle is
the regular pattern of inflows and outflows of cash within a business
what are the reasons of producing a cashflow forcast
- 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.
what infomation does a cashflow show
- cash inflow
- cash outflow
- net cash flow
- opening balance
- closing balance
liquidity is
the ability of a firm to pay its short-term debts
factors that affect cash flow are
- 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
deficit is
when you have a negative closing balance at the end of the month
some options to deal with defecit are
- 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
two ways to measure profit are
- profit in absolute terms (the £ value of profit earned)
- profit in relative terms ( profit earned as a proportion of sales achieved or investment made)
capital is
the amount invested into a business or project
net proft margin is
the percentage return made in sales; calculated as net profit divided by sales
profit is
the differences between income and total costs of a business
profitability is
the EFFICENCY of a business at generating profits in RELATION to the size of the business and the REVENUE is received
difference between profit and profitablility
profit is just the sum of money whereas profitability relates the sum to the size of the business
two main ways to measure the size of a business are
- sales revenue
- capital employed
gross profit is
the profit made once the firm’s direct costs have been paid
operating profit is
profits made directly from trading
profit for the year (net profit) is
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.
gross profit margin =
gross profit / sales(turnover) x 100
operationn profit margin =
operatig profit / sales(turnover) x 100
profit for the year margin =
profit for the year/ sales(turnover) x 100
net profit margin =
net profit(before tax) / sales revenue x 100
Internal sources of finance is
ways of raising finance from within the business e.g retained profit
External sources of finance is
ways of raising finance from outside the business from private companies e.g banks loans
Short term finance is
finance intended for repayment within 12 months, usually intended for revenue expenditure
Long term finance is
finance intended for repayment usually after 3 years or more, usually intended for capital expenditure
revenue expenditure is
spending on day-to-day costs, for example purchasing raw materials
capital expenditure is
spending on assets that will be used repeatedly longer than a year by firms in their main operations
internal sources of finance are
- retained profits
- working capital
- sales of assets
external sources of finaces are
- loans
- share capital
- crowd funding
- debt factoring
- overdrafts
- venture capital
- hire purchases
- mortgages
- trade credit
- government grant
working capital is
the day to day cash that the business has at its disposal (internal/short and long term)
retained profits are
profits that are kept and reinvested from previous years (internal/short and long term)
sales of assests are
non-current assets a business owns and can sell for capital (internal/ long term)
debt factoring is when
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)
an overdraft is
a bank allows a business to overspend on its current account up to an agreed limit( external/ longterm)
share capital is
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)
loans are
a sum provided to an individual or business for an agreed purpose (external/long term)
mortgages are
a long term loan taken out on property (external/ long term )
debentrue is
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)
venture capital is
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)
crowdfunding is
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)
improving cash flow can be done by
- cashflow management
- cashflow forecasts
- the cash cycle
- causes of cash flow problems
- solutions to cash flow problems
causes of cash-flow problems can be
- poor sales and low profits
- high costs and underestimating spending
- unexpected increases in cost or falls in demand
- seasonal demand
- over investment
- overtrading
overtrading is
where a business expands too quickly putting pressure on short-term finance
unexpected events are
events that are not included in the cash flow forecast
features of a good cash flow are
- updated regularly
- makes sensible assumptions
- allows for unexpected changes
working capital is
the cash needed to pay for the day-to-day trading of the business
improving the cash postion in the short term can be done by
- Reduce current assets
- Increase current liabilities
- Sell surplus fixed assets
improving the cash postion in the long term can be done by
- Increase equity finance
- Increase long term liabilities
- Reduce net outflow on fixed assets
Difficulties improving cash flow are
- Difficult to re-negotiate
- May Not be able to reduce their stock levels
- Getting access to sources of finance
- Cost of finance
methods of improving profits and profiability
- Increasing price
- increasing cost of production
- increase sales volume
- investment in non-cureent assests
difficulties improving profits could be
- Cost of implementation methods
- Impact on brand image
- Reaction of customers
- Impact and reaction from staff
- Keeping up with rival firms
