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Business > Topic 5 - Finance > Flashcards

Topic 5 - Finance Flashcards

1
Q

What is breakeven?

A

understanding the breakeven position is key to understanding what a business needs to do to operate profitably

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2
Q

Contribution

A
  • looks at the profit made on individual products
  • it is used in calculating how many items need to be sold to cover all the business’ total costs
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3
Q

Contribution Formula

A

total sales - total variable costs
contribution per unit x number of units sold

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4
Q

Contribution per Unit Formula

A

selling price per unit - variable costs per unit

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5
Q

Profit

A

contribution - fixed costs

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6
Q

Breakeven Chart

A

(Look at book)

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7
Q

What is the margin of safety?

A

is the actual difference between the actual output and the breakeven output

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8
Q

What is a budget?

A

a financial plan for the future concerning the revenues and costs of a business

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9
Q

Uses of budgets in management

A
  • allocate resources
  • communicate targets
  • motivate staff
  • improve efficiency
  • forecast outcomes
  • provides direction
  • control income and expenditure
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10
Q

Two main approaches to budgeting

A

Historical Budgeting
Zero Budgeting

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11
Q

What is historical budgeting?

A
  • use last years figures as the basis for the budget
  • realistic in that it is based on actual results
  • circumstances may have changed
  • does not encourage efficiency
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12
Q

What is zero budgeting?

A
  • budgeted costs and revenues are set to zero
  • budget is based on new proposals for sales and costs
  • makes budgeting more complicated and time-consuming, but potentially more realistic
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13
Q

Three Main Types of Budget

A

Revenue (or income)
Cost (or expenditure)
Profit

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14
Q

Two Key Sources of Information for Budgets

A
  • financial performance in previous periods
  • market research
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15
Q

Variance Analysis

A

calculating and investigating the difference between actual results and the budget

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16
Q

Variances can be…

A
  • positive/ favourable (better than expected)
  • adverse/ unfavourable (worse than expected)
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17
Q

Favourable Variances

A
  • actual figures are better than budgeted figure
  • e.g. costs lower than expected
  • e.g. revenue/ profits higher than expected
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18
Q

Adverse Variances

A
  • actual figures worse than budget figure
  • e.g. costs higher than expected
  • e.g. revenue/ profits lower than expected
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19
Q

Why is cash flow important?

A
  • cash flow is dynamic and unpredictable part of life for most businesses
  • cash flow problems are the main reason why a business fails
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20
Q

Cash Inflows Examples

A
  • cash sales
  • sale of fixed asset
  • interest on bank balances
  • grants
  • loans from bank
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21
Q

Cash Outflow Examples

A
  • payments to suppliers
  • wages and salaries
  • tax on profits
  • dividends paid to shareholders
  • repayment of loans
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22
Q

What is cash flow problem?

A

when a business does not have enough cash to be able to pay its liabilities

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23
Q

Main causes of Cash Flow Problems

A
  • low profits or (worse) losses
  • excess inventories held
  • allowing customers too long to pay
  • seasonal demand
  • unexpected changes in the business
24
Q

Managing Working Capital

A
  • inventories
  • debtors
  • creditors
25
Q

Managing Amounts Owed by Customers

A
  • credit control
  • selling off debts to debt factors
  • cash discounts for prompt payment
26
Q

What is Debt Factoring?

A
  • the selling of debtors (money owned to the business) to a third party
  • this generates cash
  • it guarantees the firm a percentage of money owed to it
  • cost involved in factoring can be high
27
Q

What is credit control?

A
  • establishing credit limits for new customers
  • credit checking new and existing customers
  • setting realistic credit limits
  • determine appropriate terms and conditions for credit
28
Q

Long-Term Sources of Finance

A
  • finances the whole business over many years
    e.g.
  • share capital
  • retained profits
  • venture capital
  • mortgages
  • long-term bank loans
29
Q

Medium-Term Sources of Finance

A
  • finances major projects or assets with a long-life
    e.g.
  • bank loans
  • leasing
  • hire purchase
  • government grants
30
Q

Short-Term Sources of Finance

A
  • finances day-to-day trading of the business
    e.g.
  • bank overdraft
  • trade creditors
  • factoring
  • short-term bank loans
31
Q

Main Internal Sources of finance for a Start Up Business

A
  • founder finance
  • retained profits
  • friends and family
32
Q

Main External Sources of finance for a Start Up Business

A
  • bank loan
  • bank overdraft
  • loans and grants
33
Q

Main Internal Sources of finance for an Established Business

A
  • retained profits
  • working capital
  • asset disposal
34
Q

Main External Sources of finance for an Established Business

A
  • issue shares
  • bank loan/ overdraft
  • debentures
  • suppliers
35
Q

Ways of Raising Loan Capital

A
  • bank overdraft
  • bank loan
  • debentures
36
Q

Bank Overdrafts

A

short-term finance, widely used by businesses
the bank lets the business ‘owe its money’ when the bank balance goes below zero, in return for charging a high rate of interest
flexible

37
Q

Bank Loans

A

long-term finance
good for financing investment in fixed assets
generally at a lower rate of interest that a bank overdraft has
not much flexibility

38
Q

Debentures

A

a debenture is a form of bond or long-term loan which is issued by the company, usually with a fixed rate of interest

39
Q

What is a financial objective?

A

a specific goal or target of relating to the financial performance, resources and structure of a business

40
Q

Profit Formula

A

Total Revenue - Total Costs

41
Q

Cash Flow Formula

A

Total Cash Inflows - Total Cash Outflows

42
Q

How does Cash Flow differ from Profit?

A

timing differences
- sales to customers made on credit
- payment to suppliers
the way fixed assets are accounted for
cash flows arising from the way the business is financed

43
Q

What is Business Investment?

A
  • capital expenditure on items such as product machinery, IT systems, buildings etc.
  • can also be the purchase of other businesses or brands
  • investment is intended to help generate a return over more than one year
44
Q

Equity

A

amount invested by the owners of the business

45
Q

Debt

A

finance provided to the business by external parties

46
Q

What is ratio analysis?

A

analysing relationships between financial data to assess the performance of a business

47
Q

Gross Profit Formula

A

revenue - cost of sales

48
Q

Gross Margin (%) Formula

A

gross profit/ revenue

49
Q

What is operating profit?

A

is what is left after all the costs of a business have been taken from its revenues

50
Q

Operating Profit Margin Formula

A

operating profit/ revenues x 100

51
Q

Revenue Formula

A

volume sold x average selling price

52
Q

Two main ways for a business to increase revenues

A
  • increase quantity sold
  • achieve higher selling price
53
Q

Variable Costs

A
  • costs which change as output varies
    e.g.
    raw materials
    wages based on hours
54
Q

Fixed Costs

A
  • costs which do not change when output varies
    e.g.
    rent and rates
    salaries
    advertising
55
Q

Total Costs (TC) Formula

A

fixed costs (FC) + variable costs (VC)

Business (8 decks)

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