Topic 5: Financial Management Flashcards

1
Q

what is a financial objective?

A

-a goal or target pursued by the finance department
-will contain a specific numerical element and time scale

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2
Q

ways to increase revenue?

A
  • decrease price
  • sourcing out cheaper raw materials
    -advertise more
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3
Q

why is cash flow important?

A

businesses need enough cash to pay expected bills in the coming months

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4
Q

who is cash flow important to?

A

small/new business + bigger businesses with more retained profit

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5
Q

How can cashflow be increased

A

forecast
plan
control
delay outflows
increase inflows

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6
Q

What is a return on investment

A

companies invest their capital in assets hoping to make a return through profit

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7
Q

How to calculate return on capital

A

net profit (before tax) / capital invested x 100

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8
Q

What does return on investment tell us

A
  • a measure of the returns made from investments
  • provides comparison with other investment opportunities
  • opportunity cost, what an investor could have achieved investing elsewhere
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9
Q

how can a business reduce costs?

A
  • cheaper raw materials
  • reduce wage cost per unit
  • move to a low cost location
  • delayering
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10
Q

How does cost minimisation benefit a business

A
  • keep price the same and benefit from a higher profit margin
  • use cost reduction to reduce price and attract customers
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11
Q

why does a business set financial objectives

A

-act as a focus for decision making
-allow business to measure success
-allows shareholders to access whether a business may be a worthwhile investment

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12
Q

why is profit important

A

-provide measure of success
-source of capital for business growth
- attract further funds from investors
- dividends for shareholders

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13
Q

importance of costs

A

-can price customers are willing to pay cover costs of production

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14
Q

gross profit formula

A

sales revenue - cost of sales

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15
Q

net profit formula

A

gross profit - expenses

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16
Q

profit of the year

A

net profit - all other costs

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17
Q

profit margin formula

A

profit / sales revenue x 100

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18
Q

what is profitability

A

a relative measurement - comparing profits to another variable e.g revenue

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19
Q

how to analyse whether gross profit margin is good

A

comparisons with competitors
comparisons with previous years

20
Q

how can gross profit margin be improved ?

A

main aim: increase difference between sales rev and costs
- increase selling price
- decrease costs

21
Q

calculation for operating profit

A

gross profit - overhead costs

22
Q

operating profit margin

A

operating profit/sales revenue x 100

23
Q

what is the formula for contribution?

A

selling price - variable cost per unit

24
Q

total contribution formula

A

contribution x no. of units sold

25
significance of total contribution?
if contribution EXCEEDS fixed costs business is making profit. VICE VERSA
26
what is breakeven
the level of output where revenue is equal to total costs
27
what information is needed to calculate breakeven?
selling price fixed costs variable costs
28
breakeven calculation
fixed costs / selling price - variable cost
29
calculation for margin of safety
actual sales - breakeven level of sales -aka: how many units above breakeven point are they selling
30
strengths of breakeven analysis?
- quick calculations - can help business focus on what output is required before profitability - illustrates importance of keepinng fixed costs low
31
limitations of breakeven analysis
- most businesses sell more than one product - unrealistic assumptions - aid for planning rather than making decisions
32
sources of finance
bank loan overdraft retained profit share capital venture capital trade credit debt factoring
33
What is a budget
an agreed financial plan for the future concerning the revenues + costs of a business
34
what are the three types of budgets
revenue or income budget- planned income of a business over period of time or revenue budget cost or expenditure budget - agreed planned expenditure profit budget - agreed panned profit of a business
35
uses of budgeting
provide direction + co-ordination improve efficiency motivate staff assign responsibility
36
downsides of budgeting
- unforeseen changes - time consuming - changes in price that are difficult to predict
37
formula for calculating variances
difference between budgeted and actual figure
38
what is variance analysis?
the process of comparing actual performance to forecast performance
39
types of variance
favorable and adverse variance
40
why might favorable variances occur?
- low costs - cheap supplier - low interest rates, more disposable income
41
why might adverse variances occur?
- high costs - price not covering costs - losing sales to competitors
42
what is cash flow
flow of money in and out of a business in a given time period
43
importance of cash flow
- business can fail without adequate availability of cash - if staff aren't paid they will leave - if suppliers aren't paid they will refuse to deliver
44
what causes cash flow problems?
- lower sales than expected - higher costs - seasonal demand - too much stock
45
ways to improve cash flow?
- debt factoring - credit control - overdraft ( for short-term problem)