Topic 5: Financial Management Flashcards
what is a financial objective?
-a goal or target pursued by the finance department
-will contain a specific numerical element and time scale
ways to increase revenue?
- decrease price
- sourcing out cheaper raw materials
-advertise more
why is cash flow important?
businesses need enough cash to pay expected bills in the coming months
who is cash flow important to?
small/new business + bigger businesses with more retained profit
How can cashflow be increased
forecast
plan
control
delay outflows
increase inflows
What is a return on investment
companies invest their capital in assets hoping to make a return through profit
How to calculate return on capital
net profit (before tax) / capital invested x 100
What does return on investment tell us
- a measure of the returns made from investments
- provides comparison with other investment opportunities
- opportunity cost, what an investor could have achieved investing elsewhere
how can a business reduce costs?
- cheaper raw materials
- reduce wage cost per unit
- move to a low cost location
- delayering
How does cost minimisation benefit a business
- keep price the same and benefit from a higher profit margin
- use cost reduction to reduce price and attract customers
why does a business set financial objectives
-act as a focus for decision making
-allow business to measure success
-allows shareholders to access whether a business may be a worthwhile investment
why is profit important
-provide measure of success
-source of capital for business growth
- attract further funds from investors
importance of costs
-can price customers are willing to pay cover costs of production
gross profit formula
sales revenue - cost of sales
net profit formula
gross profit - expenses
profit of the year
net profit - all other costs
profit margin formula
profit / sales revenue x 100
what is profitability
a relative measurement - comparing profits to another variable e.g revenue
how to analyse whether gross profit margin is good
comparisons with competitors
comparisons with previous years
how can gross profit margin be improved ?
main aim: increase difference between sales rev and costs
- increase selling price
- decrease costs
calculation for operating profit
gross profit - overhead costs
operating profit margin
operating profit/sales revenue x 100
what is the formula for contribution?
selling price - variable cost per unit
total contribution formula
contribution x no. of units sold
significance of total contribution?
if contribution EXCEEDS fixed costs business is making profit. VICE VERSA
what is breakeven
the level of output where revenue is equal to total costs
what information is needed to calculate breakeven?
selling price
fixed costs
variable costs
breakeven calculation
fixed costs / selling price - variable cost
calculation for margin of safety
actual sales - breakeven level of sales
-aka: how many units above breakeven point are they selling
strengths of breakeven analysis?
- quick calculations
- can help business focus on what output is required before profitability
- illustrates importance of keepinng fixed costs low
limitations of breakeven analysis
- most businesses sell more than one product
- unrealistic assumptions
- aid for planning rather than making decisions
sources of finance
bank loan
overdraft
retained profit
share capital
venture capital
trade credit
debt factoring
What is a budget
an agreed financial plan for the future concerning the revenues + costs of a business
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
uses of budgeting
provide direction + co-ordination
improve efficiency
motivate staff
assign responsibility
downsides of budgeting
- unforeseen changes
- time consuming
- changes in price that are difficult to predict
formula for calculating variances
difference between budgeted and actual figure
what is variance analysis?
the process of comparing actual performance to forecast performance
types of variance
favorable and adverse variance
why might favorable variances occur?
- low costs
- cheap supplier
- low interest rates, more disposable income
why might adverse variances occur?
- high costs
- price not covering costs
- losing sales to competitors
what is cash flow
flow of money in and out of a business in a given time period
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
what causes cash flow problems?
- lower sales than expected
- higher costs
- seasonal demand
- too much stock
ways to improve cash flow?
- debt factoring
- credit control
- overdraft ( for short-term problem)
