Topic 5: Financial Management

Question 1

what is a financial objective?

Answer 1

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

Question 2

ways to increase revenue?

Answer 2

• decrease price
• sourcing out cheaper raw materials
  -advertise more

Question 3

why is cash flow important?

Answer 3

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

Question 4

who is cash flow important to?

Answer 4

small/new business + bigger businesses with more retained profit

Question 5

How can cashflow be increased

Answer 5

forecast
plan
control
delay outflows
increase inflows

Question 6

What is a return on investment

Answer 6

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

Question 7

How to calculate return on capital

Answer 7

net profit (before tax) / capital invested x 100

Question 8

What does return on investment tell us

Answer 8

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

Question 9

how can a business reduce costs?

Answer 9

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

Question 10

How does cost minimisation benefit a business

Answer 10

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

Question 11

why does a business set financial objectives

Answer 11

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

Question 12

why is profit important

Answer 12

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

Question 13

importance of costs

Answer 13

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

Question 14

gross profit formula

Answer 14

sales revenue - cost of sales

Question 15

net profit formula

Answer 15

gross profit - expenses

Question 16

profit of the year

Answer 16

net profit - all other costs

Question 17

profit margin formula

Answer 17

profit / sales revenue x 100

Question 18

what is profitability

Answer 18

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

Question 19

how to analyse whether gross profit margin is good

Answer 19

comparisons with competitors
comparisons with previous years

Question 20

how can gross profit margin be improved ?

Answer 20

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

Question 21

calculation for operating profit

Answer 21

gross profit - overhead costs

Question 22

operating profit margin

Answer 22

operating profit/sales revenue x 100

Question 23

what is the formula for contribution?

Answer 23

selling price - variable cost per unit

Question 24

total contribution formula

Answer 24

contribution x no. of units sold

Question 25

significance of total contribution?

Answer 25

if contribution EXCEEDS fixed costs business is making profit. VICE VERSA

Question 26

what is breakeven

Answer 26

the level of output where revenue is equal to total costs

Question 27

what information is needed to calculate breakeven?

Answer 27

selling price
fixed costs
variable costs

Question 28

breakeven calculation

Answer 28

fixed costs / selling price - variable cost

Question 29

calculation for margin of safety

Answer 29

actual sales - breakeven level of sales
-aka: how many units above breakeven point are they selling

Question 30

strengths of breakeven analysis?

Answer 30

• quick calculations
• can help business focus on what output is required before profitability
• illustrates importance of keepinng fixed costs low

Question 31

limitations of breakeven analysis

Answer 31

• most businesses sell more than one product
• unrealistic assumptions
• aid for planning rather than making decisions

Question 32

sources of finance

Answer 32

bank loan
overdraft
retained profit
share capital
venture capital
trade credit
debt factoring

Question 33

What is a budget

Answer 33

an agreed financial plan for the future concerning the revenues + costs of a business

Question 34

what are the three types of budgets

Answer 34

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

Question 35

uses of budgeting

Answer 35

provide direction + co-ordination
improve efficiency
motivate staff
assign responsibility

Question 36

downsides of budgeting

Answer 36

• unforeseen changes
• time consuming
• changes in price that are difficult to predict

Question 37

formula for calculating variances

Answer 37

difference between budgeted and actual figure

Question 38

what is variance analysis?

Answer 38

the process of comparing actual performance to forecast performance

Question 39

types of variance

Answer 39

favorable and adverse variance

Question 40

why might favorable variances occur?

Answer 40

• low costs
• cheap supplier
• low interest rates, more disposable income

Question 41

why might adverse variances occur?

Answer 41

• high costs
• price not covering costs
• losing sales to competitors

Question 42

what is cash flow

Answer 42

flow of money in and out of a business in a given time period

Question 43

importance of cash flow

Answer 43

• 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

Question 44

what causes cash flow problems?

Answer 44

• lower sales than expected
• higher costs
• seasonal demand
• too much stock

Question 45

ways to improve cash flow?

Answer 45

• debt factoring
• credit control
• overdraft ( for short-term problem)