Unit 3 : Finance Flashcards
What is capital expenditure?
Capital expenditure refers to money spent on long term or non-current assets that will be of use to the business for extended periods of time
What is revenue expenditure?
Revenue expenditure refers to the spending of money on the daily operations of a business - wages,raw materials, rent
What is ratio analysis ?
Ration analysis is a quantitative tool in which a company compares differetn financial figures to asses their financial performance and position.
Purpose of ratio analysis
To examine a firms financial position
To assess financial performance
To compare actual figures with predicated figures
To aid in decision making
Define gross profit margin
GPM shows the value of a companys gross value expressed as a percentage of its sales
How do you increase GPM
Increase sales revenue
- cut prices
- reposition the product
- improved marketing strategies
Decrease overheads or expenses
- Find cheaper suppliers of raw materials
- Reduce staffing costs
What is profit margin
Profit before interest and tax as a percentage of total sales revenue
How to increase profits
Reduce overhead expenses
- discuss preferntial payemtn terms with creditors and suppliers
- negotiate cheaper rent
- Reduce indirect costs
What is ROCE?
Return on capital employed
capital employed = total internal sources of finance + long term external sources of finance.
profit before interest and tax/capital employed
What should ROCE be?
ROCE > more than interest to show financiers that the organisation will be able to provide returns on the money invested in them
What is the current ratio?
Current assets / Current liabilites
What should current ratio be ?
Should not be more than 2. Between 1.5 - 2
< 1.5 - current liabilities too much
> 2.0 - misuse of money
should be better invested
too much inventory
too many debtors
What is an acid ratio and what should it be?
Current assets - stocks / Current liabilities
Should be 1
Uses of ratios
Employees and unions can use it to understand chances for raises and how stable their organisation is
Managers can use it for decision making and to identify problem areas
Creditors can ensure that the org can pay them back
Shareholders - should i invest
Limitations of ratios
Usually dependent on historical information may not always be accurate
Changes in external environment are not reflected in ratios
No universal manner or format of presenting - interfirm minsinterpration
Does not ttkae into account qualitaitve factors so cannot solely be used for decision making
What is investment appraisal?
A qualitative tool which is used to calculate the financial costs and benefits of an investment decision
What is PayBackPeriod?
The time it takes for a firm to make enough profits through a project invested in to pay back the initial cost of investment
PBP formula
Initial investment / Contribution per month
What does average rate of return to?
Average profit on an investment project expressed as a percentage of the initial investment
What is ARR formula?
(Total returns - capital cost) / years of use // capital cost *100
What does the term of sources of finance refer to?
refers to how businesses fund their activities
Describe 3 internal sources of finance
Personal funds - own money, savings, borrowed ~ sole propritership and partnerships
Retained earnings - reinvesting, no interest, simple and easy
How does share capital work as SOF
Share capital refers to the money raised from selling shares in a limited liability company
What is loan capital?
Loan capital refers to the money borrowed from commercial lenders ( medium to long term)
What are debentures?
Long term loans issued by the business which allows them to obtain money and pay it back with interest regardless of if the business makes a profit or not. It is similar to share capital but debenture owners have no ownership
What is an overdraft?
Overdrafts are financial services that allow businesses to temporarily borrow more money than they have in the bank
Helps with cashflow
when there is need for a large cash outflow - peak seasonal trading or purchase of machinery
DIS - repayable on demand from lender
What is trade credit?
Trrade credit is a system that allows people to buy now and pay later.
What is crowdfunding?
Raising finance from a large number of indviduals in a short amount of time
very regulated
usually on online sources of finance
What is leasing?
Leasing refers to a form of hiring whereby a contract is agreed upon between a leaser and a lesee upon the lease of a certain asset - land, space, machinery.
What is sale-and-leaseback>
When a company sells an assent when in need of funds but then immediately hires it back
What is hire purchase?
Lease for a set amount of time with intent to purchase after all payments are done. Asset is legal property of leaser till all payments are over
What is microfinance?
Microfinance is a type of financial serive privded to small business, especially women and those on low incomes.
Adv and disadv of microfinance
Adv
- Makes financial sources more accesible to people who usually do not get loans from bankks
- Helps create mployment oppurtunities
- Helps increase standard of living
Disadv
- Risky - they may not always be able to pay back
- Unethical - youre profiting off the poor
- Eligibility - tough eligibility standards
- Microfinance provides only small loans
What is a business angel?
Extremely wealthy individuals who choose to invest their own money in businesses that have potential
Disadv of business angel
Dilution of control of owner because business angel will take control
Might have to buy back the share to regain control
What does a business angel consider when investing in a project
Return on investment
The business plan
People
Track record
What is a short term source of finance?
those available fo rless than a year used to finance daily day-to-day business operation
What is a long term source of finance>
Are those available for more than 12 months used for capital expenditure
Factors affecting choice of SOF
SPACED
SIZE
PURPOSE OF FINANCE
AMOUNT
COST
EXTERNAL FACTORS
DURATION
What is profit and loss acount?
A statement showing a firm trading activites over a given period of time
What does window dressing refer to?
The legal act of creative accounting to make accounts seem more attractive
What is a balance sheet?
A balance sheet is a annual financial statmeent that provides infromation about current assets and current liabilities
What are assets?
Items of monetary value
non current - last for more than 12 months
current - likely to be liquidated within 12 months
What are liabilities?
A liability is legal obligation to repay lenders the money lent at a different time
What is eq- uity?
Refers to the value of the business that is owned by the owners
Limitations of balance sheets
- Static documents do not reflect constantly changing figures
- Only estimates not completely accurate
markets value != book value - no universal format
- intangible assets are not included
What is branding?
Refers to the connection of tangible and intangible assets to a firm
what is patent
Patents provide legal protection to owners, giving them ownership over intellectual property preventing impersonation
What is a copyright?
Legal protection for original artists, writers etc.
What is goodwill?
Intangible asset which exists when the value of a firm exceeds its book value
What are reigstered trademarks?
Distrinctive signs that uniquely identify a brand, a product or a business entity
What is liquidity?
Ability of business to convert its curretn assets to cash quickly and easily without a fall in its value
What is working capital?
Working capital refers to the funds available to finance the daily operations of a businesses
Reasons for cash flow forecasts?
- Assess financial health of a business
- Can help amangers anticipate and identify liquidity problems
- Facilitate business lanning
What is investment?
Investment is the spending of money on capital or productive assets
What is overtrading ?
Overagressive methods of growth without the appropriate resources to handle itW
What is overborrowing?
The larger the proportion of capital raised through external soruces of finance the higher the cash outlflow on interestpayments
Overstocking
Bad inventory management leaves money tied up in stocks leading to money being wasted with no return
How to improve cash flow position
Increase cash inflow
Decrease cash outflow
Source additional sources of finance
How can cash inflow be increased
Cash only sales - decreased customer base
Tighter credit control - only giving credit to people who can pay it back on time
Change pricing policy - cut costs to get rid of exess stocks
Improve product portfolio - diversification allows a spreading risks and several sources of cash inflow
Hiw can cash outflow be decreased
Seek preferential credit terms
Seek alternate suppliers
Better stock control
Leasing
Reduce expenses
What can innacurate CFF’s be caused by
Incorrect market research
Competitior behaviour
Human resources - decreased productivty
Changing fashions and tastes
Economic change
External shocks
