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business > unit 5 > Flashcards

unit 5 Flashcards

1
Q

What are financial objectives?

A

Financial objectives are financial goals that a business wants to achieve. Businesses usually have specific targets in mind, not just profit maximisation, and a specific time period for completion

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2
Q

Who sets financial objectives?

A

Financial managers

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3
Q

What can financial objectives be based on to ensure that they are relevant?

A

Past financial data

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4
Q

What are the 3 types of financial objectives?

A

Revenue objectives
Cost objectives
Profit objectives

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5
Q

What is cash flow?

A

Cash flow is all the money flowing in and out of the business on a day to day basis

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6
Q

Why are cash flow objectives put in place?

A

To prevent cash flow problems

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7
Q

What does ROI stand for?

A

Return on investment

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8
Q

What does ROI measure?

A

Return on investment measures how efficient an investment is - it compares the return from a project to the amount of money that’s been invested

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9
Q

ROI formula

A

(ROI / Cost of investment) X 100

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10
Q

What are two internal factors that influence financial objectives?

A

The overall objectives of the business
- The status of the business

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11
Q

What are 5 external factors that influence financial objectives?

A

-The availability of finance
-Competitors
-The economy
-Shareholders
-Environmental and ethical influences

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12
Q

Explain the influence the economy has on financial objectives

A

In a period of economic boom, businesses can set ambitious profit targets. In a downturn, they have to set more restrained targets and they might set targets that minimise costs.

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13
Q

Percentage change in profit formula

A

(Current year’s profit - previous year’s profit) / previous year’s profit) X 100

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14
Q

What are the 3 types of profit?

A

-Gross profit
-Operating profit
-Profit for the year (net profit)

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15
Q

Gross profit formula

A

Gross profit = sales revenues - cost of sales

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16
Q

Operating profit formula

A

Operating profit = gross profit - operating expenses

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17
Q

Profit for the year formula

A

Profit for the year = operating profit - net finance costs - tax

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18
Q

Operating profit margin formula

A

(Operating profit / sales revenue) X 100

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19
Q

Net profit margin

A

(Net profit / sales revenue) X 100

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20
Q

gross profit margin

A

(Gross profit)
——————– X100
sales revenue

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21
Q

contribution per unit

A

selling price per unit - variable cost per unit

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22
Q

total contribution formula

A

-total revenue - TVC
-contribution per unit X num of units sold

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23
Q

Break even output formula

A

Fixed costs/contribution per unit

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24
Q

margin of safety formula

A

actual output - break even output

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25
Q

Give examples of cash inflows

A

-Sales revenue
-Payment from debtors (recievables)
-Sale of assets
-Owners’ capital invested
-Sources of finance

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26
Q

Give examples of cash outflows

A

Purchasing stock
Wages
Paying debts
Purchasing assets

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27
Q

main causes of cashflow problems

A

-low profits
-allowing customers too much credit and too long to pay

28
Q

improving cash flow short term

A

-cut costs
-reduce current assets
-increase current liabilities

29
Q

improving cash flow long term

A

-increasing equity finance
-increase long term liabilities
-reduce net outflow on fixed assets

30
Q

debt factoring pros/cons

A

used if the business sells a lot on credit, you have a lot of debtors so you sell these debtors to a factoring company. They will give you 90% of the value.

Pros:
-business can focus on selling rather than collecting debts
-Receivables (amount owed by customers) are funded into cash quickly

Cons:
-customers may feel their relationship with the business has changed
-quite a high cost

31
Q

Bank Overdraft pros and cons

A

when a business withdraws more cash from a bank account than it holds.
-short term finance
-used by startup businesses
-external finance

pros:
-quick and simple to organise
-flexible
-interest only paid on the amount borrowed under the family

cons:
-can be withdrawn at short notice
-higher interest rates than a bank loan

32
Q

Retained profit

A

when a business uses historical profits from previous years to invest
-long term finance
-internal finance
-usually established business

Pros:
-flexibility
-business owners in control
-low cost
-no control/shares given up
-safe low risk approach

cons:
-may create conflict with shareholders
-no expertise added
-a drain on finance if loss-making

33
Q

selling fixed assets

A

raising cash by selling assets
-usually long term finance
-internal finance
-usually established businesses

pros:
-not a form of debt so no no interest paid
-providing you can find a buyer its a quick form of cash

cons:
-only a finite amount of times
-risk you cant fins a buyer or its not a fair price

33
Q

new shares issues

A

when a limited company issues shares in exchange for a payment
-long term finance
-external finance
-established businesses

pros:
-no interest
-if PLC -> stock exchange - opportunity to raise finance

cons:
-Give up shares in the business
-expected to pay dividends

34
Q

bank loan

A

when a business borrows a sum of money and pays it back with interest over an agreed period of time.
-long term finance
-external finance

pros:
-no shares in the business need to be given up
-interest rates are lower than overdrafts
-greater certainty of funding

cons:
-harder to arrange
-no flexibility
-assets will be taken if you fail to repay

35
Q

venture capital

A

a type of finance offered by V.C. fund to high risk high reward firms in exchange for a share of the business
-long term finance
-external finance

pros:
-makes expansion possible
-no repayment
-reduce personal risk
-V.C have expertise

cons:
-given up share of the business
-may lose control if more than 50% of share given up

36
Q

Trade credit

A

when you buy raw materiel’s or components from suppliers today but pay later.
-short term finance
-external finance

pros:
-simple to arrange and maintain
-cheap form of short term finance
-no control is given up

cons:
-risk of spoiling relationship with supplier if credit terms are not met
-large fine if you pay late

37
Q

What are the three types of budget?

A

income
expenditure
profit

38
Q

Give 3 advantages of budgeting

A

-help achieve targets
-control income and expenditure
-assists managers to review their activities and make decisions
-motivate staff
-allocate resources

39
Q

Give 3 drawbacks of budgets

A

-can cause resentment and rivalry if departments have to compete for money
-restrictive
-time-consuming to set and review the budget
-costs-there will always be unexpected costs

40
Q

What are the two methods used to set budgets?

A

Zero-based budgeting and historical budgeting

41
Q

Define varience

A

Variance is the difference between actual figures and budgeted figures

42
Q

Give 3 external influences that cause variance

A

-competitor behaviour
-changes in the economy
-the cost of raw materials

43
Q

Give 3 internal influences that cause variance

A

-improvements in efficiency
-overestimated/ underestimated budgets
-changes in selling price

44
Q

Possible Causes of Adverse Variances

A

• Unexpected events lead to unbudgeted
costs

• Over-spends by budget holders

• Sales forecasts prove over-optimistic

• Market conditions (e.g. competitor actions) mean demand is lower than budget

45
Q

Possible Causes of Favourable Variances

A

• Stronger demand than expected = higher actual revenue

• Selling prices increased higher than budget

• Cautious sales and cost assumptions (e.g. cost contingencies)

• Better than expected productivity or efficiency

46
Q

Give 3 advantages of break-even analysis

A

-Easy to carry out
-Quick way to find out break-even output and margin of safety
-Forecasts how variations in sales will affect costs, revenue and profits

47
Q

Give 3 disadvantages of break-even analysis

A

-Assumes that variable costs always rise steadily
-The analysis is for only one product and the majority of businesses sell a whole portfolio of products
-It only tells you how many units you need to sell and not how many you are actually going to sell

48
Q

Key Benefits of Using Financial Objectives

A

-A focus for the entire business

-Important measure of success of failure for the business

-Reduce the risk of business failure

-Provide transparency for shareholders about their investment

-Help coordinate the different business functions

-Key context for making investment decisions

49
Q

Cost Minimisation definition

A

Cost minimisation aims to achieve the most cost-effective way of delivering goods and services to the required level of quality

50
Q

Key Benefits of Effective Cost Minimisation

A

-Lower unit costs (competitiveness)
-Higher gross profit margin (%)
-Higher operating profits
-Improved cash flow
-Higher return on investment

51
Q

Possible Cash Flow Objectives

A

• Reduce borrowings to target level
• Minimise interest costs
• Reduce amounts held in inventories or owed by customers
• Reduce seasonal swings in cash flows

52
Q

Two Common Investment Objectives

A

-Level of Capital Expenditure

Set at either an absolute amount (e.g. invest 5m per year) or as a percentage of revenues (e.g. 5% of revenues)

-Return on Investment (ROCE)

Usually set as a target % return, calculated by dividing operating profit by the amount of capital invested

53
Q

Problems and Limitations of budgets

A

-Are only as good as the data being used

-Can lead to inflexibility in decision-making

-Need to be changed as circumstances change

-Take time to complete and manage

-Can result in short term decisions to keep within the budget

54
Q

Favourable variances

A

• Actual figures are better than budgeted figure

• E.g. costs lower than expected

• E.g. revenue/profits higher than expected

55
Q

Adverse variances

A

• Actual figure worse than budget figure

• E.g. costs higher than expected

• E.g. revenue/profits lower than expected

56
Q

What is the Margin of Safety

A

Margin of Safety is the difference between: Actual Output (units) and Breakeven Output (units)

57
Q

Profit equation

A

Profit =
Margin of Safety (units)
X
Contribution per Unit (E)

58
Q

How to Improve the Margin of Safety?

A

-Increasing Contribution per Unit
• Raise selling prices
• Reduce variable costs per unit

-Lower the Breakeven Output
• Lower fixed costs
• Turn fixed costs into variable costs

-Increase Actual Output
• Sell more

59
Q

Trade
Receivables (Debtors)

A

Amounts owed to a business by customers

60
Q

Trade
Payables (Creditors)

A

Amounts owed by a business to suppliers & others

61
Q

Receivables
Days

A

The average length of time taken by customers to pay amounts owed

62
Q

Payables
Days

A

The average length of time taken by a business to pay amounts it owes

63
Q

Receviable days equation

A

Receviables davs =

Trade receivables
————————- × 365
Revenue sales)

64
Q

Payable days

A

Payables Days =

Trade payables
———————. × 365
Cost of sales

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