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Business > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

financial objective

A

all types of businesses must have profit as a financial objective

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2
Q

key financial objectives

A
  • Profit = targets for revenue & costs
  • Cash flow
  • Return on investment
  • Capital structure
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3
Q

return on investment meaning as an objective

A

meaning how much profit is made from an investment?

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4
Q

capital structure meaning as an objective

A

meaning where is the capital or funding coming from?

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5
Q

what are the 3 types of profit?

A
  • gross profit
  • operating profit
  • profit for the year
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6
Q

what is the equation for gross profit?

A

revenue - cost of sales

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7
Q

what is the equation for operating profit?

A

gross profit - expenses

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8
Q

what is the equation for profit of the year?

A

operating profit - tax

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9
Q

what is cashflow?

A

the amount of money available in the business’ bank account to pay for its day-to-day expenses

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10
Q

cashflow as an objective

A

A positive cash flow enables a business to pay their suppliers & lenders & avoid the risk of being taken to court & put into liquidation

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11
Q

equation for cashlow

A

cash inflow - cash outflow = net cashflow

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12
Q

equation for profit

A

revenue - total costs

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13
Q

links between profit and cashflow

A
  • Revenues eventually turn into cash inflows
  • Costs eventually turn into cash outflows
  • A business with a consistently negative cash flow is unlikely to make a profit
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14
Q

return on investment as an objective

A

Return on investment measures the profit made as a % of the initial investment

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15
Q

equation for return of investment

A

(profit made from investment / cost of investment) x 100

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16
Q

2 main capital sources

A
  • shareholders
  • banks
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17
Q

capital structure as an objective

A
  • shareholder= equity
  • banks = debt
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18
Q

why is equity safe?

A
  • capital obtained from the sale of shares doesn’t have to be repaid
  • doesn’t make a profit no dividend is due to shareholders
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19
Q

why is debt dangerous?

A
  • loan must be repaid with interest whether the business has enough cash flow or not
  • bank can take court action = risk of liquidation
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20
Q

ideal capital structure

A

less than 50% of a business’ capital should come from banks

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21
Q

equation for gearing

A

(loan capital / total capital borrowed) x 100

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22
Q

benefits of having clear financial objectives

A
  • Specific & measurable way of assessing success or failure
  • clear targets for managers to achieve
  • used to reward managers for achieving these targets (bonus payments)
  • Enables shareholders to anticipate how much dividend they will receive & to compare the return on investment with other investment options
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23
Q

what is a budget in measuring financial performance?

A

financial plan for the future anticipating the revenues, costs & profit of a business

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24
Q

budgets

A

budget shows forecasted (planned) & actual figures for revenue, expenses & profit

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25
Q

calculating budgets

A

means calculating & investigating the differences between actual results & the budgeted figures

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26
Q

what is a variance?

A

is a difference between an actual & a budgeted figure

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27
Q

equation for variance

A

budgeted figure - actual figure

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28
Q

favourable variance

A

better than expected
e.g. costs lower than expected
e.g. revenue/profits higher than expected

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29
Q

adverse variance

A

worse than expected
e.g. costs higher than expected
e.g. revenue/profits lower than expected

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30
Q

example of an adverse variance ending in good result

A

higher production costs than budget (adverse variance) due to sales being significantly higher than budgeted (favourable budget)

31
Q

managing cashflow

A

A cash flow forecast is a budget* for the cash flowing into & out of a business’ account over a period of time.

32
Q

what is liquidity

A

Liquidity is the amount of cash available in a business’ bank account

33
Q

key words in cash flow forecast

A
  • Net cash flow
  • Opening balance
  • Closing balance
34
Q

value of cash flow forecasts

A
  • show a surplus of cash which could be invested or used for expansion
  • show cash flow issues= will the business run out of cash?
  • manage cash flow issues by taking actions: get an overdraft, a loan or change timings of cash outflows
35
Q

what are receivables?q

A

money owed to the business by customers who haven’t paid their invoice yet (future cash inflows)

36
Q

what are payables?

A

money the business owes to its suppliers (future cash outflows)

37
Q

solving unexpected cashflow problems

A
  • Ask for or increase an overdraft
  • Apply for a short-term loan
  • Debt-factoring
38
Q

what is debt factoring?

A

when a business sells its accounts receivables to a third party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms.

39
Q

pros of debt factoring

A
  • A quick way to turn receivables into cash
  • Avoids having to borrow money
  • It is not a debt
  • No need to chase customers for payment
40
Q

cons of debt factoring

A
  • This service has a cost (% of the receivables &/or a fee)
  • Some customers may disapprove of having to deal with a debt factoring company
41
Q

contribution per unit

A

contributes towards paying for the fixed costs

42
Q

equation for contribution per unit

A

selling price - variable cost

43
Q

total contribution

A
  • the contribution from all the units sold
  • pays for the fixed costs. Any overflow is profit
44
Q

equation for total contribution

A

actual output x contribution per unit

45
Q

what id break even?

A

the production level at which total revenues equal total expenses.

46
Q

break even equation

A

fixed cost / contribution per unit

47
Q

or break even equation

A

fixed cost / (selling price - variable cost)

48
Q

what is margin of safety?

A

the difference between the actual output & the break even point.m

49
Q

margin of safety equation

A

Actual output - breakeven output

50
Q

comparing profitability

A

compare profit with sales

51
Q

equation for profit margins

A

(Profit* / Sales revenue) x 100

52
Q

assessing profit margins

A
  • Compare the figure with previous year(s)
  • Compare the figure with competitors
53
Q

improving profit

A
  • Increase sales
  • Reduce fixed costs
  • Reduce variable costs
54
Q

how to increase sales

A
  • Increase promotions
  • Reduce price (if -1 <PED)
  • Use a product life extension strategy
  • Find new markets or segments
  • Launch a new product
55
Q

how to reduce fixed costs

A
  • Find cheaper premises
  • Reduce staff number
  • Replace staff by machines
  • Increase capacity utilisation
56
Q

how to lower variable costs

A
  • Find cheaper suppliers
  • Find ways of achieving purchasing economies of scale (bulk buying)
57
Q

internal sources of finance

A
  • Retained profit
  • Sale of asset(s)
58
Q

short term external sources of finance

A
  • Overdraft
  • Trade credit
  • Debt factoring
59
Q

long term external sources of finance

A
  • Bank loan
  • Venture capital
  • Crowdfunding
  • Share capital
60
Q

criteria for choosing source of finance

A
  • available to the business? (sole trader, Ltd or Plc)
  • Amount needed
  • interest
  • Risks
  • Impact on control of the business
  • Long vs short term impact
61
Q

pros of selling fixed assets

A
  • no interest
  • no control given up
  • quick form of cashc
62
Q

cons of selling fixed assets

A

-finite
- risk of not receiving value and buyer

63
Q

pros of overdraft

A
  • quick and simple to organise
  • bespoke to business
  • no control given up
  • short term debt not included in gearing ratio
64
Q

cons of overdraft

A
  • interest = costs
  • bank has power to cancel overdraft
  • consistent use of overdraft can damage credit rating
65
Q

pros of trade credit

A
  • simple to arrange and maintain if meet terms
  • cheap form of short term finance
    -no control given up
66
Q

cons of trade credit

A
  • risk of spoiling relationship with supplier if terms not met
  • late fines
67
Q

pros of bank loans

A

-keep control
- bespoke to business needs
- frequent repayments may improve credit score

68
Q

cons of bank loans

A
  • assets taken is not payed
  • no flexibility
  • risk credit score
  • gearing increased
69
Q

pros of crowdfunding

A
  • no repayments
  • exposure of business = marketing
  • good feedback = large amount of investors align with business
70
Q

cons of crowdfunding

A
  • profits shared
  • risk of business reputation
  • limited expertise of investors
70
Q

pros of venture capital

A
  • no repayment
  • reduce personal risk
  • venture capitalists provide expertise
71
Q

cons of venture capital

A
  • control given
  • venture capitalists looking to exit as wants money
72
Q

pros of new share issue

A
  • no interest
  • if plc can raise large amount of finance
  • employee incentive
73
Q

cons of new share issue

A
  • give up share of business
  • dividends
  • take over risk
  • flotation to become plc

Business (11 decks)

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