UNIT 5 Flashcards
why are financial objectives important
- poor management of financial control is the main cause of business’ failing
- easy to manage with numbers
4 types of profit
- revenue
- gross profit
- operating profit
- net profit
name 3 cash flow objectives
- specific, reserved cash
- shortening payments periods for customers
- extending cash outflow to suppliers
name 3 investment and return objectives
- a target for capital investment, aligned with growth target
- reducing capital to reduce debt
- calculate return on investment
whats ROCE
return on capital employed
- amount of profit made compared to how much has been put in
calculate return on capital employed
operating profit/ capital employed
all times 100
how to calculate capital employed
total equity+ non current liabilities
whats the ideal capital employed
20-30 percent
whats capital structure
a balance between amount borrowed and how much they owe shareholders
what does too much share capital lead to
more dividends paid out
what does too much loan capital lead to
risk of interest increase
name 3 internal influences on financial objectives
- help to meet corporate objectives
- type of product
- other functional objectives eg: operations objective of being more efficient will have a knock on effect
whats a budget
a financial plan for the future
2 purposes of budgeting
- control/ monitoring
- motivation
what are the 2 types of budget
revenue vs expenditure
what are types of budget usually based on
historical data
whats a zero based budget
requires all expenditures to be justified, to ensure value for money
strength and 3 weakness of zero based budget
- minimise cost
- time consuming
- past data may not be best to indicate future
- external factors can affect eg: interest rates
whats a variance analysis
a difference between actual and budget figures
whats the difference between a favourable and adverse variance
favourable is where costs are lower than expected
adverse is where costs are higher, therefore revue lower
whats a cash flow forecast
a prediction of cash coming in and out of the business, usually in a table format
3 reasons why a cash flow is important
- to avoid bankruptcy
- overview of expenses
- help a business avoid insolvency ( not being able to pay off debt )
whats a net cash flow
total inflow- total outflow
how to we figure out opening balance on a cash flow forecast
its the same as months before closing balance
whats labour turnover
department of employees over a period of time
whats delayering
removing layers of management to increase efficiency
what are receivables
money owed to a business
2 ways to improve cash flow
speed up inflows
- loan/ overdraft
- destock
slow down outflow
- reduce costs
name 3 difficulties improving cash flow
- relationships can be affected
- overdrafts are expensive and short term
- consequences!!
3 strengths 3 weakness’ of cash flow forecast
- predict demand surges
- identify negative cash flow
- apply loan
• based on estimates
• doesnt account for external
• biased figures
3 advantages of break even
- allows business to plan how many products need to be sold to make profit
- pricing strategy
- supports application for loan
2 disadvantages of break even
- assumes all products are sold at same price
- assumes cost increase constantly and firms don’t benefit from bulking
whats an income statement
calculates profit or loss made by a business in the last 12 months
it compares performance and is useful for investors
gross profit
money after deducting costs
operating profit
amount left after expenses and costs
net profit
operating profit- interest and all expenses
why should we work out GP and NP
we can see if the business is doing well compared to competitors
how to work out GPM
gross profit/ revenue
x 100
calculate net profit margin
NP/ revenue x 100
3 difficulties in improving profit
- spending money to make money
- lower quality if cheap??
- consequences with change
what are the 3 types of internal finance
savings
retained profit
sales of assets
advantage and disadvantage of savings
- no interest
- may not be enough
whats debt factoring
sell debt to 3rd party
- its immediate
- the company will take a cut from debt theyre chasing for you
whats trade credit
obtains stock from suppliers however you dont pay immediately
- it helps with cash flow
- not suitable for large amounts
bank loan
suitable for large amounts however have to pay interest
bank overdraft
insant
however, high interest
venture capital
business angel buys shares
- advice and finance
- loose some ownership
LATER ON THE BUSINESS ANGEL WILL SELL SHARE AND BUY ELSEWHERE
family and friends
no interest
may not be enough
share capital
sell shares for money
- loose ownership, take over
- no interest
P2P LENDING
loan from peers, without bank
- high returns than savings
- high risk, not covered
crowd funding
- raise large amount
-may not raise enough?
grant
local council
- dont need to pay back
- need to meet certain criteria
mortgage
- re mortgage for cash
- large amount
- pay interest
how to calculate break even
fixed costs/ contribution per unit
how to calculate contribution per unit
selling price - variable cost unit
