Unit 5 Flashcards
When someone judges a business what will be the first thing they look at ?
Financial information
What are the benefits of setting financial information ?
+ they may act as a measure of performance
+ they provide targets which can be a focus for decision making
+ potential investors or creditors may be able to assess the viability of the business
What is cashflow ?
The difference between the actual amount of money a business receives and the actual amount it pays out
What is profit ?
The difference between all the sales revenue and expenditure (all costs)
What are examples of what can cause cashflow problems ?
- holding large amounts of inventory (stock)
- having sales on long credit periods
- using cash to purchase fixed assets
What is gross profit ?
sales revenue - costs of production
What is operating profit ?
sales revenue - all costs (including expenses)
what is profit of the year ?
Operating profit - tax
What are examples of cash flow objectives ?
. Targets for monthly closing balances
. Reduction of seasonality In sales
. Reduction in bank borrowings
. Targets for achieving payment from customers
. Extension of the businesses credit period to pay suppliers
What is capital expenditure ?
the money spent on fixed assets (buildings and equipment)
When does investment occur ?
+ when a business first sets up
+ as a business grows and develops
What is the calculation for return on investment ?
(Profit from investment / cost of invested) x 100
What is the capital structure referring to ?
long-term capital of the business
*equity (share capital and *borrowing (loan)
What is the calculation for gearing ratio ?
(Non- current liabilities / equity + non current liabilities) x 100
What are the external influences on financial objectives and decisions ?
. competitors actions
. market forces (e.g. changes in taste and fashion)
. Economic factors
. Political factors
. Technology
What are the internal influences on financial objectives and decisions ?
. Corporate objectives
. Resources available
. Operational factors (qty of labour)
What are income budgets ?
forecasted earnings from sales
What are expenditure budgets ?
Forecasted spending of a business
What are profit and loss budgets ?
calculating the difference between the forecasted sales income and the forecasted expenditure
What is the 3 stage process of setting budgets ?
1). Prepare for income budgets
2). Construct expenditure budgets
3). Forecast profit or loss (by comparing income and expenditure budgets)
What are the main reasons budgets are set ?
. An essential element of a business plan
. Budgets can help businesses to decide whether or not to go ahead with a business idea
. Budgets can help with pricing decisions
what are some difficulties in setting up budgets ?
- no historical evidence of the business
- a business may lack the experience to estimate costs such as those for raw materials or wages
- unexpected actions from competitors (price cuts)
what is a favorable variance ?
occurs when costs are lower than expected or profits are higher than expected
what is an adverse variance ?
when costs are higher than expected or profits are lower than expected =
what are the benefits of budgeting ?
+ targets can be set for each part of the business
+ inefficiency and waste can be identified
+ budgets can help improve internal communication
+ budgets make managers think about the financial implications
what are the drawbacks of budgeting ?
- budgets can be inflexible
- budgets have to be accurate to have meaning
what is profit per unit also known as ?
contribution per unit
What is the value of breakeven analysis ?
+ a business can estimate the level of sales required before it would start to make a profit
+ can support loan applications
+ estimate profits or losses
What are the drawbacks of breakeven analysis ?
- no costs are truly fixed
- sals revenue assumes all output produced is sold at a uniform price
Why is data beneficial for decision making and planning ?
Because data is analytical, scientific decision making can be done
What are the main internal sources of finance ?
. Retained profits
. Sales of existing assets
. Cut down on stock levels
. Share capital
What are the main external sources of finance ?
Shares
Bank loans
Share capital
Bank overdraft
Crowdfunding
Debt factoring
Venture capital
Trade credit
What are some cashflow problems ?
Poor management (lack of receivables etc.)
Giving too much trade credit
Overtrading
Unexpected expenditure
What are some methods of improving cashflow ?
Debt factoring (selling debt)
Making customers pay on time (less trade credit)
Persuading suppliers to offer longer periods of trade credit
What are some methods of improving profits ?
. Increasing prices
. Cutting costs of production
. Using capacity as full as possible
. Increasing efficiency (avoiding waste)
What are some difficulties of improving cashflow ?
- debt factoring will reduce profit margins concerning customers
- customers may be put off by reduced credit periods
What are some difficulties of improving profit ?
- increasing prices may attract criticism from customers
- cutting costs is likely to result in a fall in the quality of raw materials
- increasing efficiency may result in redundancies if technology is introduced
