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As Business (new) > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

What are financial objectives?

A

Financial objectives are the monetary targets a business wants to achieve within a set period of time

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2
Q

Examples of financial objectives?

A 
Return on investment
Capital structure
Revenue
Costs
Profit
Cash flow
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3
Q

What is ROI?

A

Return on investment-ROI is a measure of a firm’s profitability and performance

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4
Q

Return investment calculation

A

Operating profit / x 100
Capital invested

Example:
Capital invested = £100 000
Operating profit = £8 000
£8 000/£100 000 x 100 = 8%
This means that for every £1.00 invested in the business £0.08 was generated in profit in that year
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5
Q

What is long term funding

A

Long term funding is the amount of capital that has been invested in a business and will stay in the business for over a year. This is normally for the purchase of assets

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6
Q

where can long-term funding come from?

A

Long term funding can come from 2 sources:
Equity i.e. capital invested by the shareholders of a company
Debt i.e. money borrowed from financial institutions

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7
Q

Calculation of gearing?

A

Calculated as:
Deb/t x 100
Total long term funding

Example:
Long term funding = £3.2m
Debt = £1.2m
£1.2m/£3.2m x 100 = 37.5%

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8
Q

Revenue objectives

A

Revenue objectives are targets set for the amount of money coming into a business from sales in a set period of time

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9
Q

Gross profit calculation

A

sales revenue - cost of sales

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10
Q

Operating profit calculation

A

gross profit - expenses

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11
Q

Profit for the year calculation

A

operating profit-interest and taxation

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12
Q

Define cash flow

A

Cash flow is the movement of money into and out of a business

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13
Q

Cash flow objectives?

A

May be a specific cash flow target ,example:
To ensure all debts are received within 30 days
To maintain a cash balance of £25,000

A cash flow target may be to keep a surplus in order to take advantage of unforeseen opportunities

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14
Q

Internal influences on financial objectives?

A

Factors from within the business
Corporate and other functional objectives
Characteristics of the firm
Relationship between owners and directors
Public or private sector

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15
Q

external influences

A 
Factors from outside the business
Competitors
Consumers
Economic conditions
External environment
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16
Q

what are debts

A

money owed by an individual or organisation to another individual or organisation

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17
Q

Cost objectives?

A

Cost objectives are limits set for the amount of money to be spent on expenditure in a set period of time

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18
Q

Profit objectives?

A

Profit = Revenue – total costs

Profit objectives are targets set for the amount of surplus to be achieved in a set period of time

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19
Q

what is profit?

A

Profit – The difference between income and total costs of a business.

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20
Q

What is profitability?

A

Profitability – The efficiency of a business at generating profit in relation to the size of the business.

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21
Q

Difference between profit and profitability?

A

Profit is just a sum of money whereas profitability relates the sum to the size of the business.

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22
Q

What are two main ways to measure a size of a business?

A 
Sales revenue
Capital employed (all the money that has been invested in the business by owners)
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23
Q

What is gross and operating profit?

A

Gross profit – The profit made once the firm’s direct costs have been paid.
Operating profit – Profit made directly from trading (its main activities).

24
Q

Gross profit margin calculation?

A

Formula: GPM = gross profit x 100
sales (turnover)
Example: If a business makes £100,000 gross profit from sales of £850,000 worth of goods
GPM = 100,000/850,000 x 100 = 11.76%

25
Q

Operating profit margin calculation?

A

Formula: OPM = operating profit x 100
sales (turnover)
Example: If a business makes £60,000 operating profit from sales of £850,000 worth of goods
OPM = 60,000/850,000 x 100 = 7.1%

26
Q

What is a budget?

A

Budgets are agreed financial plans with targets set for income (revenue), expenditure (costs) and profit over a given period of time, usually a year.

27
Q

What is the person responsible for a budget known as?

A

Budget holder.

28
Q

3 types of budget?

A

Income budget
Expenditure budget
Profit budget

29
Q

What is income budget?

A

Shows the budgeted income for a business and the sources

30
Q

Income budget advantages?

A

Will help a firm to plan its workforce and operations

Will allow a firm to plan its expenditure based on requirements to meet demand, for example, order levels and staffing.

31
Q

What is expenditure budget?

A

Shows the budgeted expenditure for a business

32
Q

Profit budget calculation?

A

Profit budget = income budget – expenditure budget

33
Q

Methods of setting budgets?

A

Budgeting according to company objectives
Budgeting according to competitors’ spending
Setting the budget as a percentage of sales revenue
Budgeting according to last year’s budget allocation

34
Q

What is zero budgeting?

A

All budgets start at zero and budget holders must justify why any expenditure is necessary before it is approved. Budgets are then set based on the strength of the justification linked to company objectives.

35
Q

Advantages of zero budgeting?

A

Encourages more thorough planning and consideration about spending
Helps to identify changes in an organisation’s needs and ensures those areas of the business that are growing and need more finance get it
Helps to save money by cutting costs where managers are unable to justify their spending

36
Q

Disadvantages of zero budgeting?

A

It can be very time consuming for budget holders

Managers who are better at negotiating or presenting may acquire bigger budgets despite needs of other departments

37
Q

Reasons for setting budgets

A

Helps to gain investment or finance
Financial control
Monitoring and review
Allows firms to establish their priorities
Improving staff performance and better accuracy
Assign responsibility – Budget holders can be held accountable for performance.

38
Q

Problems of setting budgets

A

Imposed budgets – If budgets are imposed by managers further up the hierarchy with less knowledge of the department they may be unrealistic or overly optimistic. .
Research problems and accuracy – It may be difficult for firms to gain accurate and current research to inform their forecasts.
Unforeseen changes – Budgets rely on forecasts and many changes may occur such as suppliers increasing prices, falling demand, economic changes, government actions or new rivals setting up.
The time taken in setting budgets – A large amount of time may be needed to set accurate budgets. r.

39
Q

Budget Benefits

A

They provide direction and co-ordination which may motivate staff to work towards company objectives.
Budgets can act as SMART objectives to measure performance against.
They improve efficiency by eliminating waste and overspending.
They encourage careful planning which improves company performance.

40
Q

Budget drawbacks

A

Allocations may be incorrect and unfair – particularly if imposed.
Short-term savings may be made to meet budgets that are not in the interests of the firm in the longer term, for example, finding cheaper raw materials that may impact quality and future reputation and sales.
They are difficult to monitor fairly.
They may be inflexible.

41
Q

Variance calculation

A

Variance = budget figure – actual figure

42
Q

What is liquidity?

A

The ability of a firm to pay its short term debts

43
Q

Explanation of fixed costs?

A

Costs that do not change directly with output
They must be paid even if the firm makes and sells nothing.
They may change in time but do not change by a set amount every time another unit is made.

44
Q

Break even analysis (FC)

A

It is a straight line as fixed costs do not change directly with output and should remain constant in the short term.

45
Q

Break even analysis (VC)

A

The variable cost line should increase by the same amount as every extra unit is made and sold.
starting from zero

46
Q

Contribution per unit calculation?

A

Contribution per unit = Selling price – variable cost per unit

47
Q

Break even calculation?

A

BE = Fixed costs/

Contribution per unit

48
Q

TC line on graph

A

(fixed + variable costs). This line will always start where the fixed cost line crosses the axis as even at zero output you will still have to pay your fixed costs.

49
Q

Where do you label the break even point?

A

Where the total revenue and total costs line cross is where they are equal and profit is therefore zero.

50
Q

Margin of safety calculation?

A

Margin of safety = actual output – break-even output

51
Q

What is break even?

.

A

Break-even is the point at which total costs equal total revenue and neither a profit nor loss is made

52
Q

When do problems with cash flow occur?

A

Cash-flow problems occur when inflows are insufficient to cover the outflows. Suitable solutions need to be provided to prevent the business having poor liquidity and failing.

53
Q

Causes of cash flow problems

A

Poor sales and low profits
High costs and underestimating costs
Unexpected increases in costs or falls in demand
Seasonal demand
Over investment in non-current assets – such as buildings and vehicles.
Over trading

54
Q

Methods of improving cash-flow problems?

A

Bank overdraft
Short-term loans
Debt factoring (also known as factoring or invoice factoring)
Sale of assets
Sale and leaseback of assets
Diversifying the company’s product portfolio to increase sales
Expanding into new markets nationally or internationally
Improving decision-making procedures, planning, monitoring and control of stock and credit terms
Better market research to anticipate changes in demand and costs
Setting up a contingency fund

55
Q

Difficulties improving cash-flow?

A

Firms, particularly small firms, may find it difficult to re-negotiate credit terms with its customers and suppliers
Some firms may not be able to reduce their stock levels,
Gaining access to sources of finance to solve cash flow problems, such as loans and overdrafts
Cost of finance to solve problems , for example, interest charged
Analysing the firm’s performance to find out what the cash flow problems are can be difficult
There may be an impact on brand image from the actions firms may take to solve cash flow problems, for example, Cadbury and Twinning’s moving their production to Poland for cheaper labour costs
Short-term decision-making may impact on the business in the long-term, for example, finding cheaper suppliers may impact the overall quality leading to poor image and lower future sales.

As Business (new) (6 decks)

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