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Business A-Level > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

What are financial objectives?

A

goals or targets that relate to a business’s finance

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2
Q

What is cash flow?

A

the difference between cash receipts and cash payments

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3
Q

Why is a positive cash flow important?

A
  • cash receipts needs to exceed cash payments so that the business has the cash to pay off bills when they fall
  • a negative cash flow means that the business has to borrow money
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4
Q

What is profit?

A

the difference between total revenue and total costs and revenue

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5
Q

Why is profit important in the financial management ?

A

reward to the owners who will be shareholders expecting a reasonable dividend and value of shares to rise
important source of funds for investment
businesses who make a loss find it hard to borrow funds
for business to survive in the long run must make profit

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6
Q

What are the 3 types of profit?

A

gross profit
operating profit
net profit (profit for the year)

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7
Q

What is the calculation for revenue?

A

price x quantity

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8
Q

What is the calculation for gross profit ?

A

revenue - direct costs (COGS)

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9
Q

What are direct costs ?

A

is spending that can be clearly allocated to a particular product or area of the business e.g fuel and raw materials

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10
Q

What is the calculation for operating profit ?

A

gross profit - indirect costs

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11
Q

What is the calculation for net profit ?

A

operating profit - remaining costs

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12
Q

What are indirect costs?

A

is spending that relates to all aspects of a business’s activities e.g building maintenance costs and salaries

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13
Q

What do remaining costs include?

A

interest paid and received by the firm as well as profits on taxation

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14
Q

Give 3 examples of fixed costs

A

rent
insurance
salaries

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15
Q

What are fixed costs?

A

costs which don’t vary with output

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16
Q

Give 3 examples of variable costs

A

wages
raw materials
fuel

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17
Q

What are variable costs?

A

costs which vary with output

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18
Q

What is the calculation for total costs?

A

variable costs + fixed costs

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19
Q

What are semi-variable costs?

A

costs which have characteristics of fixed and variable costs

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20
Q

What is an example of semi-variable costs?

A

transport costs - the renting and insurance is fixed

the wage of the driver is variable

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21
Q

What is the calculation for profit?

A

total revenue - total costs

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22
Q

What are revenue objectives?

A

earning a certain amount of revenue over a financial period

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23
Q

When/ where/ how might revenue objectives be used?

A

throughout the business that aim for growth
build customer base and establish themselves in market
maximise revenue
relate to specific aspect of business
reduce or increasing prices

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24
Q

What are the 2 types of cost objectives?

A

reducing costs or cost minimization

reducing costs to maintain profit margins

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25
Q

What are profit objectives?

A

can relate to previous years and any expected changes in the future

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26
Q

What are cash cycles?

A

is the time that elapses between the outflow of cash and receipt (inflow) of cash

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27
Q

What are non-current assets/ investment ?

A

purchase of assets that will remain with the business for over the long term and for over a year

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28
Q

What is another term for investment objectives?

A

capital expenditure

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29
Q

What happens to a business when they reach a level of capital expenditure?

A

increase size, value and its ability to supply products to its customers

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30
Q

Why might it be difficult to reach a capital investment expenditure objective?

A

business might have problems in raising sufficient capital to fund its planned investment programme

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31
Q

Describe 3 factors which makes it easier for a business to raise capital for investment

A
  • business hasn’t borrowed excessive amounts already, reassuring to lenders it will be repaid
  • business is purchasing non-current assets (property) that will remain value and and could be sold
  • the business is a company and sell additional shares to raise funds
32
Q

What are the two types of capital raising ?

A 
loan capital (borrow funds - pay interest)
share capital (choose to sell shares - pay dividends, lose control)
33
Q

What are capital structures?

A

balance between these types of capital, loan capital and share capital

34
Q

What are the 3 things that affect capital structure objectives?

A

interest rates
inflation
income

35
Q

What are capital structure optimisation objectives?

A

aims to minimise the cost of raising capital for the company without affecting overall value

36
Q

What are internal influences of financial objectives?

A

overall business objective - financial objective must assist the business in achieving its overall or corporate objectives as growth
nature of product - determined by cash flow cycles or price sensitivity
senior managers - if they hold shares then they may look profit objectives or they may seek recognition that accompanies successful achievement of growth

37
Q

What are external influences of financial objectives?

A

Competitive environment - actions of competitors
Economic environment - implications for consumer spending and borrowing
Technological environment - rapidly changing technology
Political and legal environment - EU and changes - national minimum wage etc

38
Q

What is a source of finance?

A

is the way in which a business raises the finance that it needs for some activity

39
Q

What are the 2 internal sources of finance?

A

retained profit

sale of assets

40
Q

What are the external sources of finance?

A 
overdraft
debt factoring 
bank loans
mortgages
debentures
venture capital
share or equity capital 
crowdfunding
41
Q

What are retained profits?

A

is the profit kept in the business rather than paid out to shareholders in dividends

42
Q

What are the advantages of retained profit?

A

cheap
very flexible - management maintain full control over how they reinvest and what amount is kept.
doesn’t add to debt
no interest rates

43
Q

What are the disadvantages of retained profit?

A

slow - risk of missing out on business opportunities whilst saving the amount
shareholders might prefer dividends
high gearing

44
Q

What is the sale of assets?

A

when you sell or transfer the assets of your company, rather than stock or shares

45
Q

What are the advantages of sale of assets ?

A

No need to pay interest
Doesn’t have to paid back
No loss of control for the business

46
Q

What are the disadvantages of sale of assets ?

A

Asset is no longer owned
Asset may be still needed by the business so may lead to leasing costs
Many businesses don’t have suitable assets

47
Q

What is an overdraft?

A

to continue withdrawing money even if there is not any funds

48
Q

What are the advantages of an overdraft?

A

Very quick to arrange
Only pay interest on the amount withdrawn
A good short term solution to cash flow problem

49
Q

What are the disadvantages of an overdraft?

A

Only suitable for small amounts
Interest or charges are paid and have to repaid in a short amount of time
Cash flow forecasts will need to be shown each time the overdraft arrangements is rearranged
Usually high rates of interest
A bank may withdraw overdrafts with little notice

50
Q

What is debt factoring?

A

A business sells its outstanding customer accounts (those who have not paid their debts to the business)

51
Q

What are the advantages of debt factoring?

A

Improves cash flow - allows businesses to instantly release the cash value of their invoices. This means that they can instantly use the cash to operate and reinvest in the business.
Saves time and resources - can be expensive to chase up invoices so it means resources have to be used efficiently
Accelerates growth

52
Q

What are the disadvantages of debt factoring?

A

Reduces profits

Puts business into temporary debt - if the customer doesn’t pay the invoice or is late, causes problems for the business

53
Q

What is a bank loan?

A

borrowing money from the bank

54
Q

What are the advantages of a bank loan?

A

Easy and quick to set up
Small or large amounts can be borrowed
Structured repayment plan

55
Q

What are the disadvantages of a bank loan?

A

High interests

If repayments cannot be kept up, business risks getting a poor credit rating and/or being made bankrupt

56
Q

What is a mortgage?

A

is when the bank loans you money in exchange for property

57
Q

What are the advantages of a mortgage?

A

Often fixed rate of interest

Repayments every month

58
Q

What are the disadvantages of a mortgage?

A

May have a variable interest rate which can be expensive if rates rise
Lenders may insist of security

59
Q

What are debentures?

A

Selling of debt to someone else who can pay it off at that time, and then you repay the debt later

60
Q

What are the advantages of a debenture?

A

Repayable at a future date, improves cash flow

61
Q

What are the disadvantages of a debenture?

A

Has to pay interest to the creditor

The creditor may take control over some or all of the firm’s asset, to improve their chances of recovering the debt

62
Q

What is venture capital?

A

investment made by specialist funds to finance the launch, early development or expansion of a private company

63
Q

When would businesses be more likely to use external sources of finance?

A

Large sum is required
Level of risk is low encouraging outsider to invest or lend money
Profit levels are low

64
Q

What influences what source of finance should be used?

A 
Business’s legal structure
Cost - rate of interest, cost of selling shares and opportunity cost
Flexibility
Control
Purpose of the finance
65
Q

What are budgets?

A

financial plans that forecast revenue from sales and expected costs over a period of time

66
Q

What are the 3 types of budgets?

A

revenue or earnings budget
expenditure budget
profit budget

67
Q

What is revenue/ earnings budget?

A

expected revenue from selling products, expected levels of sales and selling price

68
Q

What is expenditure budget?

A

cost or production budget, plan spending on labour, raw materials, fuel and other items essential for the production process

69
Q

What is profit budget?

A

using revenue and costs can calculate expected profits

70
Q

What are the advantages of setting budgets?

A

helps the business achieve its financial and wider objectives
control finance effectively
enable managers to make informed and focused decisions
production budgets ensures that a business doesn’t overspend
can allocate finances where needed
used to motivate staff
revenue budget used as a target

71
Q

What type of research needs to be done before constructing budgets?

A
  • analysing the market to predict likely trends in sales and prices to help forecast revenue
  • research the costs of labour, fuel and raw materials by contacting suppliers and seeing if they can negotiate cheaper prices or bulk buying
  • consider government estimates for wage rises and inflation, then incorporate them into future sale revenue and expenditure budgets
72
Q

What are the sources of information for budgets?

A
  • previous trading records
  • market research (predict likely sales)
  • suppliers
  • government agencies
73
Q

What are the difficulties in constructing budgets?

A

difficult to accurately forecast sales - tastes and preference
the risk of unexpected changes - external environment
decisions by the government or other public bodies - publishing of the budget

74
Q

What affects favourable variance?

A
  • wage rises lower than expected
  • economic boom leads to higher than expected sales
  • rising value of the pound makes imported raw materials cheaper
  • poor forecast
  • inexperience
75
Q

What affects adverse variance?

A
  • fuel prices increases
  • government increases business rates by an unexpected amount
  • competitors introduce new products winning extra sales
  • poor forecast
  • inexperience
76
Q

What causes cash flow problems?

A

overtrading - business expands to quickly without organising funds to finance
allowing too much trade credit
poor credit control
inaccurate cash flow forecast

77
Q

How can cash flow be improved?

A 
improved control of working capital
offer less trade credit
arrange short term borrowing
negotiate improved terms for trade credit
debt factoring
sale and leaseback

Business A-Level (11 decks)

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