Unit 5 Decision Making To Improve Financial Performance Flashcards

1
Q

What is return on investment objective

A

Target for the min acceptance return on an investment

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2
Q

Return on investment formula

A

Profit made from investment/cost of investment x 100

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3
Q

Define debt

A

Borrowing money from lenders such as banks

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4
Q

Define equity

A

Receiving funding from shareholders

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5
Q

Why is equity good

A

Safe
Funds from investors don’t need to be repaid
Investors cannot ask for their investment back
Investors are only entitled to a dividend of the business makes a profit

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6
Q

Why is debt not as good as equity

A

Debts need to be repaid in full
If the business isn’t able to repay its debts a lender can take the business to court and the business could be put into liquidation

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7
Q

Capital structure

A

The percentage or ratio of debt to equity

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8
Q

What are the 4 types of finance objectives

A

Profit focus - maximise profit
Revenue focus - market share focus
Cost focus - maximise costs
Cash flow focus - increase cash flow

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9
Q

Risks of capital structure made of debts

A

Risk of interest rates
Creditors become wary

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10
Q

Favourable variance

A

When actual performance is better than what it had been budgeted for
Eg - actual sales may have been higher than budgeted for or actual costs may have been lower

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11
Q

Adverse variance

A

Actual performance was worse than had been budgeted for

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12
Q

Reasons for setting budget

A

Support bank loan application or share issue
Financial control - prevent overspending
Decision making
Help forward planning

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13
Q

Pros of budgeting

A

Gives senior and functional managers spending guidance which encourages spending discipline.
Helps support a business if they are looking to obtain profits

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14
Q

Net cash flow

A

Difference between cash inflow and outflow

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15
Q

Causes of cash flow problems

A

Too much production capacity
Excess inventories
Allowing customers too much credit
Overtrading
Seasonal demand

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16
Q

Methods of improving cash flow

A

Apply for short term loan
Managed customers and suppliers to ensure a positive net cash flow each month

17
Q

Pros and cons of applying for a short term loan

A

Pros - usually at a fixed rate of interest, also interest rate is less than overdraft
Cons - business will have to provide the bank with security

18
Q

What are receivables

A

Money owed to a business by its customers

19
Q

What are payables

A

The value of money owed to suppliers by a business

20
Q

How to improve profits and profitability

A

Increase sales - increase promotion and find new markets - could be expensive and may fail
Reduce costs - find cheaper suppliers and cut wages costs - could reduce quality and reduce motivation
Increase price - improve current product and increase price - customers may switch to competition
Reduce fixed costs - reduce marketing and relocate to cheaper premises - could increase transport costs and could damage image