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biz! > Unit 5- decision making to improve financial performance > Flashcards

Unit 5- decision making to improve financial performance Flashcards

1
Q

what is the value of setting financial objectives?

A

-they 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

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2
Q

what is cash flow?

A

the difference between the actual amount of money a business receives and the actual amount it pays out (inflows and outflows)

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3
Q

what is profit?

A

the difference between all sales revenue (even if your payment has not yet been received) and expenditure

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4
Q

why might a business have cash flow problems?

A

-holding large amounts of inventory
-having sales on long credit periods
-using cash to purchase fixed assets

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5
Q

what is gross profit?

A

the difference between a sales revenue and the direct costs of production

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6
Q

gross profit formula

A

sales revenue - direct costs of production (eg: materials and direct labour)

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7
Q

what is operating profit?

A

the different between the gross profit and the indirect costs of production (eg: marketing and salaries)

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8
Q

operating profit formulas

A

sales revenue - ALL costs of production
OR
gross profit - expenses

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9
Q

profit for the year formula

A

operating profit + other income - other expenditure

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9
Q

what are some cash flow objectives that a business might set?

A

-targets for monthly closing balances
-reduction of bank borrowings to a target level
-reduction of seasonability in sales
-targets for achieving payment from customers
-extension of the business’s credit period to pay suppliers

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10
Q

what is capital expenditure and when will investment happen?

A

the money spent on fixed assets such as buildings and equipment and represents long-term investment into the business.
Investment will occur:
-when a business first sets up
-as a business grows and develops

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11
Q

what will objectives for investment depend on?

A

-the overall corporate objectives. eg: growth
-the type of business
-the state of the economy
-the market in which the business is operating

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12
Q

return on investment formula

A

profit from investment/ capital invested x100
(could be used when a business is deciding between 2 investments)
(this is only a forecast)

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13
Q

what t¡meows the capital structure of a business refer to?

A

the long term finance of a business

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14
Q

what is long term capital made out of?

A

equity (share capital) and borrowing (loan capital)

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15
Q

what is equity and borrowing?

A

-equity: money that a business raises through the issue off shares
-borrowing: money that a business raises through loan capital

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16
Q

gearing ratio formula

A

loan capital / total capital x100
Gearing refers to the relationship, or ratio, of a company’s debt-to-equity. Gearing shows the extent to which a firm’s operations are funded by lenders versus shareholders, it measures a company’s financial leverage

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17
Q

total capital formula

A

loan capital + equity

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18
Q

what are some external influences on financial objectives and decisions?

A

-competitor actions
-market forces
-economic factors
-political factors
-technology

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19
Q

what are some internal influences on financial objectives and decisions?

A

-corporate objectives
-resources available
-operational factors

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20
Q

what is a budget?

A

a budget is a financial plan. it provides a target for entrepreneurs and managers as well as a basis for a later assessment of the performance of the business

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21
Q

what are income budgets?

A

forecasted earnings for sales and are sometimes called ‘sales budgets’

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22
Q

what are expenditure budgets?

A

sets out the expected spending of a business.

23
Q

what arte profit and loss budgets?

A

they are calculated by subtracting forecast expenditure (or costs) from forecast sales income

24
Q

why do businesses set budgets?

A

-they are an essential element of a business plan
-can help businesses decide whether or not to go ahead with a business idea
-can help with pricing decisions

24
Q

what are the difficulties of setting budgets?

A

-there may be no historical evidence available to a business, no trading records on the level of sales income, costs or how these figures fluctuated throughout the year
-forecasting costs, may lack the experience to estimate costs such as raw materials or wages.
-competitors might react by cutting prices or promoting their products heavily

25
Q

what is variance analysis?

A

the study by managers of the differences between planned activities in the form of budgets and the actual results that were achieved

25
Q

when does a positive (-or favourable variance occur and when does a negative (or adverse) one occur?

A

-positive:when costs are lower than forecast or revenues higher
-negative: when costs are higher than expected or revenues are lower than anticipated

26
Q

what are some possible responses to positive variance?

A

-increase ion production if prices are rising, giving increased profit margins
-to reduce prices if costs are bellow expectations and the business aims to increase its sales
-to reinvest into the business or pay shareholders higher profits if profits exceed expectations

27
Q

what are some possible responses to negative variances?

A

-to reduce costs (buying less expensive materials)
-to increase advertising in order to increase sales of the product and revenues
-to reduce prices to increase sales (relies on demand being price elastic)

27
Q

benefits of budgets

A

-targets can be set for each part of the business
-inefficiency and waste can be identified so that proper action can be taken
-managers will think about the financial implications of their actions
-should improve financial control by preventing overspending
-improve internal communication
-can motivate employees to fulfil their higher level needs (maslow)

28
Q

drawbacks of budgets

A

-the operation of budgets can become inflexible
-have to be accurate to have any meaning
-wide variances between budget and actual figures can demotivate staff and waste the resources used to prepare the budget

29
Q

what is contribution?

A

the amount of money left over after variable costs have been subtracted from sales revenue.
it calculates:
-the breakeven point
-the level of profit

30
Q

contribution formula

A

sales revenue - variable costs

31
Q

contribution per unit formula

A

sales price per unit - variable cost per unit

32
Q

total contribution formula

A

unit contribution x output

33
Q

break even formula

A

fixed costs x contribution per unit

33
Q

profit formuła

A

total contribution - fixed costs

34
Q

benefits of a breakeven analysis

A

-starting a new business: whether the proposal is viable
-supporting loan applications
-measuring profits and losses
-modelling ‘what if?’ scenarios

35
Q

drawbacks of breakeven analysis

A

-no costs are truly fixed, fixed costs are likely to increase in the long term
-total cost line should not be straight as this does not represent the discounts available for bulk buying
-sales revenue assumes that all output produced is sold and at uniform price, which is unrealistic
-the analysis is only as good as the info provided

36
Q

gross profit margin formula

A

gross profit / sales revenue x100

37
Q

operating profit margin formula

A

operating profit / sales rev x100

38
Q

profit of the year margin formula

A

profit of the year / sales revenue x100

39
Q

what are payables?

A

(sometimes called trade creditors) is money owed for goods and services that have been purchased on credit

40
Q

what are receivables?

A

(sometimes called trade debtors) is money owed by a business’s customers for goods and services purchased on credit

41
Q

what are some internal sources of finance?

A

-retained profits: profit not paid to shareholders, kept for investments
-sales of existing assets: sells machinery, space, land, factories that it no longer needs
-friends and family: loans from family members and friend

42
Q

what are some external sources of finance?

A

-equity: money provided by owners or shareholders, no need to pay back and no interest
-loans: money raised from creditor, paid back + interest
-venture capital: venture capitalist may provide funds as a loan in return for a share of the business
-mortgages: loan granted to buy land or business
-crowfunding: people contribute amount (gofund me)

43
Q

what are some short term sources of finance?

A

-overdraft: overspend up to a limit, can be expensive + interest
-debt factoring: business sells its bills that have not been paid
-trade credit: receiving materials but paying at a later date

44
Q

why might cash flow problems occur?

A

-poor management
-giving too much credit
-overtrading
-unexpected expenditure

45
Q

how can a business improve their cash inflows?

A

-factoring: biz can sell its outstanding debtors to a specialist debt collector
-sale and leaseback: owner of an asset (eg: property) sells it and then leases it back
improved working capital control: working capital cash available to help business with their day-to-day operations

46
Q

how might working capital help improve cash flow?

A

-selling stocks of finished goods
-pay on time for customers, offering less trade credit (might damage sales)
-persuading suppliers to offer longer periods of trade credit
-stimulating sales, discounts and prompt payment
-selling off excess material stocks

47
Q

what is profitability?

A

measures sales against some yardsticks, such as the sales revenue achieved by the business

48
Q

how might a business improve profits and profitability?

A

-increasing prices: more revenue but risk of loss of sales which reduces profits, depends on elasticity
-cutting costs: can increase profit margins but might lower quality
-using capacity as fully as possible
-increasing efficiency: avoiding waste in the form of poor quality and unsaleable products, using staff fully and minimal resources

48
Q

what are the difficulties of attempting to improve profit?

A

-increasing prices: reduce sales and revenue and attract. criticism for customers
-cutting costs: reduction of quality, might mean job losses and ups labour reactions
-use capacity fully: may cause problems in matching supply with demand, price reductions and lower revenues
-increasing efficiency: redundancies if technology is introduced

49
Q

what are the difficulties of attempting to improve cash flow?

A

-factoring: profit margin is reduced due to the cost, customers might raise concerns about supplier’s cash flow problems
-sale and leaseback: the asset is removed forever and now rent has to be paid
-working capital control: customers may be put off by reduced credit periods and suppliers might be unwilling to expand them

biz! (10 decks)

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