(Unit 5) Decision making to improve financial peformance

Question 1

What is a financial target?

Answer 1

A goal or objective to be pursued by the finance department.

Question 2

What is a financial aim?

Answer 2

Broad goals for the finance department.

Question 3

What is an financial objective?

Answer 3

Specific SMART targets for the departments to achieve their aims.

Question 4

What are financial tactics?

Answer 4

Short-term financial measures adapted to meet needs of a short-term threat or opportunity.

Question 5

What is a cash flow?

Answer 5

The total amount of cash flowing into the business (inflows) minus all the cash leaving the business (outflows) over a period of time.

Question 6

What are inflows?

Answer 6

Receipts of cash into the business (e.g. selling of assets).

Question 7

What are outflows?

Answer 7

Payments of cash leaving the business (e.g. purchasing goods or equipment, repaying loans and interest).

Question 8

What is cash?

Answer 8

The actual money held within a business in the short-term that is available to use to pay debts (liquidity).

Question 9

What is profit?

Answer 9

The final result at the end of a financial period where the revenue is greater than the total costs.

Question 10

What does insolvent mean?

Answer 10

This is when a business is unable to pay its debts.

Question 11

What are targets that link to profit?

Answer 11

• sales growth and maximization
• profit growth and maximization
• cost minimization
• cost leadership

Question 12

What does TIM-WOOD stand for (reduce waste)?

Answer 12

Transport, Inventory, Movement, Waiting, Over-Processing, Overproduction, Defects

Question 13

What does ROCE stand for?

Answer 13

Return of Capital Employed

Question 14

What are targets of ROCE?

Answer 14

• Improvement on previous year
• To be better than the average in the industry
• To be better than rivals

Question 15

How do you calculate ROCE?

Answer 15

(operating profit / capital employed) x100

Question 16

What is Capital Employed?

Answer 16

The value of resources used by a business (excellent guide to a firms size).

Question 17

Why is ROCE important?

Answer 17

Profit is the ultimate measure of success and needs to be compared with the size of the business.

Question 18

What is gearing?

Answer 18

The % of capital raised through loans.

Question 19

What is cash flow?

Answer 19

The amount of money flowing into and out of a business over a period of time.

Question 20

What factors affect cash flow?

Answer 20

• amount of cash invested into the firm
• amount of stock held by a firm
• seasonality
• amount of credit given by suppliers

Question 21

What is liquidity?

Answer 21

The ability of a firm to pay its short-term debts.

Question 22

What are budgets?

Answer 22

They are agreed financial plans with targets over a given period of time.

Question 23

What is a budget holder?

Answer 23

The person responsible for the budget set.

Question 24

What are some reasons for setting budgets?

Answer 24

• helps to gain investment or finance
• financial control
• monitoring and reviewing a firms progress
• allows firms to establish their priorities

Question 25

What are some of the problems with setting budgets?

Answer 25

• unforeseen changes
• time taken in setting budgets
• research problems + accuracy

Question 26

How do you calculate profit budget?

Answer 26

Income budget - expenditure budget

Question 27

What is zero budgeting (method of setting objectives)?

Answer 27

This is the process of when a budget starts at zero and then every expenditure must be JUSTIFIED before it is approved, then budgets are based on the strength of the justification linked to company objectives.

Question 28

What are the advantages of zero-budgeting?

Answer 28

• more thorough planning
• helps to identify changes
  -helps to save money by cutting costs

Question 29

What are the disadvantages of zero-budgeting?

Answer 29

• time consuming
• managers who are better at negotiating may acquire a bigger budget despite the needs of other departments.