(Unit 5) Decision making to improve financial peformance Flashcards
What is a financial target?
A goal or objective to be pursued by the finance department.
What is a financial aim?
Broad goals for the finance department.
What is an financial objective?
Specific SMART targets for the departments to achieve their aims.
What are financial tactics?
Short-term financial measures adapted to meet needs of a short-term threat or opportunity.
What is a cash flow?
The total amount of cash flowing into the business (inflows) minus all the cash leaving the business (outflows) over a period of time.
What are inflows?
Receipts of cash into the business (e.g. selling of assets).
What are outflows?
Payments of cash leaving the business (e.g. purchasing goods or equipment, repaying loans and interest).
What is cash?
The actual money held within a business in the short-term that is available to use to pay debts (liquidity).
What is profit?
The final result at the end of a financial period where the revenue is greater than the total costs.
What does insolvent mean?
This is when a business is unable to pay its debts.
What are targets that link to profit?
- sales growth and maximization
- profit growth and maximization
- cost minimization
- cost leadership
What does TIM-WOOD stand for (reduce waste)?
Transport, Inventory, Movement, Waiting, Over-Processing, Overproduction, Defects
What does ROCE stand for?
Return of Capital Employed
What are targets of ROCE?
- Improvement on previous year
- To be better than the average in the industry
- To be better than rivals
How do you calculate ROCE?
(operating profit / capital employed) x100
What is Capital Employed?
The value of resources used by a business (excellent guide to a firms size).
Why is ROCE important?
Profit is the ultimate measure of success and needs to be compared with the size of the business.
What is gearing?
The % of capital raised through loans.
What is cash flow?
The amount of money flowing into and out of a business over a period of time.
What factors affect cash flow?
- amount of cash invested into the firm
- amount of stock held by a firm
- seasonality
- amount of credit given by suppliers
What is liquidity?
The ability of a firm to pay its short-term debts.
What are budgets?
They are agreed financial plans with targets over a given period of time.
What is a budget holder?
The person responsible for the budget set.
What are some reasons for setting budgets?
- helps to gain investment or finance
- financial control
- monitoring and reviewing a firms progress
- allows firms to establish their priorities
What are some of the problems with setting budgets?
- unforeseen changes
- time taken in setting budgets
- research problems + accuracy
How do you calculate profit budget?
Income budget - expenditure budget
What is zero budgeting (method of setting objectives)?
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.
What are the advantages of zero-budgeting?
- more thorough planning
- helps to identify changes
-helps to save money by cutting costs
What are the disadvantages of zero-budgeting?
- time consuming
- managers who are better at negotiating may acquire a bigger budget despite the needs of other departments.
What is variance?
The difference between the budget figure and actual figure.
How do you calculate variance?
Budget figure - Actual figure
What is favourable variance?
This is when costs are lower than expected or revenue is higher (e.g. more profit is made than expected).
What is adverse variance?
This is when costs are higher than expected or revenue is lower (e.g. less profit is made than expected).
What is break-even?
The point at which total costs= total revenue and neither a profit or a loss is made.
How do you calculate break-even?
Fixed costs / contribution
How do you calculate contribution per unit?
Selling price - Variable cost per unit
What is fixed costs?
Costs that do not change directly with output.
What are variable costs?
Costs that do change directly with output.
What are the benefits of using break-even charts?
- simple and quick to complete
- help a firm plan
- little training is needed (useful for new/inexperienced businesses)
- shows changes in all cases
- forecasting and planning for the future
What are the limitations of break-even charts?
- very simple overall
- assumes all units are sold at the set price
- assumes fixed and variable costs stay the same
What is profitability?
The efficiency of a business at generating profit in relation to the size of the business.
What is gross profit?
The profit made once the firms direct costs have been paid.
What is operating profit?
The profit made directly from trading (its main activities).
What is net profit?
The profit from all activities once all costs and income of the business have been paid and revenue received from the firms main and additional activities.
What does GPM stand for?
Gross profit margin
How do you calculate GPM?
(Gross profit / Sales) X100
What is GPM?
How much of the profit from a product you keep when selling a product (margin).
Only takes into account the direct costs of making a product.
What is OPM?
How much of the profit from a product you keep when selling a product.
Takes into account raw materials + wages etc, but before interest or tax.
What does PEYM stand for?
Profit for the year margin
How do you calculate PEYM?
(Profit for the year / Sales) X100
What are the internal sources of finance?
- Retained profits (ST + LT)
- Sale of assets (LT)
What are the external sources of finance?
- Debt factoring (ST)
- Overdrafts (ST)
- Share capital (LT)
- Loans (LT)
- Mortgage
- Venture capital (LT)
- Crowdfunding (LT)
What is debt factoring?
A business will sell its debt/invoices (which have not been collected) to a third party at a discount, in exchange for immediate cash (small loss, e.g. 15%).
What is share capital?
A business can raise money by issuing shares to shareholders, usually for cash.
What is a loan?
A sum provided to an individual or business for an agreed purpose.
What is mortgage?
A very long-term loan taken out on a property, lower interest rates as secured against the property being bought and deposit is required.
What is a venture capital?
Finance provided to SME’s that seek growth or initial investment in exchange for equity of the business.
What is crowdfunding?
A method of raising finance by asking a large number of people each for a small amount of money, often via the internet.
What is revenue expenditure?
Spending on day-to-day costs (e.g. paying wages)
What does capital expenditure?
Spending on assets that will be used repeatedly for longer than a year.
