Unit 5. Finance Flashcards
Pros on setting financial obj
1.Enables managers and owners to judge the performance of the enterprise
- valuable to managers as a measure of performance - because most biz are judged on their financial attainments by other stakeholders
- could identify aspects of the performance of the biz that are causing problems - Could motivate workers - clear guideline
Difference between cash flow and profit
Just because biz is profitable, does not mean there will hold large sum of cash, or even have enough cash.
EX) biz such as jeweller might hold large amount of expensive stocks for customers to view before making a choice. This will entail large amounts of cash being tied up in the form of stocks and not available to the biz for other purposes
What are the diff measurements of profit
1: gross profit
When direct cost is deducted from the revenue.
- gives broad indication of the financial performance of the biz without taking into account other costs such as indirect cost or overheads.
2: operating profit
Gross profit - operating expenses ( like rent and wages Indirect cost to the trading )
3: profit of the year
Operating profit - ( interest paid and received by item and corporation taxes)
Some financial obj managers may make
1: Revenue obj normally short term
-may be used to mainly by biz that aim to grow.
-based on biz reducing its prices in the expectation of making a large number of additional sales and therefore increasing its revenue. Effective when elastic.
Cons: do not necessary increase a biz profit.
Increase revenue by ad could cause increase cost which could lower profits.
2.Cost Objectives
2 type of way: cost minimization and reduction of cost
- Profit objectives
Can be expressed in: - As a simple figure
- As a percentage increase in profits
May motivate workers but could collect concerns if low performance since it will be shown. - Cash flow Obj
- increase liquidity - Investment returns ( Capital expenditure ) objectives
- happens when biz buy large quantities of non current assets
-obj for ROI
6, capital structure obj
Refers to the way in which a biz has raised the capital it requires to purchase it assets.
What is non current assets
Items that biz owns and which it expects to retain for one year or longer ( property, vehicles)
What are budgets
Financial plans for a future period of time
Biz forecast their revenue and expenditure using budgets
Formula of ROI
Profit from the investment ➗capital invested in the project x 100
Influencing on capital structure objectives
Capital structure: refers to the way in which the business has raised the capital it requires to purchase its assets.
1: cost of borrowing
( is it high IR or low )
2: economy condition
(When good share price is high)
What are the internal influenced on financial objectives and decisions
1: overall obj of the biz- if operated with profit maximization, the finance department set for cost minimization.
2:nature of the product that is sold-are they long cash cycle(like boating) or high elastic of demand
3: obj of the biz senior management-if managers of biz hold large shareholders-may be to increase profit
External influence
1: tech-as technology, may be easier to operate finance- may set managers to set more challenging objectives
2: Economy
If economy is not performing well and business has difficultly on raising capital, then objectives may be more likely to set on profit.
3: Political and legal environment
Immigration from other Eu countries to the Uk has created a supply of cheap labour enabling biz to control and cash flow more effectively.
5: competitiveness
If competitive market, might consider establishing an objective of increased level of investment to provide new and improved location
What are three type of budgets
1: Revenue or earning budgets
Sets outs business expected revenue from selling its products, including the expected level of sales and the likely selling price of the product.
It may be straightforward for an established biz, vice versa.
2: Expenditure budgets
Also called cost or production budgets. Sets out expected expenditure on a monthly basis.
3: Profit BUdgets
By combining expenditure and revenue budgets, it is possible to calculate expected profits
What biz may research before constructing a budgets
1: analyzing the market to predict likely trends in sales and prices to help forecast revenue
2: researching cost for labour, fuel and raw materials by contacting suppliers and seeing if they can negotiate price reductions for prompt payment or ordering in bulk
3: compare the financial performance in previous years
What are the Difficulties in constructing a budget
Sets outs business expected revenue from selling its products, including the expected level of sales and the likely selling price of the product.
It may be straightforward for an established biz, vice versa.
Also called cost or production budgets. Sets out expected expenditure on a monthly basis.
By combining expenditure and revenue budgets, it is possible to calculate expected profits
DIFFICULTIES
Highly dependent on market research to forecast sales and revenue.
Changes in fashion and tastes could make it difficult to forecast sales
Or changes in technology
Or state of an economy
Ex) significant increase in oil price in Russia, orCovid 19
Or in legislation.
Ex) increase IR effect
What is Variance Analysis
Process of investigating any doff between forecast data and actual figures
Adverse favorable what are they
favorable good adverse bad
Factors leading to adverse and favorable variances
1: poor forecasting tech insufficient use of market research - likely advertise
Responses to adverse sales/revenue variance
1: cut prices
2: Seek new market
3: improve company brand image
4: Increase Advertising or promotion
Responses to adverse production
1: Reduce waste
2: Seek cheaper raw materials
3: Cut wages or increase labour productivity
Pros of budgeting
- Allows managers to ensure biz not to overspend
- Allow senior managers to direct extra funds into important areas of the biz
- Helps biz to set up the target which could motivate staff
Cons of budgeting
- If a biz intends some of its worker to manage budgets, (delayering budgets) - training required
Increase cost of training depending on the skill of workforce. - Workers may be demotivated if the target senior manager made an over ambitious target.
Factors to have an effective budgeting
- Manager should review budgets as frequently as possible to asses their effectiveness
- Managers should set not too ambitious target
Two main reason why manager might forecast cash flow for a biz
- To support applications for loans
- To help avoid unexpected cash flow crisis
What is payable and receivable
Payables: term that relates to the amount of time taken by a biz to pay its suppliers ad other creditors. It is normally expressed in terms of days
Receivables: term that relates to the amount of time taken by a biz customers to pay a biz for the products that is has supplied
Explain the term trade credit
The notion of allowing customers time for payment
Reasons why managers use break even analysis
- To help decide whether the biz idea will be profitable and whether it is viable
- Help decide the level of output and sales necessary to generate a profit
- To asses the impact of changed in the level of production on the profitability of the biz
Break even formula
Fixed cost ➗ contribution per uint
Formula of contribution
Revenue - VC
Formula of contribution per unit
Selling price of one unit of output - VC of producing that unit
Showing the break even point at break even chart
When TC = revenue
What is margin of safety
Measures the amount by which a biz current level of output exceeds breakeven out put
shown by difference between breakeven point and profit point quanitity
Pros of Breakeven analysis
- Biz can forecast the effect of varying numbers of customers on its costs, revenue and profit.
Can also analyze the implication of changing prices and cost. - Quick and cheap, provide evidence to bank for a loan to financial planning as well as evidence or whether the biz is likely to make a profit
Cons of breakeven analysis
- Difficult to use when a biz sells more than one product. Only shows for one product
- It is not a real life number. Just an assumption, therefore the number may fluctuate
What the breakeven analysis depends on(EVALUATION)
If the guideline and its value are over stated.
: managers must bear in mind the value of break even analysis depends on the use of reliable data or cost pries and expected sales.
Profit margin formula
Profit x 100 ➗revenue
Types of profit margin and their formula(what are they)
- Gross profit Margin
Gross profit ➗revenue x 100
:margin of revenue- COGS - Operational profit margin
Operational profit ➗ sales revenue x 100
: margin of profit deducting indirect cost
3, Profit for the year margin
profit for the year ➗ revenue x 100
Financial factors managers want to consider before launching new products
-Does the biz have sufficient capital to fund this new product?
-what will b the effect of launching this new products on the biz cash flow
-will the new product generate a profit and if so over what time scale?
Is the data reliable? What are the data that could be used
primary market research may be high quality data
Historical data is not always a good indicator of the dat a
What are the Internal and external source of finance Or categorise in SR or LR
Internal:
Retained profits, Share capital, working capital,selling asset capitals.
External:
Bank loan, overdraft, Venture capital, debt factoring
SR: overdraft, retained profits, debt factoring, selling capitals.
LR: Retained profits , bank, loans mortgages and debentures, VC, share capital.
Pros and cons retained profit
Pros:
1. Biz do not have to pay interest on loan
2. May avoid need for a company to sell further shares.- control
Cons:
1.opportunity cost- shareholders may feel shit
2.finite amount retained - slow growth to expand
Source of finance(EVALUATION)
- The biz legal structure: are they plc? Or ltd?
- the cost of source of finance
-rate of interest
-cost of selling shares
-opportunity cost
3.Flexibility: do you need it now? Or not?
4.Control
5.The purpose of which the finance is needed: do you need it a lot??
Pros and Cons of Overdrafts
Pros:
1. flexible way of funding day to day financial requirements.
2. Interest is only payable on the actual amount borrowed
Cons
1. Interest rates are high
2. Bank may ask for repayment at any time
Pros and cons of debt factoring
Pros:
1. Allows biz to receive cash almost immediately a sale is made.
2. May reduce biz overdraft and Interest charges
Cons:
1. Can reduce or even eliminate biz profit margin if its small
2. Customers may be aware if debts are factored and could lose faith in the supplier
Bank loan pros and cons
Pros:
1.can be negotiated to meet a biz precise requirements
2. Managers can plan for repayments within budgets
Cons
1. inflexible
2. Biz may be required to offer collateral
Mortgages and Debentures pros and cons
Pros:
1. Ideal sources for very long term projects
2. Avoid owners losing any controls
Cons:
1. Managers have to offer collateral
2. biz could lose valuable alternative investment
Pros and cons: VC
Pros:1. Can bring expertise into the biz as part of the deal
2. Avoids to pay interest on the entire amount of finance
Cons:
Usually only able to raise small amounts of finance
Possible sources for new start up biz
Internal:
1.Owners personal assets
2.Retained profit
3.Friends family
External:
VC
Possible sources for established biz
Internal
1.retained profits
2.Working capital
3.Asset disposals
External
1.Issue shares
2. Bankloan /overdraft
3. VC
4. Suppliers
Sole trader source of finance and key issues
Owners savings,
Loans
Banks
Key issues
Evidence that biz have potential to develop
Bank may give you high IR
Ltd source of finance and key issues
Dependent upon the size of the ltd
Banks, shares , working capital
Disagreement among existing shareholders
Loss of control
PLC source of finance and key issues
Suppliers, banks gov grants and loans VC public share
Issues
State of the colony and stock market
Recent financial performance
Reputation of company
Causes of cash flow problems
1.overtraining
2. Allowing too much trade credit
3. poor credit control
4. Inaccurate cash flow forecasting
cash+ stock+ debtors-creditors= working capital
What is trade credit
When biz allow customers pay between 30 - 90 days
What is working capital
diff between current assets and current liabilities
Used to pay its employees and suppliers, taxes etc,
Fund to meet short term obligation.
What is working capital
Is the finance available to the biz for its day-to-day training activities. Working capital is available when its customers pay for the goods or services they have received. Working capital is used to pay wages, and for fuels and raw materials.
What are the method of improving cash flow and the associated difficulties-
- Improve control of working capital
・the employment of additional staff to oversee the con tool will increase costs
・customers may object to being pressured to pay and buy elsewhere.
2.Nagotiate improved terms for trade credit
-increase the date of payables and decrease the date of receivables.
-relationship with payables may ruin relationship
- may be loss of customers-competitors who provides favourable credit terms
- Debt factoring
・could reduce profit margin depending on its significance of it.
・customers may be unsettled by the realisation that a supplier is having cash flow difficulties
4.arrange ST borrowing
Basically……….. turn into cash quicker
.
Stocks:
Sell them don’t overstock debtors:reduce debt days
creditors :delay credit days.
What is debt factoring
Selling the sale invoice to third party with discount
Pros of careful cashflow
1: reduced borrowing cost
Managers can predict of cash flow
2: good relations with supplies
3:public relations-customers don’t feel doubtful
Method of improving profits
(and difficulties)
Answer in:
Marketing view
Finance view
Human Resources
Operation view
Marketing:
1. Launch new products
2. Advertise more
3. Increase prices
could reduce sales if price elastic
could face criticism if product is essential
Finance:
1.Cut costs(VC,FC)
Human Resources:
1.Cut wage cost-redundancy
2. Motivate workers/increase their skill by improving workforce performance
Operations
1. Increase efficiency
2.Less waste
3.reduce substandard goods
-may require additional expenditure on employees or technology to identify faulty products.
-may require more expensive inputs increasing cost
4.Increase capacity utilization
Pros and cons of share capital (equity)
-pros:doesn’t need to be repaid(no interest, nor collateral)-low risk
-can be used to rise very large amount of capital.
Cons:
-risk of control
-shareholders expectations-more shareholders- affecting the company like sr objectives.
What did Archie Carrol stated about CSR?
He stated that CSR involves the conduct abiding, ethical and socially supportive.
By creating a layers in the pyramid as a hierarchy this can assist managers in understanding the different types of obligations that a biz has towards society.
Tell me about the Carrols Pyramids
He secreted in to four types of responsibility that a biz should meet to be socially responsible.
1: Economic(financial) responsibilities- the responsibility to be profitable. Without this, the org wouldn’t likely to survive in the LT- will not be able to fulfill its other responsibilities to society.
2: legal responsibilities-business should obey the laws of the countries in which they are operating. Meeting these responsibilities will help to ensure the biz acts in the best interest of society by, such as paying minimum wages or avoiding activities that cause pollution.
3: Ethical responsibilities-a step beyond legal responsibilities and entails behaving in a morally correct way to meet ethical responsibilities. As an example would be when business pays for a living wage than legally-enforceable minimum wage.
4:Philanthropic responsibilities- relate to discretionary behavior by biz to improves the lives of other in society.
Example would be providing recreational facilities for communities or sponsoring sport events.
It goes by BOTTOM-to-TOP
What is Stakeholder Concept and Shareholder Concept? What are the difference?
Stakeholder concept is when business considers the needs of its stakeholders, not just shareholders. This can be an important component of corporate social reporting.
Whereas with shareholder concept is when business to see as a primary importance and argues that this could be accomplished by maximizing the profit and resulting to an increase in share prices and higher dividend payment. However there is an issue which encourage short-term is in SM and also the increased taking the risk of generating maximum profits.
What are the impact of being socially responsible?
It can help or to attract the best employees and to build a strong employer brand as they are socially responsible.
It can also help biz to access new markets and this can be very attractive at a time when globalization is increasing competitive pressures by incorporating socially responsible behavior into strategy making it able to gain access to the markets to the poor who needs financial support and benefit over time from their growth.
