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Business > Unit 5 - Finance > Flashcards

Unit 5 - Finance Flashcards

1
Q

Budget

A

A financial plan for the future concerning the revenues and costs of a business

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2
Q

Managers use budgeting to… (2)

A
  • help control spending
  • to help plan when money is coming in (inflow)
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3
Q

Variances

A

The difference between the budgeted amount and the actual amount

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4
Q

Uses of budgets in management (5)

A
  • to set targets
  • provides direction and coordination
    -Allocate resources
  • control income and expenditure
  • forecast outcomes
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5
Q

What is historical budgeting

A

Using last years figures as a basis for the budget and is based on actual results.
( however circumstances may of changed and doesn’t encourage efficiency)

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6
Q

What is zero budgeting

A

Budget is based on new proposals for costs and sales and budgeted costs and revenues are set to zero.
(More realistic but time consuming )

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7
Q

Types of Budget (3)

A
  1. Revenue (income) budget - expected revenues and sales.
  2. Cost ( expenditure) budget - expected costs based on sales budget
  3. Profit budget - based on the combined sales and cost budgets
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8
Q

What is a favourable budget

A

Having more money than we expected/ budgeted for

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9
Q

What is an adverse budget

A

When we have less money than expected / budgeted. ( figure will be negative)

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10
Q

Variation calculation

A

Variation = actual - expected (budgeted)

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11
Q

Reasons why a budget may be favourable (4)

A
  • switching to a cheaper supplier / buying in bulk
  • rising demand for the product
  • competition is going out of business.
  • improved productivity.
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12
Q

Reasons why a budget may be adverse

A
  • inflation on raw materials and staff costs can lead to higher costs
  • products going out of fashion can lead to reduced sales
  • higher tariffs ( tax on foreign imports and exports) and weaker currency exchange rates can’t cause impact costs to rise
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13
Q

Problems and limitations of budgets (4)

A
  • can lead to inflexibility in decision making
  • need to be changed as circumstances change
  • can result in short term decisions to keep within the budget
  • take time to complete and manage
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14
Q

What is break even

A

The point at which profit is zero, so the revenue from selling products is the same as the total costs incurred in producing/ providing them.

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15
Q

Break even point calculation

A

BEP = FIXED COSTS / (SELLING PRICE - VARIABLE COST PER UNIT)

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16
Q

Contribution calculation

A

CONTRIBUTION = SELLING PRICE - VARIABLE COSTS OF PRODUCTION

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17
Q

Total contribution

A

TOTAL CONTRIBUTION = CONTRIBUTION PER UNIT X QUANTITY

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18
Q

profit calculation (2)

A
  1. PROFIT = TOTAL CONTRIBUTION - FIXED COSTS
  2. PROFIT = CONTRIBUTION PER UNIT X MARGIN OF SAFETY
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19
Q

What is the margin of safety

A

A measure of how close business is to its break even level

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20
Q

Margin of safety calculation

A

MARGIN OF SAFETY = OUTPUT - BEP

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21
Q

Revenue changes to the BEP (3)

A
  • an increase in selling price will decrease the BEP
  • revenue line steepens as price increases because more contribution is being made on each unit.
  • extra contribution means fixed costs can be covered more quickly
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22
Q

Variable costs changes to the BEP (3)

A
  • an increase to variable costs increases the BEP
  • VC line and total cost line becomes steeper as less contribution is being made on each unit
  • smaller contribution means fixed costs can’t be covered as quickly so more needs to be produced to make break even
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23
Q

Fixed costs changes to the BEP

A
  • increase in fixed costs increases BEP
  • Higher costs means more needs to be produced to cover them
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24
Q

Benefits of BEP analysis (3)

A
  • helps management and finance provide bettered understand the viability and risk of a business idea
  • focuses on what output is required before a business reaches profitability
    -margin of safety calculation shows how much sales forecast can prove over optimistic before before losses are incurred
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25
Q

Limitations of BEP analysis (3)

A
  • unrealistic assumptions
  • variable costs don’t always stay the same
    -a planning aid rather than a decision making tool
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26
Q

What is cash flow

A

A measure of how and when money is flowing in and out of a business

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27
Q

Net flow calculation

A

NETFLOW = INFLOW - OUTFLOW

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28
Q

How does money flow in to a business (4)

A
  • selling products
  • profit on investments
    -Interests on savings
  • renting out property
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29
Q

How does money flow out of a business (4)

A
  • rent
  • wages and salaries
  • repaying loans
    -tax
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30
Q

What is liquidity

A

A measure of how easily a firm can turn its assets into cash

31
Q

Assets in order of liquidity ( most first)

A

Cash
Cheque
Money owed by customer
Inventory
Property
3 year debenture

32
Q

Why produce a cash flow forecast?

A
  • gives advanced warning of cash shortages
  • ensures you can afford to pay suppliers and employees on time
  • spot problems with customer payments
  • provide reassurance to investors and lenders that the business is being managed properly
33
Q

Closing balance

A

CLOSING BALANCE = OPENING BALANCE + NET FLOW

34
Q

What is a cash flow problem

A

When a business doesn’t have enough cash to be able to pay its liabilities

35
Q

Why might a business experience a cash flow problem? (5)

A
  • loss making
  • inaccurate/ poor / overly optimistic forecasting
  • excess stock
  • Bad debts
  • seasonal demand
36
Q

Managing accounts owed by customers (4)

A
  • credit control - decide how much credit to give and the repayments terms
  • debt factoring - sell accounts receivables to a 3rd party at discount
  • cash discounts
  • improved record keeping
37
Q

Advantages and disadvantages of debt factoring

A

+ provides instant working capital
- short term debt

38
Q

Advantages and disadvantages of cash discounts

A

+ access funds faster so improves cash flow
- can reduce profit margins
- cards are more convenient to customer

39
Q

Advantages and disadvantages of improved record keeping

A

+ accurate forecasting and timely invoicing
- time consuming

40
Q

How to manage accounts owed by suppliers (3)

A
  • agree longer credit terms with suppliers to give you more time to repay
  • spread payments into manageable chunks over more time
  • find cheaper suppliers
41
Q

How to manage inventory (3)

A
  • keep smaller balance ( just in time stocks )
  • computerise ordering to improve efficiency
  • improve stock control
42
Q

What is profit in absolute terms

A

The £ value of profit earned

43
Q

What is profit in relative terms

A

The profit seemed as a proportion of sales achieved or investment made

44
Q

Gross profit margin calculation

A

GPM = (GROSS PROFIT / REVENUE ) X 100

45
Q

Gross profit (also the same as contribution) calculation

A

GROSS PROFIT = REVENUE - COST OF SALES

46
Q

What is operating profit

A

What is left after all the normal running costs of a business have even taken from its revenue

47
Q

Operating profit margin calculation

A

OPM = (OPERATING PROFIT / REVENUE) X100

48
Q

What does operating profit tell us ? (3)

A
  • how efficiently a business turns its sales into operating profit
  • how efficiently the core business is run
  • whether a business is able to add value during production
49
Q

Operating profit calculation

A

OP = GROSS PROFIT - OPERATING EXPENSES

50
Q

Profit for the year margin calculation

A

PFTYM= (PROFIT FOR THE YEAR / REVENUE) X 100

51
Q

What is a bank overdraft

A

A short term finance which lets you borrow money through current account by taking more money than you have in the bank

52
Q

+ and - of bank overdraft

A

+ you can borrow what you need to
+ in control
- likely to be charged for borrowing
- high rates of interest

53
Q

What is crowd funding

A

A long term finance which is a way of raising money to finance projects and businesses as it enables fundraisers to collect money for a larger number of people via online platforms

54
Q

+ and - of crowd funding

A

+ money may not need to be repaid
+ funds often come from investors
- potential failure to meet goals and not recieve money

55
Q

What is a grant

A

A short term finance that is a sum of money awarded to an organisation in anticipation of it being applied for an agreed purpose

56
Q

+ and - of a grant

A

+ money doesn’t need to be repaid
+ widely available
+ boost credibility
- contractually bound as you mission needs to meet their needs
- spending is controlled
- have to wait a long time

57
Q

What is retained profit /savings

A

A short term finance and is the amount of a business’s net income that is kept within its accounts rather than paid out to shareholders

58
Q

+ and - of retained profit / savings

A

+Indicator of the long term financial stability of the business.
+ increased stock value
+ boosts your corporate liquidity therefore, have a financial safety net
- missed investment opportunities
- increased risk
- increased tax implications

59
Q

What is a hire purchase

A

A short term finance which is a system where one pays for something in regular instalments

60
Q

+ and - of a hire purchase

A

+ option to get newer and higher specification assets
+ flexibility
+ allows businesses to manage cash flows
- risk of asset being repossessed if payments are missed
- you don’t own the asset until the final payment

61
Q

What is a mortgage

A

A long term finance which is a loan used to purchase and maintain a house

62
Q

+ and - of a mortgage

A

+ lower interest rates than other types of loans
+ can improve your credit score
+ possible long term stability and flexibility
- must payback more than you borrow
- risk of not keeping up with payments

63
Q

What is share capital

A

A long term finance which is the money company raise by issuing common / preferred stock

64
Q

+ and - of share capital

A

+ more money so more investors
+ support from shareholders
+ seen as more stable
- takes away control from the original owner
- high risk of takeover

65
Q

What is a venture capital

A

A short term gain and long term commitment and is a form of equity finance by a venture capitalist/ investment firm

66
Q

+ and - of venture capital

A

+ business get access to support, advice and contacts
- loss of control
- loss of profit due to less shares

67
Q

How to improve profitability (6)

A
  • increase the quantity of goods sold
  • change selling price
  • reduce variable costs
  • reduce fixed costs
  • reduce product range
  • outsource non essential functions
68
Q

What is a financial objective

A

The goals / targets related to the financial performance of a business

69
Q

Main types of financial objectives (8)

A
  • revenue objectives
  • cost objectives
  • profit objectives
  • cash flow objectives
  • investment level objectives
  • capital structure objectives
  • return on investment objectives
  • objectives relating to debts
70
Q

Benefits of financial objectives

A

+ improve coordination
+ improve efficiency
+ allows shareholders to assess whether the business is a worthwhile investment
+ enables external stakeholders to confirm the financial validity of a business

71
Q

Disadvantages of financial objectives

A
  • difficult to set realistic objectives
  • external changes may be out of control of business
  • difficult to measure accurately
  • impossible to determine success or failure
72
Q

What is return on investment

A

Financial gains from investments - cost of the investment

73
Q

Return of investment % calculation

A

ROI = (RETURN ON INVESTMENT / COST OF THE INVESTMENT) X100

Business (9 decks)

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