Unit 5 (Finance) Flashcards
Decision making to improve financial performance
What is return on investment (ROI)?
A return on investment is how much profit is made as a result of your investment.
What are some advantages of ROI?
- Good for comparative analysis
- Good way to profitability
- Can engage/lure investors
- Identify areas for improvement
What are some disadvantages of ROI?
- Does not consider time
- An investment may take 10 years to start being profitable
What is the value of setting financial objectives?
Provides a focus for the whole business
Reduces risk of failure
Motivates employees
Measures financial performance of the business
Identifies strengths and weaknesses
Make business look attractive to investors
What are the 6 elements to economies of scale?
Purchasing
Financial
Marketing
Tech
Managerial
Risk bearing
What’s the benefit of revenue objectives?
Seek to maximise sales in an attempt to secure economies of scale.
What is a cash flow forecast?
A short term planning tool designed to help the business understand its liquidity and its ability to pay bills in time.
What is meant by liquidity?
Your ability to cover any short-term liabilities such as loans, staff wages, bills and taxes.
What is meant by equity?
The money the owners have put into the business (eg by issuing shares or retained profit)
What is meant by external finance?
Investment for the business obtained from outside of the business.
What is meany by internal finance?
Money gained from inside the business.
What is debt factoring?
Selling debts to other companies who will collect in on behalf of the business, which eliminates receivables and replaces it with cash/
What are benefits of debt factoring?
Improves cash flow
Frees up finance department time cashing bad debts
Useful for small businesses who don’t have enough resources
What are disadvantages of debt factoring?
Results in a lower profit figure as the full amount isn’t acquired
Can damage reputation of business (desperate measures)
Can make company accounts look unattractive
What is debt factoring short term use and long term use?
Short term - Used to swap debt for cash to improve working capital.
Long term - If business has a cost objective they’ll look to reduce the cost of chasing debts.
What is an overdraft?
An overdraft is when your bank allows you to withdraw money when the account has no funds of insufficient funds to cover the withdrawal.
What are some benefits of an overdraft?
Quick fix method to tide a business over a difficult month
Can be arranged on phone or online
Business will only pay interest on the amount overdrawn
What are some disadvantages of an overdraft?
Very expensive - interest rates
Not suitable for large amounts of money over long periods
If business goes over amount they may get charged heavily
What is retained profit?
Profits from previous years used to reinvest into the business
What does gearing mean?
How much debt you have
What are benefits of using retained profit?
No interest
No loss of control or shares
Quick access for quick advantage of business opportunities
What are some drawbacks of using retained profit?
Start ups wont have any capital
Business may not have made enough profit to be useful
Opportunity cost
Not all business are profitable
What is share capital?
Finance raised from issuing shares int he business (only for PLC AND LTDS)
What are benefits of using share capital?
Investors are often prepared to provide extra funding
More cost effective way to raise finance, no interest
What are drawbacks of using share capital?
Can be expensive and slow process to organise
More shares sold, the more profits have to be divided up and paid out to investors and dividends
What is a budget?
A financial plan for the future concerning revenues and costs of a business
Why do companies set budgets?
Budgets for revenues and costs are prepared in advance and then compared with actual performance to establish any variances
Uses of budgets in management?
Establish priorities
Assign responsibilities
Provide direction
Improve efficiency
Allocate resources
Forecast outcomes
Delegate without loss of control
What is good budgeting and its feature?
Managerial responsibilities are clearly defined
Corrective action taken if results differ from budget
Performance is monitored against the budget
Unaccounted for variances are investigated
What is historical budgeting and its features?
Uses last years figures as a basis
Realistic as it’s based on actual results
However circumstances may have changed
What is zero budgeting?
Budgeted costs and revenues set to zero
Budget based on new proposals for sales and costs
Makes budgeting more complicated but potentially more realistic
What are the main types of budget?
Revenue, profit and costs.
What are some sources of information for budgets?
Financial performance in previous periods
Market research
Competitors activity
Customer feedback
What are some difficulties with budgeting accurately?
Sales forecasting
- harder when market experiences rapid change
- startup firms find it hard to estimate
Costs
- always likely to be unexpected costs
- will vary depending on the sales budget
- changes in PESTLEC will impact costs
What is a variance analysis?
Calculating and investigating the differences between actual results and the budget
What is meant by a favorable variance?
Actual figures better than the budgeted figure
What is meant by an adverse variance?
Actual figure worse than budgeted figure
What are some causes of favourable variances?
Stronger market demand
Selling price increased
Cautious sales and costs assumptions
Competitors weakness leading to higher sales
Better than expected productivity or efficiency
What some problems with budgets?
Only as good as data being used
Can lead to inflexibility indecision making
Need to be changed as circumstances change
Take time to complete and manage
Can result in short term decision to keep within the budget
What is a debenture?
A loan agreement in writing between a borrower and a lender that is registered at Companies House. Secured with collateral.
What is venture capital?
A venture capitalist (VC) is an investor who provides young companies with potential with capital in exchange for shares.
Benefits and drawbacks of using a debenture?
Debentures provide a fixed rate of interest for the lender which has to be paid before any dividends are issued to shareholders
What are payables?
Money that is owed BY the business to its suppliers (debts of the business)
-> also knows as a current liability
-> will appear on a statement of financial position
What are receivables?
Money owed TO the business by its customers.
-> will appear on a statement of financial position
What is on a balance sheet?
Current Assets
- Cash
- Recievables
- Inventory
Non-current Assets
- Property, equipment
- Intangible assets (patents)
Current Liabilities
Non-current Liabilities
Equity
What is on an income statement?
Revenue
Cost of goods sold
Operating expenses
Operating profit
Interest and taxes
Net profit
