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Business > Unit 5: Financial performance > Flashcards

Unit 5: Financial performance Flashcards

1
Q

What is a financial objective?

A

A specific goal or target relating to the financial performance, resources and structure of the business

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2
Q

What are the benefits to using financial objectives?

A
  • A focus for the entire business
  • Important measure of success or failure
  • Reduce the risk of business failure
  • Provide transparency to shareholders
  • Help coordinates different functions
  • Context for making investment decisions
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3
Q

What are the types of financial objectives?

A

Revenue, cost, profit, cash flow, investment for return, capital structure

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4
Q

What are the internal influences on financial objectives?

A

Business ownership, size and status of business, functional objectives

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5
Q

What are the external influences on financial objectives?

A

Economic conditions, competition, social and political change

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6
Q

What does and income statement record?

A

A business’ sales revenue over a trading period and all relevant costs incurred as well as the profit or loss

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7
Q

What are cost of sales also known as?

A

Direct costs, variable costs

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8
Q

What are the costs that are not directly related to producing the goods or service called?

A

Expenses

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9
Q

What is profitability?

A

The measure of a business’ ability to generate profits from its operations

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10
Q

What is return on investment?

A

A performance measure used to evaluate the efficiency of an investment as it measures the sales in comparison to the cost of investment

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11
Q

What is meant by improving profit in absolute terms?

A

Increase the total profit

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12
Q

What is meant by improving profit in relative terms?

A

Improving the profit margin or return on capital

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13
Q

What are simple ways to increase profit?

A

Increase quantity sold and selling price, reduce variable costs, reduce fixed costs. reduce product range, outsource non-essential functions

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14
Q

What is cash flow?

A

The money coming in and going out of a business over a period of time

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15
Q

Why is cash flow so important?

A
  • Cash flow problems are the main reason for business failure
  • Cash flow is unpredictable
  • Cash is limited
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16
Q

What is a cash flow forecast used for?

A

It predicts the cash inflows and outflows over a period of time, usually 12 months

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17
Q

Why should a cash flow forecast be produced?

A
  • Advanced warning of cash shortages
  • Financial control
  • Business knows that it can pay suppliers
  • Obvious in showing customers that have problems paying
  • Provides reassurance to investors
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18
Q

What are debtors?

A

Amounts owed to a business e.g. by customers

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19
Q

What are creditors?

A

Amounts owed by the business e.g. to suppliers

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20
Q

What are inventories?

A

Cash tied up in raw materials, work in progress and finished goods

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21
Q

Give examples of ways to manage amounts owed by customers

A
  • Credit control (offer less trade credit, establish credit limits for new customers, credit checking, chasing up bad debts)
  • Cash discounts for prompt payment
  • Improved record keeping e.g. timely invoices
  • Debt factoring (selling off debtors to a third party)- invoice discounting
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22
Q

Give examples of ways to manage inventories

A
  • Stock holding ties up cash

- Ensure stock is being turned over

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23
Q

Give examples of ways to manage cash paid to suppliers

A
  • Negotiate improved terms for trade credit

- Delayed payment

24
Q

What are some benefits of good cash flow management?

A
  • Reduced borrowing costs
  • Good relations with suppliers
  • Public relations
25
Q

Why do new start ups suffer from cash flow problems?

A
  • Incur many costs
  • Suppliers may demand payment
  • Won’t have retained profit
26
Q

What is the difference between cash flow and profit?

A

Cash inflow is only money that has actually been received

27
Q

What is a budget?

A

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

28
Q

What are the three types of budget?

A

Revenue, cost, profit

29
Q

What should be done before constructing a budget?

A

Analyse the market and past data

30
Q

How are budgets used by management?

A
  • Turn objectives into practical reality
  • Establish priority & set targets (motivate staff)
  • Assign responsibilities (monitor performance)
  • Control income and expenditure
31
Q

How is variance analysis used?

A

In comparing budgeted figures with actual figures

32
Q

What type of variance is when actual figures are better than budgeted figures?

A

Favourable

33
Q

What are adverse variances?

A

When actual figures are worse than budgeted figures

34
Q

What should management do with a variance?

A
  • Act only if the variance is outside of an agreed margin
  • Investigate the cause
  • Was it avoidable?
  • Act to remedy the problem (if appropriate)
35
Q

What are factors leading to favourable variances?

A
  • More disposable income
  • Trends (weather)
  • Costs lower than expected
  • Increase in staff efficiency
  • Better production systems
  • Economies of scale
36
Q

What are factors leading to adverse variances?

A
  • Less disposable income
  • Trends (weather)
  • Increased competition
  • Unrealistic competition
  • Bad publicity (scandal)
  • Lack of budget experience
37
Q

What are ways to respond adverse variances?

A
  • Improve company image
  • Cut prices
  • Seek new markets
  • Product range
  • Increase advertising
  • Cut wages
  • Reduce waste
  • Seek cheaper raw materials
38
Q

What are limitations of budgets?

A
  • Leads to inflexibility in decision-making
  • Needs to be updated
  • Takes time to complete and manage
39
Q

What are behavioural implications of budgets?

A
  • May be imposed, rather than negotiated
  • Setting unrealistic targets adds to demotivation
  • Budgets can contribute to departmental rivalry
  • Spending up to the budget (use it or lose it)
40
Q

What is break even?

A

The point at which the total sales are equal to total costs

41
Q

What is contribution?

A

What a business needs to achieve from selling products in order to first cover its fixed costs and then make a profit

42
Q

What is the margin of safety?

A

The difference between actual output and break even output

43
Q

What are benefits to effective break even analysis?

A
  • Focuses onwhat output is required to make a profit
  • Helps management & finance providers better understand the viability of a business idea
  • Illustrates the importance of keeping fixed costs down
  • Quick and easy
44
Q

What are limitations of break even analysis?

A
  • Unrealistic assumptions
  • Sales are unlikely to be the same as output
  • Variable costs do not always stay the same
  • Most businesses have a range of products
  • A planning aid rather than a decision making tool
45
Q

Give examples of short term sources of finance

A

Trade credit, debt factoring, bank overdraft, grant, family & friends, selling fixed assets

46
Q

Give examples of long term sources of finance

A

Bank loan, sale and leaseback, retained profit, ordinary share capital, venture capital, mortgage, crowdfunding, debenture

47
Q

Give examples of personal sources of finance

A

Cash and investments, redundancy payments, inheritance, personal credit cards, remortgaging, putting time into the business for free

48
Q

What is a debenture?

A

A form of bond or long term loan which is issued by a company, usually a fixed rate of interest

49
Q

How long is a debenture?

A

Often 10-20 years long

50
Q

Can debentures be traded with another company?

A

Yes

51
Q

What are venture capitalists?

A

People that use a mix of loan and share capital and they usually wants some control over the business

52
Q

What else do venture capitalists provide as well as finance?

A

Contracts and advice

53
Q

What is a lease?

A

A contract outlining the terms under which one party agrees to rent property owned by another party

54
Q

What is sale and leaseback?

A

A business sells their property to a company, and then leases it back temporarily

55
Q

What is crowdfunding?

A

Funding a business by raising many small amounts of money from a large amount of people, typically through the internet

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