3.5 - Financial Managment

Question 1

What is the equation for gross profit?

Answer 1

sales revenue - cost of goods sold

Question 2

What is the equation for operating profit?

Answer 2

gross profit - operating expenses

Question 3

What is the equation for net profit?

Answer 3

Operating profit - interest

Question 4

Net Profit vs. Net Cash Flow

Answer 4

Timing differences
- business may not receive cash straight away, delayed payments
The way fixed assets are accounted for

Question 5

What are the benefits of serving financial objectives?

Answer 5

• focus for decision making
• provide a yardstick for success or failure to be measured against
• Shareholders assess whether investment is worthwhile
• Outside organisations may be able to judge financial viability if a business

Question 6

What are some examples of financial objectives?

Answer 6

• ROCE
• cash flow targets
• profit and shareholder returns
• cost minimisation

Question 7

What are some cash flow objectives?

Answer 7

-Reduce bank borrowings
-Minimise the time taken by customers who pay on credit
-Extend the period taken to pay suppliers
-Minimise Interest Rates
-Reduce the affect of seasonal swings

Question 8

What is the formula for return on investment?

Answer 8

(net profit/ amount invested) x100

Question 9

What is the equation for capital gearing?

Answer 9

(loan capital/total capital employed) x100

Question 10

What are some external influences on a business?

Answer 10

• Market factors
• Actions of other businesses
• PESTLE analysis

Question 11

What are some internal influences on a business?

Answer 11

• Overall corporate objectives
• Operational factors
• Resources available

Question 12

What are the three types of budgets?

Answer 12

Expenditure, revenue, profit

Question 13

What is variance?

Answer 13

difference between actual figures and budgeted figures

Question 14

What is favourable variance?

Answer 14

When costs are lower than expected or revenue is higher than expected

Question 15

What is adverse variance?

Answer 15

When costs are higher than expected or revenue is lower than expected

Question 16

What are cash flow forecasts?

Answer 16

State the inflows and outflows of cash that the managers of a business expect over some future period

Question 17

What is the opening balance?

Answer 17

the amount carried forward from the previous month (previous month’s closing balance)

Question 18

What is the closing balance?

Answer 18

sum of net cash flow and opening balance

Question 19

What is the importance of budgeting?

Answer 19

• Planning
• Assessing performance
• Motivation

Question 20

What is a break-even chart?

Answer 20

A graphic presentation of the break-even analysis that shows when total revenue and total cost intersect to identify profit or loss for a given quantity sold.

x axis - output
y axis - costs and revenue

Question 21

What is the formula for contribution per unit?

Answer 21

selling price per unit - variable cost per unit

Question 22

What is the formula for breakeven output?

Answer 22

Fixed costs / contribution per unit

Question 23

What is the formula for margin of safety?

Answer 23

Actual level of output - Breakeven level of output

Question 24

What is the formula for gross profit margin?

Answer 24

Gross profit / revenue x 100

Question 25

What is the formula for operating profit margin?

Answer 25

Operating profit / sales revenue x 100

Question 26

What is the formula for net profit margin?

Answer 26

Net profit / sales revenue x100

Question 27

What are payables?

Answer 27

short-term liabilities owed to suppliers for purchases made on credit

Question 28

What are receivables?

Answer 28

amounts due from individuals and companies that are expected to be collected in cash

Question 29

What are some internal sources of finance?

Answer 29

Personal funds, retained profit, sale of assets

Question 30

What are some external sources of finance?

Answer 30

loans overdraft venture capital crowdfunding debt factoring

Question 31

What are overdrafts?

Answer 31

allow a business to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing in the short term.

Question 32

What is debt factoring?

Answer 32

A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee. Useful when finance is required quickly

Question 33

What is trade credit?

Answer 33

the practice of buying goods and services now and paying for them later

Question 34

What is equity?

Answer 34

The amount an owner(s) would receive if their ownership interests in a business (stock) were sold. (The money the owner has left over)

Question 35

What is borrowing?

Answer 35

Obtaining money, goods, or services in exchange for promise of future payment

Question 36

What are some methods of improving cash flow?

Answer 36

- speed up inflows - slow down outflows - debt factoring - short-term borrowing