5 - Decision making to improve financial performance 💰 Flashcards
(66 cards)
1
Q
Define financial objectives
A
the monetary targets a business wants to achieve within a period of time
2
Q
What can a financial objective include?
A
- profit
- costs
- cash flow
- revenue
- return on investment
- capital structure
3
Q
Define return
A
how much money the business gets back
4
Q
Define investment
A
how much capital isbeing used
5
Q
Define ROI %
A
a measure of a business’ profitability and performance
6
Q
What are some likely ROI targets?
A
- benchmark to industry standard
- internal benchmarking
- external factors eg. interest rates
7
Q
How do you calculate ROI
A
operating profit / capital invested X100
8
Q
Define long-term funding
A
the amount of capital invested in a business that will stay in the business for over a year
9
Q
What 2 sources does long term funding come from?
A
- equity
- debt
10
Q
What is the formula for gearing?
A
debt / total long term funding X 100
11
Q
Define cash
A
physical existence of money within the business
12
Q
Define cash flow
A
timings of cash flowing into and out of the business
13
Q
What makes cash and profit different?
A
- credit sales
- bad debts
- heavy stock holding
- investment in fixed assets
- seasonality
- repayments of loans
14
Q
What can an income statement also be known as?
A
profit and loss accoun
15
Q
How do you calculate the gross profit?
A
sales revenue - cost of sales
16
Q
How do you calculate operating profit?
A
Gross profit - expenses (FC)
17
Q
How do you calculate profit for the year?
A
Operating profit - interest and taxation
18
Q
In an income statement, what are the rows going down?
A
Sales revenue
Cost of sales (VC)
Gross profit
Expenses (FC)
Operating profit
Interest and taxation
Profit for the year
19
Q
Internal influences on financial objectives
A
- Business ownership
- Size and status of business
- Corporate culture
- Budgets
19
Q
External influences on financial objectives
A
- Economy
- Competitors
- Social and political change
- Legislation
- Market changes`
20
Q
Define budgets
A
forecasts or plans for the future finance of a business
21
Q
What can budgets be?
A
income
expenditure
profits
22
Q
Problems in setting budgets
A
- dependent on predictions
- costs are subjective to change
- actions of competitors are unknown
- managers may lack expertise
- may be subject to bias
- takes time and effort = opportunity cost
23
Q
What are the steps of setting a budget?
A
- Set clear objectives
- Carry out market research
- Produce a sales forecast
- Set income budget
- Set expenditure budget
- Set profit budget
- Set divisions target
- Review against objective
24
What is the difference between the budget and the actual called?
variance
25
A positive variance is called...
favourable
26
A negative variance is called...
adverse
27
What happens to income, expenditure and profit if variance is adverse?
Income goes down
Expenditure goes up
Profit goes down
28
What happens to income, expenditure and profit if variance is favourable?
Income goes up
Expenditure goes down
Profit goes up
29
Define the break-even point
the point where TR = TC and the business is not making a profit/loss
30
Formula for break-even point
fixed costs / contribution per unit
31
Formula for contribution per unit
selling price - variable costs per unit
32
How do you calculate the margin of safety
actual output level - break even level of output
33
Pros to break even
- provides a target
- aids decision making
- helps to secure finance
- predicts outcome of changing variables
- calculates profit/loss
- calculates minimum number of sales
34
Cons to break even
- based on predictions
- even FC can vary in reality
- ignores changes in FC
- only indicates the number of sales needed, doesn't ensure sales are true
35
List examples of cash inflows
- cash sales
- payment from debtors
- sales of assets
- bank loan
- owner’s investment
36
List examples of cash outflows
- purchasing stock
- wages/salaries
- paying debt = loans/creditors
- purchasing assets
37
What is a credit sale?
When it takes time before the business gets it
38
What is a cash sale?
The business gets the money immediately
39
Formula for net cash flow
Inflows - outflows
40
Formula for closing balance
Net cash flow + opening balance
41
What are debtors?
Someone who owes a business money
42
What are creditors?
someone the business owes money to
43
What does an insufficient liquid cash flow mean?
An inability to meet short-term debts
44
When might a business miss opportunities?
When they have limited cash
45
What should a business consider when they encounter cash flow problems?
Whether the cash flow problem is short term or long term
46
Direct causes of cash flow problems:
- credit sales
- overtrading (additional overheads)
- internal management (poor planning/stock control)
- seasonality
- unexpected events
47
How can a business improve their cash flow?
- increasing volume of inflows
- speeding up timings of inflows
- reducing the volume of outflows
- slowing down timings of outflows
48
Sources of Finance
List the external sources of finance X10
- debt factoring
- overdraft
- share capital
- loans
- venture capital
- crowd funding
- trade credit
- mortgage
- grants
- lease/hire purchase
49
Sources of Finance
List the internal sources of finance X3
- retained profits
- sale of assets
- personal savings
50
Sources of Finance
What is debt factoring?
When a business sells its accounts to a 3rd party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms
51
Sources of Finance
What are the short-term sources? X7
- debt factoring
- overdraft
- trade credit
- sale of assets
- personal savings
- grants
- lease/hire purchase
52
Sources of Finance
What are the long-term sources? X6
- retained profits
- share capital
- loans
- venture capital
- crowd funding
- mortgage
53
Sources of Finance
Pros and cons to debt factoring
✅ Receives debt asap
Addresses cash flow issues
Debt chased by experts
Time saving
❌ Reduces profitability as have to pay fee
May damage rep if seen having poor finances
54
Sources of Finance
Pros and cons to overdraft
✅ Timely payments
Flexible
Helps time mismatch flow of finance
❌ High interest
Risk of seizing
Owe money
55
Sources of Finance
Pros and cons to retained profits
✅ No interest
No debt
❌ must have good cash flow to save
56
Sources of Finance
Pros and cons to share capital
✅ No interest
Large finance raised
Only need to pay dividends not fixed
❌ Loss of ownership
Potential loss of control
Complex system
57
Sources of Finance
Pros and cons to loans
✅ Lower interest rate than overdraft
Greater certainty
❌ Requires security
Interest
Harder to arrange
58
Sources of Finance
Pros and cons to venture capitalists
✅ Exposure
Expertise and advice
Opportunity to grow
Doesn’t need to be repaid
❌ Loss of control
Pressure to grow fast
Mismatched interests
59
Sources of Finance
Pros and cons to crowd funding
✅ Brand loyalty
Exposure
You’re in control
❌ Risk of public failure
Don’t get any money if target isn’t raised
60
Sources of Finance
Pros and cons to trade credit
✅ No interest
More future cash
❌ Still has to be paid back within a time period
61
Sources of Finance
Pros and cons of sale of assets
✅ Can raise considerable sums
Improve profitability if no longer used
❌ May receive low value if product sold fast
Reduced ability to make a profit
62
Sources of Finance
Pros and cons of mortgages
✅ Greater certainty of funding
Lower interest rate than others
❌ Requires security (collateral)
Hard to arrange
Interest
63
Sources of Finance
Pros and cons to personal savings
✅ No interest
Owner keeps control
Opportunity cost is low
❌ Lack of savings
Nothing to fall back on
Risk
64
Sources of Finance
Pros and cons to grants
✅ Free money
Targeted at businesses
May come with free publicity
❌ Very specific eligibility
Time consuming to get
Competitive and May have strings attached
65
Sources of Finance
Pros and cons to lease
✅ Convenience in pay
Helpful for smaller businesses
Encourages savings
❌ Risk
Financial debt
If unable to pay, can’t keep goods
