Business Studies (Finance) Flashcards
(46 cards)
Strategic Role
Planning,organising, controlling the financial assets of the business in order to achieve its goals
Objectives Of Financial Managment
PLEGS
- Profitability
- Liquidity
- Efficiency
- Growth
- Solvency
Definition - Profitability
Ability of a business to maxmise and achieve profit due to higher sales or lower expenses
Definition - Liquidity
Ability to meet financial obligations in short term (up to 12 months) e.g debt
Definition - Efficiency
Ability to use resources effectively, ensuring financial stability/profitability
Definition - Growth
Ability to increase in business size and operational scale (ensures stability)
Definition - Solvency
Ability to meet long term financial obligations (gearing)
Short Term And Long Term
and
Potential conflicts between short and long term objectives
Short term goals - achieved within 1-2 years ‘tactical objective’ day to day operations
Long term goals - strategic plan of a business over 5 years
Financial Obligations can lead to conflict
Eg growth. The decision to expand would have support of managers, employees, suppliers and the local community. However, expansion is associated with increased costs and gearning→ leading to low profits in the short term. This can conflict with Business owners, shareholders and investors. Long term business owners would support expansion if it increases overall value.
Interdependance With Key Business Functions
Finance Vs Marketing
- Finance researchers financial performances (info for various markets)
- Funds for marketing promotion
Finance Vs Operations
- Requires funds for inputs to carry transformation process
- Finance management forecasts the economy or state of market (informing operaions the quantity of materials
Finance Vs Human Resources
- HR produces emplyees to operations and maketing (generate revenue)
- Finance delegate funds to acquired training/development for skill/knowledge
Planning And Implementing Dot Points
–Financial needs
-Budgets,
-Record systems,
-Financial risks
-Financial controls
Financial Needs
Definition = determine where a business is headed and how it will get there (needs)
- Important financial information needs to be collected before future plans can be made
- Financial information includes balance sheets, income statements, sales and price forecasts,break-even analysis
- Business’s must consider factors:
1) the size of the business
2) the current phase of the business cycle
3) future plans for growth and development
4) management skills for assessing financial needs and planning.
Budgets
Definition = financial document used to estimate
future revenue and expenses over a period of time
- provide an accurate picture of income and expenses and should be used to drive important business e.g increase marketing
- provide financial information for a business’s specific goals/used in strategic, tactical and operational
planning
-provide a basis for direction of sales effort, production planning, price setting, financial requirements,
control of expenses and of production cost
3 Types Of Budgets:
1) Operating Budgets (sales, production, raw materials, direct labour, expenses)
2) Project Budgets ( capital expenditure, research and development)
3) Fiancial Budgets (income statemt, balance sheet, cash flow statement)
Record Systems
Definition =employed by a business to ensure
that data are recorded and the information provided is accurate, reliable, efficient and accessible
- serves as an invaluable tool for decision making
Financial Risks
Definition = possibility of financial loss to businesses. If unable to meet financial obligations they face possibility of becoming bankrupt or insolvent
Common Financial risks for businesses include:
1) Market risk — involves the risk of changing conditions in the specific marketplace in which a
company competes for business; e.g, the increasing number of consumers shopping online
or increasing competition. (affect its profitability)
2) Operational risk — various dangers faced during the day-to-day management of a business e.g fraud risk, human resource issues (businesses can experience operational risk when they have poor management)
3) Credit risk — this is the danger associated with borrowing money.
Financial Controls
Definition = procedures/policies aimed to monitor/ controls the allocation and usage of its resources
- designed to ensure they are followed by management and employees
- Control is important in assets e.g accounts receivable, inventory and cash
Common policies/procedures that promote control within a business are:
1) clear authorisation and responsibility for tasks in the business
2) separation of duties
3)protection of assets (buildings are kept locked,regular
checks of inventory are carried out and security surveillance systems are installed)
Debt and Equity financing – Advantages and disadvantages of each
Debt = short/long term borrowing from external sources
- Advantages
1) Funds are usually readily available and can be
acquired at short notice
2) Increased funds should lead to increased
earnings and profits
3) Flexible payment periods and types of debt are
available
-Disadvantages
1) increased risk if debt comes from financial institutions because interest, bank charges and government charges may increase
2)Debt can be expensive, e.g. interest must be paid
3) Security is required by the business
Equity= internal sources of finance in business
- Advantages
1) Does not have to be repaid unless the owner leaves
the business
2) The owners who have contributed the equity retain
control over how that finance is used
3) Less risk for business owner
- Disadvantes
1) Lower profits and lower returns for the owner
2) Long, expensive process to obtain funds this way
3) Ownership is diluted, i.e. the current owners will
have less control
Matching The terms And Source Of Finance To Business Purpose
The terms of finance must be suitable for the purpose for which the funds are required.
- main reason for identifying the options for short-term and long-term debt:
1) to MATCH the term of the loan with the economic lifetime of the asset purchased.
2) A short-term or current asset needs to be matched with short-term finance.
3) Non-current assets should be purchased with long-term finance.
- deciding which type of finance to use, businesses will compare debt vs equity finance and then take into account what finance is needed for its purpose.
- must match the terms and sources of finance to business purposes.
Monitoring And Controlling Syllabus Dot Points
Financial managers ensure financial resources of a business are used effectively to achieve business goals
- inconsistment methods of review of the system control will impact upon visiblity of business (requires managements to monitor internal/external factors)
1) Cash flow statement
2) Income statement
3)Balance sheet
Cash Flow Statement
= indicating movement of the cash receipts and cash payments resulting from transactions over a period of time (inflows/outflows)
- identify trends/useful predictor of change (status)
Users of cashflow –> lenders, owners, shareholders, creditors
Formula: Opening balance + inflows= outflows
Cash flow statement shows whether a business can: Generate favourable cash flow, pay its financial obligations when they are due etc
The cash flow statement is further broken down into:
Operating activities, investing activities and financing activities
Income Statement
= summary of income earned and the expenses incurred over a period of time
- uses information to see how much money has come into the business as revenue/how much has gone out s expenditure and how much is derived as profit
- examing figures from income statement –> managers make comparisons, anaylse trends before making financial decisions (see whether expenses are increasing, decreasing or remaining steady –> signficance of change)
Formulas:
COGS= opening stock + purchases - closing stock
Gross profit= sales-COGS
Net profit= gross profit- expenses
Balance Sheet
= summary of a business assets and liabilities at a particular point in time
Assets= Liabilities + owners equity
- represents the networth (equity)
- shows financial stability
Assets = items of value owned by business
Current assets (within 12 months e.g inventory/stock)
non-current assets (12 months+ e.g land, machinery)
Liabilities = items of debt owed by business to outside parties
current liabilities (debt to be repaid within 12 months e.g overdrafts)
non-current liabilities (long term debt e.g mortgage)
Owners Equity = funds contributed by owner
- retained profits/net worth of business
Financial Ratios
-Liquidity
-Gearing
-Profitability
-Efficiency
-comparative ratio analysis
Liquidity
=a business’s ability to meet short-term financial obligations
-Managers must assess if the business can pay its debts when due.
Current Ratio Formula: Current assets ÷ Current liabilities.
A 2:1 ratio is considered a healthy financial position (for every $1 of liabilities, the firm has $2 of assets).
High current ratio- may indicate over-investment in low-return assets (safer but less profitable).
Low current ratio- suggests investment in longer-term assets for potentially higher profit (riskier).
Gearing
=the proportion of debt (external finance) to equity (internal finance) used to fund a business.
-Gearing ratios determine the firm’s solvency, or ability to meet long-term financial obligations.
Debt to Equity Ratio Formula: Total liabilities ÷ Total equity.
Higher gearing = higher risk, but also greater potential for profit.
A ratio greater than 1 means more debt than equity (less solvent).
A ratio between 0 and 1 means more equity than debt (more solvent).
