finance

Question 1

Benefits of setting financial objectives

Answer 1

-focus/coordinate
-measures success
- reduce risk of failure
-investment transparency

Question 2

What is profit?

Answer 2

difference between total revenue and total costs

Question 3

What is cash flow?

Answer 3

difference between total cash inflows and outflows

Question 4

net profit=

Answer 4

sales- vc- fc

Question 5

net cash flow=

Answer 5

inflow-outflow

Question 6

How is cash flow different from profit?

Answer 6

• timings
• the way fixed assets are accounted for
• cash flows come from sources of finance

Question 7

Measures of profit-3

Answer 7

Gross profit
Operating profit
Profit for the year

Question 8

Gross profit

Answer 8

revenue-cost of sales

Question 9

gross profit margin

Answer 9

gross profit/revenue x100

Question 10

operating profit

Answer 10

gross profit- admin costs

Question 11

profit of the year

Answer 11

operating profit- finance/taxes

Question 12

revenue objectives: 3

Answer 12

revenue growth
sales maximisation
market share

Question 13

cost minimisation objectives

Answer 13

reduce cost without affecting quality

Question 14

profit objectives

Answer 14

• specific profit level
• rate of profitability
• profit maximisation
• exceed market profit margins

Question 15

cash flow objectives

Answer 15

• reduce borrowings
• reduce inventories held
• reduce seasonal cash swings

Question 16

investment objectives: 2

Answer 16

• capital expenditure
• profit from investment

Question 17

debt

Answer 17

business owes money

Question 18

equity

Answer 18

how much value you have over debt

Question 19

Budgets

Answer 19

financial plan for future

Question 20

creating budgets

Answer 20

prepared in advance
compare = variances
managers responsible

Question 21

why do we use budgets

Answer 21

• targets
• direction
• motivate
  -forecast
• monitor

Question 22

what is historical budgets

Answer 22

uses last years figures

Question 23

what is zero budgeting

Answer 23

budget set to zero and needs authroisation to use

Question 24

main budget types

Answer 24

revenue
cost
profit

Question 25

how is a budget constructed

Answer 25

analyse market
draw up sales budget
draw up cost budget

Question 26

two key sources of info for budgets

Answer 26

previous financial performance and market research

Question 27

variance analysis

Answer 27

difference between actual results and budget

Question 28

adverse variance

Answer 28

actual is worse than budget

Question 29

favourable varaince

Answer 29

actual is better tahn budget

Question 30

cash inflows

Answer 30

• cash sales
• sales/fixed assets
• interest on bank balances
• grants
• bank loan
  -invested share capital

Question 31

cash outflows

Answer 31

-payment to suppliers
-wages/salaries
-tax on profit
-paying assets
-loan repayment (interest)
-dividends

Question 32

features of cash flow forecast

Answer 32

• updated regularly
• allow for unexpected changes
• make sensible assumptions

Question 33

common cash flow problems

Answer 33

lower sales then expected
customers no pay on time
costs higher than expected
unrealistic cost assumption

Question 34

main causes for cash flow problems

Answer 34

• losses
  -too much capacity
  -excess inventory held
  -allowing too much credit
• overtrading
  -unexpected changes

Question 35

debtors

Answer 35

people who owe business money

Question 36

creditors

Answer 36

amounts owed to suppliers

Question 37

inventories

Answer 37

cash tied up in stock

Question 38

3 ways to credit control

Answer 38

• estbablish credit limits
• checking credit
• monitor and set realistic limits

Question 39

improving cash position
short term!

Answer 39

• reduce current assests
• increase current liabilities
• sell surplus fixed assets

Question 40

improving cash flow
long term!

Answer 40

increase equity
increase long term liabilities
reduce outflow on fixed assets

Question 41

Contribution

Answer 41

profit made on an individual product

Question 42

what does contribution show?

Answer 42

no of items needed to be sold to cover tc
difference between sales and variable costs

Question 43

Contribution formula

Answer 43

= total sales- total variable costs

Question 44

Contribution per unit

Answer 44

=selling price per unit-variable costs per unit

Question 45

total contribution

Answer 45

= contribution per unit x no of units sold

Question 46

profit contribution formula

Answer 46

profit= contribution-fixed costs

Question 47

break even output

Answer 47

= fixed costs/ contribution per unit

Question 48

assumptions of break even

Answer 48

• selling price is the same
  -all items sold
  -fixed costs are constant
• variable costs change with output

Question 49

margin of safety

Answer 49

difference between actual output and break even output

Question 50

break even strengths

Answer 50

• focus on output needed for profit
• highlights risks
• fixed costs to minimum
• calculations quick
• shows if sales forecast incorrect

Question 51

break even weaknesses

Answer 51

-unrealistic assumptions
-most sell more than 1 product
-planning aid not decision tool

Question 52

sources of finance

Answer 52

leasing
hire purchase
trade creditors
selling fixed assets
business angel
overdraft
bank loan
gov grants
debt factoring
share capital
venture capital
retained profit
mortgages
crowd funding

Question 53

absolute profit

Answer 53

the value of profit earned

Question 54

relative profit

Answer 54

profit earned as a proportion of sales

Question 55

how to increase profit

Answer 55

sales- increase quanitity and selling price
variable- reduce vc per unit
fixed- increase output and decrease fc

Question 56

debenture

Answer 56

long term loan issued by company usually with fixed interest rates