Finance Flashcards
(33 cards)
three types of budget
revenue - expected revenue from sales
expenditure - expected costs
profits - combined sales + cost budgets
what are budgeting advantages
-establishes priorities and sets targets
-brings objectives to reality
-assigns clear responsibilities, motivated staff
-communicates targets
-improves efficiency
-monitors performance
-controls income and expenditure
what are details of good budgeting
-manager responsibility clearly defined, has responsibility to adhere to budgets
-performance measured against budget
-corrective action taken if adverse variance
-unaccounted for variances investigated
-departure from budgets permitted after approval
what are difficulties of budgeting accurately
-sales forcasting are predicted
-may have unexpected costs
what are limitations of budgets
-only as good as data being used
-inflexibility in decision making
-need to be changed as circumstances change
-takes time to complete and manage
-short term decisions must be kept within budget
what are causes of adverse and favourable variance
favourable - stronger demand means higher revenue, if selling price increases higher than the budget, competitor weakness
adverse - unexpected costs, overspending, forecasts over optimistic, market conditions
why cashflow forecast
-supports applications for loans
-must know if they have enough money to pay bills
-if warnings of cash shortages can make arrangements e.g. debt factoring
reasons for cash flow problems
-overtrading
-stockpiling, reduces liquidity
-late payments of customers
-not paying debts in time
-high fixed costs
-low sales revenue
-seasonal demand
-unexpected costs
drawbacks of cash flow forecasts
-only prediction, sales could be lower
-customers dont pay on time
-costs higher than expected
-unexpected costs
how to calculate net cashflow
cash inflows-outflows
whys cashflow important
-with no ability to pay employees/suppliers/creditors then business halted
-employees wont work with no pay
-suppliers wont deliver
-creditors cut off supply
liquidity
ability to raise cash on short notice
causes of overtrading
-investing too much money in fixed assets
-stockpiling
-allowing too much credit to customers/taking too much credit from suppliers
-overborrowing
-unexpected costs
-seasonal demand/unexpected changes in demand
solutions to overtrading
-price discounts
-sell of stocks in surplus
-sell off non current fixed assets that arent vital
-enter sale and leaseback agreement for fixed assets
-debt factoring
-avoid unnecessary purchases
-negotiate extended credit with suppliers
-review and reschedule capital spending
break even formula
fixed costs / (selling price - variable costs)
why do break even analysis
-helps decide whether idea profitable
-level of output needed to gain profit
-results can be used to get a loan
-assesses impact of changes in level of production on profitability
-effects of prices/levels of costs on potential profitability
margin of safety
-how many units u can make before making a loss
actual output - breakeven output
advantages and disadvantages of break even analysis
pros
-useful tool for management
-highlights importance of fixed costs, if lower FC and lower BEO then higher MS so lower risk
-data generated can be used to apply for loan
Cons
-predicted, depends on accuracy of data
-unrealistic assumptions: same price used, no waste, all units produced are sold, production cost the same, only one product sold (no portfolio)
pros/cons of overdrafts
pros: flexible way to fund everyday finance, interest only payable on amount borrows, quick and simple
no control loss, short term debt
cons: interests rates may be high, bank may ask for repayment any time, not reliable for some businesses, persistent use could reduce credit rating so higher interest rates
pros/cons of bank loans
pros
-no lost control
-lower interest rate vs overdraft
-greater certainty of funding
-frequent repayment may improve credit score
cons
-assets taken if fail to repay
-no flexibility
-failure to repay then lower credit score
-increases gearing of business
-requires security/collateral
harder to arrange
pros/cons of trade credit
pros
-simple if credit termsn met, this builds relations with supplier
-cheap form
-no control loss
cons
-credit risk/broken relations if credit terms not met
-large fine if pay late
pros/cons of crowdfunding
pros
-no repayments so lower costs
-good exposure
-good feedback so helps improve
cons
-profits shared so lower profits for founder
-if fails then risk of ruined rep
-investors may have limited expertise
pros/cons of retained profits
pros
-no financial cost/interest
-no control loss
-safe and low risk
-opportunity cost, missed to use that profit on investment
cons
-conflict with shareholders as they get less dividends
-finite
-no expertise added
-danger of hoarding
pros/cons of venture capital
pros
-expansion
-no repayment as equity
-reduced personal risk
-v.c. has expertise
cons
-given up shares/control
-may lose control if over 50% shares given
-v.c. eventually will leave as only looking for money, not long term
