Finance Flashcards
(44 cards)
What is Financial Management?
The planning, organizing, directing, and controlling of a business’s financial activities, including budgeting, forecasting, risk assessment, and monitoring financial resources.
Effective financial management is vital for business survival and growth.
What is the Strategic Role of Financial Management?
The responsibility to set long-term objectives that shape the entire business strategy, coordinating functions, allocating resources, and ensuring financial stability.
It aligns financial decisions with business growth, innovation, and sustainability.
Define Profitability.
The ability of a business to maximize its profit, indicating financial health, efficiency, and viability.
High profitability attracts investment and provides funds for expansion.
What does Liquidity measure?
The extent to which a business can meet its short-term financial commitments, measured by current assets relative to current liabilities.
Good liquidity ensures bills and wages are paid on time.
Define Efficiency in a business context.
The ability to minimize costs and manage assets to achieve maximum profit with minimal resources.
Efficient businesses outperform competitors.
What does Growth signify for a business?
The capacity to increase size, sales, market share, or profits over the long term, indicating success.
Uncontrolled growth can strain cash flow.
Define Solvency.
The ability to meet long-term financial commitments, reflecting overall financial stability and gearing.
Solvent businesses can borrow at better rates.
What is Working Capital?
The funds available for short-term financial commitments, calculated as current assets minus current liabilities.
More working capital supports daily operations.
What does Gearing (Debt-to-Equity Ratio) measure?
The proportion of debt and equity used to finance the business, indicating financial risk.
High gearing can lead to higher returns but also increased risk.
Define Financial Risk.
The chance of being unable to meet financial commitments, often linked to debt use and cash flow uncertainty.
Good risk management is crucial for stability.
What is Debt Finance?
Money borrowed from external sources that must be repaid with interest, including short- and long-term borrowings.
Can fuel growth quickly but increases obligations.
Define Equity Finance.
Funds raised by selling shares in the business, which do not have to be repaid but dilute ownership.
A safe way to raise capital without increasing debt.
What is Factoring?
Selling accounts receivable to a finance company for less than their full value, providing immediate cash.
Improves liquidity but reduces total revenue.
What is the Current Ratio?
A liquidity ratio calculated as current assets divided by current liabilities, showing the ability to cover short-term debts.
A healthy ratio is usually above 1.5:1.
Define Gross Profit Ratio.
Gross profit divided by sales, showing the percentage of sales that becomes gross profit before expenses.
A high ratio indicates good cost control.
What is the Net Profit Ratio?
Net profit divided by sales, indicating overall profitability from revenue after all deductions.
It guides management on expenses and pricing.
Define Return on Equity (ROE) Ratio.
Net profit divided by total equity, measuring the rate of return for shareholders.
Higher ROE attracts investment.
What does the Accounts Receivable Turnover Ratio indicate?
Sales divided by accounts receivable, showing how efficiently a business collects debts from customers.
Higher turnover improves cash flow.
Define Expense Ratio.
Total expenses divided by sales, indicating the percentage of revenue consumed by costs.
A lower ratio means more profit is retained.
What are Financial Controls?
Policies, procedures, and systems that ensure accuracy, prevent fraud, and protect assets.
They increase trust in financial statements.
Define Hedging.
Strategies that reduce the risk of financial loss from currency fluctuations or interest rate changes.
It helps avoid major losses from market swings.
What are Derivatives?
Financial instruments used to manage or ‘lock in’ future prices, especially in global transactions.
They reduce uncertainty in international finance.
Define Letter of Credit.
A guarantee from a bank that the exporter will receive payment when certain conditions are fulfilled.
It lowers the risk of non-payment in exporting.
What is a Bill of Exchange?
A written order used in international trade to pay a fixed amount of money at a set date.
It provides security of payment for exporters.
