Finance Flashcards Preview

A-Level BUSINESS AQA > Finance > Flashcards

Flashcards in Finance Deck (51)
Loading flashcards...

How can financial objectives benefit a Business?

- allows shareholders to decide whether a business is worth investing
- improves co-ordination between teams
- acts as a focus for decision making


Revenue objectives?

set to increase value or volume of sales e.g increase sales revenue by 5% in the next year or beat competitor sales


Cost Objectives?

set to minimise costs e.g "Reduce costs by 15%" bc if costs are reduced and the Business still sells same number of products overall profits will increase
BUT cutting costs shouldn't REDUCE QUALITY OF THEIR products or serbices bc that will raise ETHICAL QUESTIONS about how they operate - otherwise sales would drop and end up with LOWER PROFIT


Profit Objectives?

might set a target figure for profit or for a percentage increase from previous year


what is CASHFLOW?

all the money flowing IN and OUT of the business over A PERIOD OF TIME calculated AT THE EXACT TIME IT ENTERS OR LEAVES


cashflow objectives?

-most important SHORT TERM thing to BUSINESS bc Business need cash to survive
- if business allows payments on CREDIT this can damage the cash flow same way if it needs to spend a lot of money on a new computer system or machinery, the outflow of cash could lead the business to a potential crisis.
- cash flow objectives are put in place to AVOID cashflow problems
- businesses might set objectives to spread revenue more EVENLY throughout the year, acquire a specific amount of LIQUID assets or target a MINIMUM cash balance.



when a business produces TOO much, they'll have to PAY suppliers and staff SO MUCH that they become INSOLVENT before they have the chance to get paid by customers.


formula for return on investment?

return on investment/cost of investment x 100


return on investment?

- measures how EFFICIENT an investment is - it compares the return from a project to the amount of money that's been invested in it
- the HIGHER the ROI, the better
- companies may use it to compare the profitability of two potential investments


what is CAPITAL?

wealth in form of assets or money


what is capital expenditure?

money spent to buy fixed assets.


fixed assets?

things used over and over again to produce goods or services, like factories or vehicles.


investment objective?

businesses might set an investment objective to help achieve a set amount of capital expenditure during a year
- e.g capital expenditure of £150,000 to fund purchase of new equipment or might wish to reduce capital expenditure


Capital structure?

- refers to the way a business raises capital to purchase ASSETS
- combination of debt capital (borrowed funds) and equity capital ( capital raised by selling shares also known as share capital )


how to calculate percentage change in profit?

current years profit - previous years profit / previous years profit x 100


ways to increase profit?

- can increase or decrease based on elasticity BUT you can do the following :
- reduce costs of PRODUCTION but that could lead to LOW QUALITY which leads to less sales
- advertising which would INCREASE DEMANDS BUUUUT can be expensive
- Improve quality which would increase demands and result in less returns (should INCREASE PROFITS as long as costs of improving doesn't outweigh savings)


formula for profit

total revenue - total costs


operating profit?

takes into account all revenues and costs from REGULAR TRADING but none from ONE OFF events such as sales of buying another business
- it considers both cost of sales but also operating expenses such as administrative expenses
- if a company's GROSS PROFIT is high but its OPERATING COSTS is decreasing that usually means that company means hte company is not controlling costs


formula for operating profit?

sales revenue - cost of sales - operating expenses


profit of the year formula ?

operating profit + other profit - net finance costs - tax


internal factors influencing financial objectives?

- overall objectives of the business
- the status of the business
- other areas of the business (e.g. if a business has a high turnover of staff an objective to increase revenue may be unrealistic bc experience staff are needed to encourage customers to spend more)


external factors influencing financial objectives?

F inance
E conomy
E nvironmental/ ethical influences
C ompetitors
S hareholders


what is a profit margin?

measure the relationship between the PROFIT MADE and the SALES REVENUE. they tell you which PERCENTAGE of the selling price of a product is actually PROFIT.


how can profit margins been used?

can be used to make COMPARISONS over a period of time, or compare the profitability or different companies.


gross profit margin formula?

gross profit / sales revenue x 100


what does gross profit depend on ?

the gross profit margin depends on the type of business but HIGHER the percentage the better. A business with high sales VOLUME can afford to have low gross profit margin.


how to improve gross profit margin

increase prices or reduce DIRECT COST OF SALES


operating profit margin formula?

operating profit / sales revenue x 100


how can operating profit margin be improved?

increasing prices or REDUCING COST OF sales or OPERATING EXPENSES


why is it useful to compare operating profit margin with gross profit margin?

a business with a decreasing operating profit margin compared to gross profit margin SHOWS THAT THEY ARE STRUGGLING WITH OPERATING EXPENSES


profit margin shows?

a high profit margin is attractive to shareholders bc it shows THAY THEY MAY RECEIVE HIGH DIVIDENDS


what is working capital

the money available to a business for its day-to-day running costs


what does the length of a cash flow depend on?

- THE TYPE OF PRODUCT : this determines the LENGTH OF TIME it takes to produce and HOW LONG its held in stock. E.g. a butcher wouldn't hold stock for long, so there would only be a short delay between paying suppliers and selling to customers.
- CREDIT PAYMENTS : buying on CREDIT means that good are received, but the buyer has an agreed period of time to pay it in later


who are CREDITORS?

people who are owed money by the business


what is PAYABLE?

money the business owes


what is a DEBTOR?

people who owe the business money



the money that is owed to the business



Where there's a short period of time from the start of production to the sale of goods and where the business is given a longer credit period by its creditors (suppliers) than it gives its debtors (customers)


ways to improve cash flow?

- ARRANGING AN OVERDRAFT : this can be useful in times of need, but in the long term overdrafts can be very EXPENSIVE, as the business will need to pay INTEREST on the borrowed money so that will affect their OVERALL profit
- BUSINESSES can try to hold less STOCK so less CASH is tied up in stock BUT can cause problems if theres a sudden increase in demand and they run out
- LONGER CREDIT PERIODS to pay suppliers and SHORTER CREDIT period to customers BUT it's important to balance the need to manage CASH FLOW with the need to keep SUPPLIERS AND CUSTOMERS HAPPY.
- DEBT FACTORING (they can sell their debts to debt factoring agencies who take a percentage of the money collected)
- SALES AND LEASEBACK : when businesses sell equipment to raise capital, and then lease the equipment back off them because they need to use them.


net cash flow formula

inflow - outflow


closing balance formula?

opening balance + net cash flow


cons of cash flow forecasting ?

- can be based on false assumptions about whats going to happen
- CIRCUMSTANCES can SUDDENLY change after the forecast has been made. COSTS can go UP. machinery can BREAK DOWN and need mending. COMPETITORS can put their prices up or down, which AFFECTS SALES.
- good cash flow forecasting NEEDS LOTS OF EXPERIENCE and lots of RESEARCH into the market
- A FALSE forecast can have DISASTROUS results. A business that runs out could end up INSOLVENT.


what is break even output?

- level of sales a business needs to cover its cost
costs = revenue
when sales are BELOW the break even output, costs are MORE than revenue - the business makes A LOSS.
when sales are ABOVE the break even output, costs are LESS than revenue - the business makes a PROFIT.


why should NEW business do break even anaylsis?

bc it tells them how much they need to sell to break even. Banks and venture capitalists think of LOANING money to business will need to SEE a break even analysis as part of the BUSINESS PLAN. This helps them to decide whether to lend money to the business


when do ESTABLISHED businesses use break even analysis?

when they're preparing to launch NEW PRODUCTS to work out how much profit they are likely to make, and also to predict the impact of the new activity on CASH FLOW.


what is contribution?

the difference between the SELLING PRICE of a product and the VARIABLE COSTS it takes to produce it.


formula for contribution ?

selling price per unit - variable costs per unit


formula for total contribution

total revenue - total variable costs
contribution x units sold


formula for margin of safety?

actual output - break even output


advantages of break even analysis?

- EASY to do
- its QUICK - managers can see the break even output and margin of safety immediately so they can take quick action to cut costs or increase sales if they need to increase their margin of safety.
- break even charts let businesses forecast how VARIATIONS in sales will affect COSTS, REVENUE and PROFITS and most importantly how VARIATIONS IN PRICE will affect how much they NEED TO SELL
- helps persuade the bank to give a loan
- break even analysis influences decisions on whether new products are launched or not bc if thers too many products to sell to break even they would probably decide not to launch the product


disadvantages of break even analysis?

- break even analysis assumes that variable costs always rise steadily but sometimes businesses can get discounts for buying in bulk so costs don't go up in direct proportion to output
- good for a single product but not loads bc it can get complicated
- if the data is wrong, results wrong
- break even analysis assumes business sells everything without wastage
- break even only tells you ho wmany units you need to sell to break even but doesnt say how many you will actually sell