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Business Studies HSC > Finance - Processes > Flashcards

Finance - Processes Flashcards

1
Q

Planning and Implementing

Planning and Implementing

A
  • Financial Needs
  • Budgets
  • Record Systems
  • Financial Risks
  • Financial Control
    * debt and equity financing
    * matching the terms and source of finance to business purpose
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2
Q

Planning and Implementing

Financial Planning

A

How a business’s goals will be achieved

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3
Q

Planning and Implementing

Financial Needs

A

Determined by business size, current lifecycle phase, future plans, capacity to source finance.
* Financial Management sets out the financial requirements
* Financial statements needed to show the business can achieve a retunr on investment

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4
Q

Planning and Implementing

Budgets

A

Provide info in quantitative terms, about requirements to achieve a particular purpose
* Operating&raquo_space; main activities of the business and may include budgets relating to sales, production, raw materials, direct labour, expenses and COGS
* Project&raquo_space; capital expenditure and research + development
* Financial&raquo_space; financial data of a business. Include the budgeted income statement, balance sheet and cash flows.
* Income statement + balance sheet = results of operating activities + cash flow statement = liquidity

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5
Q

Planning and Implementing

Record Systems

A

Mechanisms employed, to ensure data is recorded + the info provided is accurate, reliable, efficient, + accessible.

  • critical process = minimise errors in recording process
  • Double Entry System&raquo_space; used to avoid possibility of errors. Important control mechanism that balances entries + finds errors quickly.
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6
Q

Planning and Implementing

Financial Risks

A

The risks to a business of being unable to cover its financial obligations.

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7
Q

Planning and Implementing

Financial Controls

A

Policies + procedures that ensure that the plans of a business will be achieved in the most efficient way

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8
Q

Planning and Implement

Debt Financing

A

Relates to short and long-term borrowing from external sources

Advantages
* Funds are readily available + can be acquired at short notice
* Interest repayments are tax deductable
* Will not dilute the current ownership of the business

Disadvantages
* Increased risk if debt comes from variety of financial institutions due to interest changes
* Regular repayments need to be made
* Security may be required by the business

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9
Q

Planning and Implementing

Equity Financing

A

Relates to the internal source of finance in the business

Advantages
* Cheaper as there are no interest repayments
* Owners who have contributed to the business retain control over the finances
* Does not have to be repaid unless the owner leaves the business

Disadvantages
* Lower profits + returns for owners
* Expectation that the owner will have about the return on investment
* Ownership is diluted + current owners have less control
* Long + expensive process to get funds

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10
Q

Monitoring and Controlling

Monitoring and Controlling

A

cash flow statement
income statement

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11
Q

Monitoring and Controlling

Monitoring and Controlling

A

Financial Statments
* Cash Flow Statement
* Income Statement
* Balance Sheet

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12
Q

Monitoring and Controlling - Financial Statements

Cash Flow Statements

A

Indicate the movement of cash receipts + payments resulting from transactions over a period of time
* opening balance
* inflows and outflows
* closing balance
* opening + inflows - outflows = closing

Insolvency: when expenditure has exceeded income for an unnacceptable period of time and the firm is unable to pay debts

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13
Q

Monitoring and Controlling - Financial Statements

Income Statements

A

summary of the income earned and the expenses incurred over a period of time

Categories include - total sales revenue, COGS, gross profit, expenses and net profit
* COGS = opening stock + purchases - closing stock
* Gross Profit = sales - COGS
* Net Profit = gross profit - expense

Income statements show profit whereas cash flow statements do not as they don’t explicity show sales.

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14
Q

Monitoring and Controlling - Financial Statements

Balance Sheet

A

Represents assets + liabilities at a particular point in time + represents the net worth of the business.
* Assets
* Liabilities
* Owner’s Equity
* Capital
* Retained Profits

Shows level of retained profits and owner’s equity
* Assets = Liabilities + Owner’s Equity

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15
Q

Financial Ratios

Financial Ratios

A

Tools used by financial managers to analyse + interpret financial statements.
* Liquidity
* Gearing
* Profitability
* Efficiency
* Comparative Ratio Analysis

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16
Q

Financial Ratios

Liquidity

A

The extent to which a business can meet its financial obligations in the short – term

Measured using current ratio
* current ratio = current assets / current liabilities
* measures ability to pay back current liabilities with current assets.
* too high = using assets inefficiently
* too low = risk of not meeting financial obligations
* suggested ratio = 2:1

Strategies to improve
* reduce current liabilities through equity financing
* sell non-current assets
* sell inventory

17
Q

Financial Ratios

Gearing

A

Solvency: the extent to which a business can meet its financial obligations in the long-term
Gearing: proportion of debt (external) and the proportion of equity (internal) that is used to finance business activities

Gearing ratio determines solvency
* Solvency = total liabilities / total equity
* acceptable ration: 0.5:1 (small bus) 1:1 (large bus)

18
Q

Financial Ratios

Profitability

A

The earning performance of the business + indicates its capacity to use its resources to maximise profits.
* Gross Profit Ratio
* Net Profit Ratio
* Return on Owner’s Equity

19
Q

Financial Ratios - Profitability

Gross Profit Ratio

A

Gross Profit / Total Sales
* over 50% = preffered
* determines the percentage of each dollar of sales as gross profit

20
Q

Financial Ratios - Profitability

Net Profit Ratio

A

Net Profit / Total Sales
* 13 - 20% = preferred
* the higher the ratio, the better financial position the business is in

21
Q

Financial Ratios - Profitability

Return on Owner’s Equity

A

Net Profit / Total Equity
* 10% = good; 20% = excellent
* the higher the ratio, the better the return

22
Q

Financial Ratios

Efficiency

A

The ability of a business to min its costs + manage its assets so that max profit is achieved w/ the lowest level of assets

23
Q

Financial Ratios - Efficiency

Expense Ratio

A

Total Expense / Total Sales
* 30 - 50% preferred
* Measures how efficient/productive a firm is in producing revenue
* Decline = lower interest rates in economy or business is using less debt.
* Increase = business must find ways to monitor + control expenses + avoid unnecessary expenses

24
Q

Financial Ratios - Efficiency

Accounts Receivable Ratio

A

Sales / Accounts Receivable
* 12 times a year = ideal
* Measures the effectiveness of a business’ credit policy and how efficiently it collects its debts
* 365 / Accounts Receivable Ratio = avge no. of days it takes to convert the balance into cash
* 30 days or less = ideal

25
Q

Financial Ratios - Efficiency

Strategies to Improve Efficiency

A
  • Check credit rating of customers
  • Offer discounts for early payments
  • Interest attached to late payments
  • Follow up on accounts that are not paid
26
Q

Ethicals w/ Financial Reporting

A

Business Studies HSC (16 decks)

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