Financial Management Flashcards
(42 cards)
5 types of trading mechanisms
Sole Trader
Partnership
Limited Company (Ltd)
Public Limited Compant (Plc)
Unincorporated association
Sole Trader
Few formalities
Trader can make contracts and employ people
Trader owns all assets and liabilities
Profits are personal income and liable to tax
Partnership
2 or more sole traders
Should be governed by partnership agreement
Jointly and severally owned assets and liabilities
Profits are income of partners
Can create limited partnerships
Ltd
Separate legal person under law
shares distributed to directors
Legal formalities must be observed - company returns and house registration
Limited liability
Creates ‘image’
Profit is income of company
Plc
- Separate legal person
- Shares distributed/traded to public
- Legal formalities observed
- Limited liability
- Creates ‘image’
- Profits are income of company, shared betweeb shareholders
Unincorporated association
- Formed by group of like people: sports clubs, charities etc
- no formal legal requirements: charities commission for charitable status
- Management committee holds trust of members
- Not a legal body: committee liable for debts, cant borrow money
Purpose of Accountants
Look after business health:
- Cash forecast
- Balance sheets (current state of business finances)
- Profit and loss records
Profit and Loss report
Shows:
- where costs are
-what tax bills will be
-where you are in the profit cycle
Gross Profit & Loss
+ Income from product sales
- Basic cost of trading
= Gross profit margin (or loss)
Net Profit and Loss
+ Income from product sales
- Cost of sales (volume related - material costs, casual labour, machine powering, overtime etc)
- Overheads (Rent/leases, Interest on equipment, admin costs, heating costs, permanent staff)
- Depreciation
= Net Profit before tax
Non-linear variable costs
- Things like raw material bulk purchase, which is susceptible to non-linear change
- Stepwise costs like setup, extra shifts, additional equipment rental etc
Simple Linear Depreciation
Depreciation = (Cost - Residual Value)/Life
Balance Sheet
- Shows the situation at a moment in time: assets. liabilities, difference
- What you have - what you owe
Fixed vs Current Assets/Liabilities
Fixed - Over 1 year e.g. plant, machinery, buildings
Current - Within 1 year e.g. short term debtors, stock, prepayments
Types of accepted account adjustment (3)
Accruals - something in the works, but with no paperwork e.g. sent the product but no invoice received yet
Provisons - Allowance for possibility of something going wrong
Prepayments - paid for but yet used e.g. rent, IT service maintenance contract etc
What is stock worth (4)
Cash Price (what was paid for it)
Sale Price (What it would sell for)
Zero
Negative
Real Cash Forecasting
Educated guess of cash flow to minimise risk incorporating:
- Industry standards for timing
- Payments - good estimates of known costs e.g. staff, materials etc
- Income - market analysis and experience
Accounting Ratios definition
Financial performance indicators that help analysing business financial health and operational efficiency.
Provides quick calculations and numbers for industry comparison
Accounting ratios (4)
Profitability
Cash flow/ Liquidity
Efficiency
Capital structure and investment
Profitability ratios (2)
Gross profit to sales (gross profit/ sales *100)
Net profit to sales (net profit/ sales *100)
Return on Investment (ROI) or Return of Capital Employed (ROCE)
ROI = (net profit before tax and interest/capital employed) *100
how much you are making using your assets
Cash flow ratios: current ratio
Current ratio = Current assets/ current liabilities
cushion available to short term creditors
normally approximately 2:1
Cash flow ratios: Liquidity ratio (acid test)
LR = (cash + debtors)/ current liabilities
Measure of liquidity.
Should be 1:1
If over you’ve either got too many debtors or under-used cash
If under, difficulty meeting current liabilities
Cash flow ratios (2)
Liquidity Ratio
Current Ratio
