mrs parkin -topic 5; finance mangement

Question 1

what is financial objective

Answer 1

specific goal/ target of relating to the financial performance, resources and structure of a business

Question 2

having a financial objectives provide

Answer 2

1) reduce the risk of business failure
2) help to coordinate the different business functions
3)measure of success of failure for the business
a focus for the entire business
4) allowing shareholders acknowledging on what’s ` happening with their shares

Question 3

examples of revenue, costs and profit objective’s

Answer 3

revenue objectives- set to increase the value or volume of sales
costs objectives- lower costs, if costs are reduce and business still sells the same number of products at the same price it will increase overall profits BUT need to be careful on cutting down costs for instance
cutting down on quality- raise ethical questions, falling sales leading to falling profits
profit objectives - set a target figure fro profits higher from the pervious year; could do this from, increasing revenue, lower costs and by doing this, achieving costs objectives can help to achieve profits objectives

Question 4

what is cash flow

Answer 4

all the money flowing into and out of the business over time

Question 5

how is cash flow different from profit

Answer 5

cash flow- difference between total cash inflows and total costs over a period of time
profit- the difference between total revenue and total costs over a period

Question 6

what does insolvent mean

Answer 6

business unable to pay its debts ( for PLC and LTD)

Question 7

if a business allows customers to pay on credit how does that affect the business’s cash flow?

Answer 7

it could damage their cash flow, because due to the time period that the customer hasn’t paid for the product/ service because if the business wants to invest into the business they wont have enough costs to invest

Question 8

what happens if the business has negative cash flow?

Answer 8

• leads to a problem

- if business produces too much, have to pay for supplier e.c.t. then the business is more likely to become insolvent

Question 9

cash flow objectives prevent

Answer 9

cash flow problems

Question 10

return on investment objectives help the business to become

Answer 10

profitable
it measures how efficient an investment is
compares the return from a project to the amount of money that has been invested
higher ROI the better, the more you can get back , higher investment
companies might set a target value fro the ROI of an investment it can be compared the profitability

Question 11

formula for ROI

Answer 11

return on investment(£)/costs of investment x100

Question 12

what does capital mean

Answer 12

wealth in the form of money

Question 13

capital expenditure

Answer 13

money spent to buy fixed assets e.g. factories

Question 14

why might business set investment objectives

Answer 14

help achieve a set amount of capital expenditure during the year or may wish to reduce capital expenditure

Question 15

what does capital structure mean

Answer 15

to they way business raises capital to purchase an assist

Question 16

what does debt capital mean

Answer 16

borrowed funds

Question 17

what does equity capital mean

Answer 17

capital raised by selling shares

Question 18

a business capital structure is a combination between

Answer 18

debt capital and equity capital

Question 19

internal reasons that might influence financial objectives

Answer 19

1) the overall objectives of the business- financial objectives need to be consistent
2) the status of the business- new business might set ambitious target e.g. revenue and business might try and grow quickly and the business in market place
3) other areas of the business, financial objectives could be limited by that’s happening in other departments of the business

Question 20

external factors that might influence financial objectives

Answer 20

the availability of finance- cash flow targets depends on how easy it is for the business to get credit
competitors- new competitors enter the market/ demand for competitors products increases, a business might set an objective to cut costs to be more competitive
the economy- if there is a period of economic boom- business set ambitious profit targets OR if economy isn’t doing well- business have to set more restrained target e.eg minimise costs
shareholders- want the best possible return on their investment - this puts pressure on business to set objectives to increase profits/ dividends
environmental/ ethical influences- want to please people that might be eco friendly if not could raise issues

Question 21

why might businesses measure on a regular basis?

Answer 21

compare their profit on regular basis

compare their profit from the current from previous period to measure progress

Question 22

how do you work percentage change in profit

Answer 22

1) current years profit - pervious years profit
2) then divide it by pervious year
3) times it by 100

Question 23

different methods to increase profit

Answer 23

1) advertising; increasing demand, leading to increasing sales + profit BUT can be expensive no grantee it will increase sales
2) reduce their costs of production BUT reducing production costs may lead to lower quality products damage number of sales
3) improving quality- reduce costs from return increasing profits but expensive
4) reducing prices - increase demand if product is elastic or it might not cover enough costs
5) increase prices If product is price inelastic

Question 24

formula for gross profit

Answer 24

sales - costs of sales

this type of profit is directly related to making product

Question 25

formula for operating profit

Answer 25

sales revenues - costs of sales - operating expense
takes into account all the revenue and costs but doesn’t take into account the one off purchases/ sales
if a company gross profit is increasing and op is decreasing means that the business not controlling its costs

Question 26

formula for profit for the year

Answer 26

operating profit + other profit - net finance costs - tax

Question 27

what is profit margins

Answer 27

relationship between profit made and sales revenue it tells you what percentage of the selling price of a product of the selling price of a product is actually profit

Question 28

formula for gross profit margin

Answer 28

gross profit/ sales revenue x 100
good profit margin depends on what type of business
higher profit margin the better
business with high sales volume - afford to have a low gross profit

Question 29

formula for operating profit margin

Answer 29

operating profit / sales revenue x 100
best to have a high operating profit margin depends on the type of business
can be improve by increasing prices or reduce costs of sales or overall the operating expenses
useful to compare profit margin with gross over a period of time

Question 30

what happens if companies have decreasing profits…

Answer 30

business with a decreasing operating profit margin compared to gross margin is struggling with operating expenses

Question 31

formula for profit for the year margin

Answer 31

profit for the year/ sales revenue x 100
high profit margin attractive to shareholders- indicate that they may receive high dividends also can attract potential shareholders

Question 32

what are inflows and outflows

Answer 32

inflows- sums of money received by a business e.g. product sales
outflows - sums of money paid out by a business e.g. buy material

Question 33

why is it important for new business to have cash flow

Answer 33

because they need to ensure that they have enough money to cover up their start up costs

Question 34

what does working capital mean

Answer 34

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

Question 35

what does creditors mean

Answer 35

people who are owned money by the business

Question 36

what does payable mean

Answer 36

money that the business owes

Question 37

what does debtors mean

Answer 37

people who owe the business money

Question 38

what does receivables mean

Answer 38

money that is owned to the business

Question 39

how to improve cash flow

Answer 39

1) business can try hold less stock- less stock = less cash is tied up in stock BUT problem- if sudden increase of demand for product - may run out
2) overdrafts- arranged by the bank - allow business to borrow money according to its need but only a certain amount BUT only useful at times when its needed - long term overdrafts really expensive business will need to pay intrust on borrowed money
3) debt factoring- gives instant cash to business whose customers haven’t paid their invoices - but only get paid 80% and the rest is given to the agent 5% back to them
4) sale and leaseback- business sell equipment- raises capital , then lease the equipment back short term have large sum of money in the olong term they have to pay little amounts of money for the equipment and its no longer theirs only if they can afford to get it back 5) reduce time when getting money from customers- try to get their suppliers to give them longer credit period and give customers shorter creit period BUT keep a balance- need to manage cash flow within suppliers BUT want to keep customers happy at the same time

Question 40

what is cash flow forecast

Answer 40

show the amount of money that mangers expect to flow into the business and flow out of the business over a period of time in the future

Question 41

why is cash flow important

Answer 41

use cash flow make sure they always have enough cash to pay around suppliers/ employees
helps them to predict when they’ll be in short term e.g. then they will possible arrange an overdraft
they need to show banks cash flow forecast when trying to get loans/other finance- proves that the business has an idea where it is going in the future

Question 42

formula for cash in

Answer 42

adding up all the cash inflows

Question 43

formula for cash out

Answer 43

adding up all the cash outflows

Question 44

formula for net cash flow

Answer 44

cash inflows - cash out flows

Question 45

formula for closing balance

Answer 45

opening balance + net cash flow

Question 46

why could cash low case problems

Answer 46

• based on false assumptions
• circumstances could change resulting forecast to be made wrong
  good cash flow = lots of experience- lots of research into the market
• having false forecast- wrong results- business may run out of cash could end up insolvent