Processes Flashcards
Name the 5 Steps in the Planning and Implementing Process
- Determining Financial Needs
- Developing Budgets
- Maintaining Record Systems
- Identifiying Financial Risks
- Establishing Financial Controls
1) How do Businesses determine Financial Needs?
Financial needs will be determined by:
- The size of the bus.
- Current phase in bus. life cycle
- Future plans for growth
A situational analysis of the current financial position is the basis for effective financial planning.
2) Why do Businessess develop budgets?
A budget is a plan predicting revenue and expenses for a future time period.
Businesses will develop budgets to determine cash required for planned activities, use and cost of materials or number and cost of labour needed for production
2) List the different types of budgets and what they are used for
1) Operating Budget - relate to main activities of the bus. (Sales, labour costs, raw material costs, administrative costs)
2) Project budgets - relate to capital expenditure (purchasing additional machinery) and research and dvelopment
3) Financial budgets - relate to financial data of the bus. (cash flow, balance sheet, income statements)
2) What is a Variance Analysis and why is this important for finance managers
Variance analysis examines the gap between planned and actual budgeted outcomes. It allows managers to adjust for future planning of finances based on the feedback.
3) Why are Record Systems used by Businesses? and what makes them effective?
Record systems are employed to ensure that the data recorded is secure, accurate and reliable.
An effective record system:
- Will improve efficiency (minimise mistakes which cost time - “time is money”)
- Continuously monitors the business’s performance
- Will produce financial reports
- Identifies issues of concern and opportunity and responds quickly to these changes.
4) What do bus. owners have to consider when taking out a loan?
Bus. owners must consider the financial risk, they must also consider:
- The amount of debt affordable
- Cost of borrowing (interest rates)
4) what happeneds if a bus cannot cover their obligations and what are some strategies to reduce this risk?
if a bus is unable to repay loan:
- Legal action
- Repossession of assets to recover loan
- Bankruptcy
Strategies to reduce this risk:
- Credit Controls
- Management of Working Capital
- Hedging
- Taking out Long term loans
- Renogotiating payment terms
5) What are financial controls and what are some examples of controls?
Financial controls are the policies and procedures that ensures the plans of the bus. will be achieved in the most efficient way. –> keeps the business on track.
Controls include:
- Clear authorisation and responsibilities of tasks
- Seperation of Duties
- Control of cash (Cash registers, depositing cash daily)
- protection of assets ( security)
- control of credit
Describe 3 advantages of Debt Finance
1) Funds are readily avaliable and can be acquired at short notice (no need to save large amounts)
2) Flexible payment periods and types of debts are avaliable –> can be paid over certain time period
3) Will not dilute current ownership of the bus. –> Owner retains full control of the bus.
Describe 3 Disadvantages of Debt Finance
1) Debt burden –> regular payments have to be made even if cash flow is low (stress)
2) Debts must be paid with interest –> costs more than you borrowed
3) Secuirty is required by the bus. –> Assests can be repossessed.
Describe 3 Advantages of Equity Finance
1) No Debt Burden –> Less risk for owner
2) Low gearing - uses on equity –> appeals to investors as a save business
3) No Interest repayments –> increase capital gain w/o repayments
Describe 3 Disadvantages of Equity Finance
1) Ownership of the business is diluted –> selling parts of the business
2) Equity hard to obtain / timely –> Limits growth in the S/T
3) More expensive than debt in the L/T –> Dividends must be paid to shareholders.
List the Processes of Financial Mananagement
- Planning and Implementing -
- Monitoring and Controlling (Financial Statements)
- Financial Ratios
- Limitations of Financial reports
- Ethical issues related to financial reports
What do Cash Flow Statements show? and how do they help businesses?
Indicates cash balance position at the end of an accounting period e.g at the end of the month.
Highlights periods of high cash payments and low cash receipts
- Allows bus. to identify problems with cash flow i.e. Liquidity and WC problems
- Cash flow forecasts allow the bus. to plan for these times of too much or too little cash.
What do Income Statements show and why are they important?
Indicates the level of profit (or loss) for a bus. for a particular period.
They are important:
- in evaluating changes in profit level
- In Assessing increases in expenses
- For making comparisons with previous years
- Comparing profits with other businesses.
