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Processes of Financial Management Flashcards

(68 cards)

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1
Q

What are the 5 steps involved in Financial Planning and Implementing

A
  1. Determining Financial Needs
  2. Developing Budgets
  3. Maintaining Record Systems
  4. Identifying Financial Risks
  5. Establishing Financial Controls
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2
Q

Financial Needs

A

Identifying financial actions that need to be taken to achieve specific outcomes

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3
Q

What are financial needs determined by?

A
  1. Size of the Business
  2. Current Phase of the Bus. Cycle
  3. Future Plans for Growth and Development
  4. Capacity to source debt and/or equity finance
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4
Q

Examples of Financial Needs

A
  • Purchase new equipment
  • Renting a new premesis
  • Hiring new staff
  • Changing the marketing mix
  • Increase in utility bills
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5
Q

Budgets

A

Provide information in quantitative terms to achieve a particular goal

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6
Q

What do Budgets show?

A
  • Cash required to achieve goal
  • Cost of capital and other expenses against their potential earning capacity
  • Cost of raw materials
  • # and cost of labour hours required for production
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7
Q

Potential Earning

A

How much money borrowed is going to make in return

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8
Q

Operating Budgets

A

Relate to the main activities of a business such as raw materials and production.

Keeping day-to-day running of the business

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9
Q

Project Budgets

A

Relate to the more strategic goals such as capital expenditure & research and development.

Weigh costs of expenses against potential revenue

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10
Q

Financial Budgets

A

Relate to the financial data of a business. Includes a combination of financial statements such as:
- Income Statement
- Cash Flow Statement
- Balance Sheet

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11
Q

Record Systems

A

Systems used by a business to record & file all data

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12
Q

What should record systems be?

A

Accurate, Reliable & Accessible -> ensures that managers are able to make informed decisions based on past data

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13
Q

Financial Risk

A

The risk of being unable to cover its financial obligations

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14
Q

Financial Control

A

Policies and procedures that ensure that parts of the plans of business will be achieved in the most efficient way.

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15
Q

Policies of Financial Control

A
  • Separation of Duties
  • Rotation of Duties
  • Control of Cash
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16
Q

Cashflow Statements

A

Indicate the movement of cash receipts & cash payments from transactions over a period of time

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17
Q

What is the purpose of cash flow statements?

A

Potential investors can assess a business’s cashflow, or finance managers can identify trends and cashflow problems

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18
Q

What are the three main areas of cash flow?

A
  • Cashflow from Operating Activities
  • Cashflow from Investing Activities
  • Cashflow from Financing Activities
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19
Q

Operating Activities (Cash Flow)

A

Inflows & outflows relating to the main activity of the business

Inflows: Sales (cash & credit)
Outflows: Payment to suppliers, wages

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20
Q

Investing Activities (Cash Flow)

A

Inflows & outflows relating to the purchase and sale of non-current assets and investments

e.g: buying and selling vehicles, property, equipment

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21
Q

Financing Activities (Cash Flow)

A

Inflows & outflows relating to the debt and equity financing of the business

Inflows: Capital contribution, shares, loans
Outflows: Repayment of loans

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22
Q

Opening cash flow

A

Opening Cash Flow = Opening Balance + Cash Inflow - Cash Outflow

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23
Q

Income Statements

A

A summary of the income earned, expenses incurred and the final net position of a business over a certain period of trading

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24
Q

Cost of Goods Sold

A

COGS = Opening Stock + Purchases - Closing StockF

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25
Gross Profit
Gross Profit = Sales - COGS
26
Net Profit
Net Profit = Gross Profit - Expenses
27
Balance Sheets
Show the financial stability of a business at any given point in time, displaying assets and liabilities
28
Accounting Equation
Assets = Liabilities + Owners Equity (ALOE)
29
Assets
Items that can be given a monetary value that the business owns
30
Current Assets
Value expected to turn over within 12 months e.g: Accounts receivable, cash, inventory
31
Non-Current Assets
Items with an expected life of 1-5 years or more e.g: buildings, land, machinery, vehicles
32
Liabilities
Items of debt owed to other organisations
33
Current Liabilities
Items of debt that are expected to be repaid within 12 months e.g: Accounts payable, Overdraft, short-term loans
34
Non-Current Liabilities
Items of debt that are repaid over a period of time greater than 12 months e.g: mortgage, loans, leases
35
Liquidity
The extent to which the business can meet its financial commitments in the short term ( < 12 months)
36
Current Ratio (Financial Ratio)
Current Ratio = Current Assets / Current Liabilities
37
Liquidity - Rule of Thumb (Financial Ratio)
Should aim for 1:1 OR 2:1 < 1:1, not liquid enough -> cannot satisfy short-term debts > 2:1, too liquid -> consider investing
38
Solvency
The ability of a business to meet its financial obligations in the long term
39
Gearing
The proportion of debt finance & equity finance that is used in the business's overall finance
40
If a business had more borrowed funds than contributed funds, what does it mean?
There is less certainty that a business's long-term debt can be repaid
41
If a business had more contributed funds than borrowed funds, what does it mean?
There is more certainty that a business's long-term debt can be repaid
42
Debt-to-Equity Ratio
Debt-to-Equity Ratio = Total Liabilities / Total Assets
43
Profitability
Earning performance of a business & an indication of its ability to use resources to maximise profits
44
Gross Profit Ratio
Indicates what % of overall sales revenue has resulted in gross profit Gross Profit Ratio = Gross Profit / Sales
45
Net Profit Ratio
Indicates what % of overall sales revenue has resulted in net profit Net Profit Ratio = Net Profit / Sales
46
Return on Equity Ratio
Shows the effectiveness of owner equity in generating profit for the business Return on Equity Ratio = Net Profit / Total Equity
47
Return on Equity - Rule of Thumb
- 10% = not bad - 15% = good - Higher ratio = better return for owner + High % will attract investors
48
Efficiency
the extent to which a business uses its resources to achieve profit maximisation.
49
Expense Ratio
Total Expenses / Sales
50
Accounts Receivable Turnover Ratio
Sales / Acc. Receivable
51
Average Length of Time for Debts to be Paid
365 / Acc. Receivable
52
Comparative Ratio Analysis
Indicates a business's financial wealth & identifies areas for improvement
53
Comparing Overtime
Ratios can be used to compare a business's current results with previous performance to identify trends
54
Comparing to a Budget
Financial figures can be compared with predicted/budgeted figures to assess and measure whether or not performance is hitting expectations
55
Comparing to Competitors
Compare current results against key competitors to give the business an idea of its performance in the market
56
Comparing to Industry Standards
Compare current results against standards developed for a particular industry -> benchmarks
57
Normalised Earnings
Processes of removing one-time/unusual influences from the balance sheet to show the true earnings of a company (e.g: removal of land sale -> large capital gain)
58
Capitalised Expenses
Process of adding capital expense to the balance sheet, to be regarded as an asset
59
Valuing Assets
The process of estimating the market value of assets/liabilities
60
Discounted Cash Flow Method
A type of method used for valuing assets: Estimates the value of an asset based on future cash flows which are discounted to the present
61
Guideline Company Method
A type of method used for valuing assets: Determines the value of a firm by observing the prices of similar companies that sold in the market
62
Timing Issues
Financial reports cover activities over a period of time, therefore the business's financial position may be inaccurate and therefore misrepresented
63
Debt Repayments
Financial reports can be limited as they cannot disclose information on debt repayment such as: - How long had/has been recovering the debt - Capacity of the business/debtor to repay
64
Notes to Financial Statements
Notes have additional information that is left out of the main documents
65
Australian Securities & Investments Commission (ASIC)
the official regulating body that enforces business laws to protect investors
66
Audited Accounts
An independent check of the accuracy of financial records and accounting procedures
67
Record Keeping
Accurately record transactions by providing receipts & invoices
68
Reporting Practices
Provide reports to investors & other stakeholders about the business's financial position

Business - Finance (4 decks)

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