teacher 1 - task 11 Flashcards
(28 cards)
What is cash
The money the business holds in physical form as well as money in electronic form
2 examples of cash
- money in the till
- cash in a business bank
What is profit
Profit is a calculation
TR - TC
Two ways to increase profit
- Increase total revenue
- decrease total costs
Why are cash and profit not the same thing
Because they act different, somethings can affect cash but not profit and vice versa
Example why cash and profit aren’t the same
Business takes out a loan
- Cash increases
- TR and TC stays the same - profit doesn’t change
—> because haven’t sold anything and costs loan hasn’t been needed to pay yet …
What is one of the biggest reasons a business fails
It runs out of cash. doesn’t mean they aren’t profitable, but they run out of cash and can’t pay wages and suppliers
Lack of profit (eg losses) is like a cancer
it will kill you slowly
lack of cash is like a heart attack
It will kill you quickly
What does cash give you
Cash gives you power over your resources, you can actually do something
cash cycle definition
the time it takes between the outflow of cash to pay for labour and raw materials, and the receiving of cash from the sale of the product
example of long cash cycle
shell oil company, have a long cash cycle, can take years to discover and retrieving oil and gas
therefore, important for shell to manage its cash carefully so it doesn’t run out
companies with cash flow objectives
oil companies - have a long cash cycle
banks - need cash otherwise cannot give loans and lend and then bank fail
expanding businesses - need cash to purchase increasing inputs (labour and raw materials, capital…)
investment
the purchase of assets such as property, vehicles and machinery that will be used for a considerable time by the business
non-current assets
items that a business owns and which it expects to retain for one year or longer,
e.g property and vehicles
capital expenditure
spending undertaken by businesses to purchase non-current assets, it is another term for investment
return on investment calculation
profit from investment
——————————————- x100
capital invested in the project
capital structure
refers to the way in which a business has raised the capital it requires to purchase its assets
Businesses with capital structures with high levels of borrowing (50% +)
are at risk of rising costs if interest rates rise.
internal factors affecting financial objectives and decisions
- overall business objectives, profit maximisation -> objective could be cost minimisation
- nature of the product sold, shell oil -> cash flow objective cause long cash flow
- objectives of senior managers, hold large number of shares so increase profit could be an objective
External factors affecting financial objectives and decisions
- competitive environment
- economic environment
- technological environment
- political and legal environment
how does the competitive environment affect financial objectives
shop industry, competitor drops prices, financial objective could be to decrease costs to produce to also drop prices
how does economic environment affect financial objectives
if a business is having difficulty in raising capital because bad economic environment then financial objectives are more likely centred on profits
how does technological environment affect financial objectives
advancements in technology allow for an overall costs minimisation, don’t need a cashier anymore etc …
so financial objective would be increase technology decrease costs and increases long term profits
