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Business Management > Unit 3 : Finance > Flashcards

Unit 3 : Finance Flashcards

(62 cards)

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1
Q

What is capital expenditure?

A

Capital expenditure refers to money spent on long term or non-current assets that will be of use to the business for extended periods of time

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2
Q

What is revenue expenditure?

A

Revenue expenditure refers to the spending of money on the daily operations of a business - wages,raw materials, rent

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3
Q

What is ratio analysis ?

A

Ration analysis is a quantitative tool in which a company compares differetn financial figures to asses their financial performance and position.

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4
Q

Purpose of ratio analysis

A

To examine a firms financial position
To assess financial performance
To compare actual figures with predicated figures
To aid in decision making

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5
Q

Define gross profit margin

A

GPM shows the value of a companys gross value expressed as a percentage of its sales

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6
Q

How do you increase GPM

A

Increase sales revenue
- cut prices
- reposition the product
- improved marketing strategies

Decrease overheads or expenses
- Find cheaper suppliers of raw materials
- Reduce staffing costs

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7
Q

What is profit margin

A

Profit before interest and tax as a percentage of total sales revenue

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8
Q

How to increase profits

A

Reduce overhead expenses
- discuss preferntial payemtn terms with creditors and suppliers
- negotiate cheaper rent
- Reduce indirect costs

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9
Q

What is ROCE?

A

Return on capital employed
capital employed = total internal sources of finance + long term external sources of finance.
profit before interest and tax/capital employed

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10
Q

What should ROCE be?

A

ROCE > more than interest to show financiers that the organisation will be able to provide returns on the money invested in them

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11
Q

What is the current ratio?

A

Current assets / Current liabilites

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12
Q

What should current ratio be ?

A

Should not be more than 2. Between 1.5 - 2
< 1.5 - current liabilities too much
> 2.0 - misuse of money
should be better invested
too much inventory
too many debtors

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13
Q

What is an acid ratio and what should it be?

A

Current assets - stocks / Current liabilities
Should be 1

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14
Q

Uses of ratios

A

Employees and unions can use it to understand chances for raises and how stable their organisation is
Managers can use it for decision making and to identify problem areas
Creditors can ensure that the org can pay them back
Shareholders - should i invest

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15
Q

Limitations of ratios

A

Usually dependent on historical information may not always be accurate
Changes in external environment are not reflected in ratios
No universal manner or format of presenting - interfirm minsinterpration
Does not ttkae into account qualitaitve factors so cannot solely be used for decision making

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16
Q

What is investment appraisal?

A

A qualitative tool which is used to calculate the financial costs and benefits of an investment decision

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17
Q

What is PayBackPeriod?

A

The time it takes for a firm to make enough profits through a project invested in to pay back the initial cost of investment

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18
Q

PBP formula

A

Initial investment / Contribution per month

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19
Q

What does average rate of return to?

A

Average profit on an investment project expressed as a percentage of the initial investment

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20
Q

What is ARR formula?

A

(Total returns - capital cost) / years of use // capital cost *100

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21
Q

What does the term of sources of finance refer to?

A

refers to how businesses fund their activities

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22
Q

Describe 3 internal sources of finance

A

Personal funds - own money, savings, borrowed ~ sole propritership and partnerships
Retained earnings - reinvesting, no interest, simple and easy

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23
Q

How does share capital work as SOF

A

Share capital refers to the money raised from selling shares in a limited liability company

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24
Q

What is loan capital?

A

Loan capital refers to the money borrowed from commercial lenders ( medium to long term)

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25
What are debentures?
Long term loans issued by the business which allows them to obtain money and pay it back with interest regardless of if the business makes a profit or not. It is similar to share capital but debenture owners have no ownership
26
What is an overdraft?
Overdrafts are financial services that allow businesses to temporarily borrow more money than they have in the bank Helps with cashflow when there is need for a large cash outflow - peak seasonal trading or purchase of machinery DIS - repayable on demand from lender
27
What is trade credit?
Trrade credit is a system that allows people to buy now and pay later.
28
What is crowdfunding?
Raising finance from a large number of indviduals in a short amount of time very regulated usually on online sources of finance
29
What is leasing?
Leasing refers to a form of hiring whereby a contract is agreed upon between a leaser and a lesee upon the lease of a certain asset - land, space, machinery.
30
What is sale-and-leaseback>
When a company sells an assent when in need of funds but then immediately hires it back
31
What is hire purchase?
Lease for a set amount of time with intent to purchase after all payments are done. Asset is legal property of leaser till all payments are over
32
What is microfinance?
Microfinance is a type of financial serive privded to small business, especially women and those on low incomes.
33
Adv and disadv of microfinance
Adv - Makes financial sources more accesible to people who usually do not get loans from bankks - Helps create mployment oppurtunities - Helps increase standard of living Disadv - Risky - they may not always be able to pay back - Unethical - youre profiting off the poor - Eligibility - tough eligibility standards - Microfinance provides only small loans
34
What is a business angel?
Extremely wealthy individuals who choose to invest their own money in businesses that have potential
35
Disadv of business angel
Dilution of control of owner because business angel will take control Might have to buy back the share to regain control
36
What does a business angel consider when investing in a project
Return on investment The business plan People Track record
37
What is a short term source of finance?
those available fo rless than a year used to finance daily day-to-day business operation
38
What is a long term source of finance>
Are those available for more than 12 months used for capital expenditure
39
Factors affecting choice of SOF
SPACED SIZE PURPOSE OF FINANCE AMOUNT COST EXTERNAL FACTORS DURATION
40
What is profit and loss acount?
A statement showing a firm trading activites over a given period of time
41
What does window dressing refer to?
The legal act of creative accounting to make accounts seem more attractive
42
What is a balance sheet?
A balance sheet is a annual financial statmeent that provides infromation about current assets and current liabilities
43
What are assets?
Items of monetary value non current - last for more than 12 months current - likely to be liquidated within 12 months
44
What are liabilities?
A liability is legal obligation to repay lenders the money lent at a different time
45
What is eq- uity?
Refers to the value of the business that is owned by the owners
46
Limitations of balance sheets
- Static documents do not reflect constantly changing figures - Only estimates not completely accurate markets value != book value - no universal format - intangible assets are not included
47
What is branding?
Refers to the connection of tangible and intangible assets to a firm
48
what is patent
Patents provide legal protection to owners, giving them ownership over intellectual property preventing impersonation
49
What is a copyright?
Legal protection for original artists, writers etc.
50
What is goodwill?
Intangible asset which exists when the value of a firm exceeds its book value
51
What are reigstered trademarks?
Distrinctive signs that uniquely identify a brand, a product or a business entity
52
What is liquidity?
Ability of business to convert its curretn assets to cash quickly and easily without a fall in its value
53
What is working capital?
Working capital refers to the funds available to finance the daily operations of a businesses
54
Reasons for cash flow forecasts?
- Assess financial health of a business - Can help amangers anticipate and identify liquidity problems - Facilitate business lanning
55
What is investment?
Investment is the spending of money on capital or productive assets
56
What is overtrading ?
Overagressive methods of growth without the appropriate resources to handle itW
57
What is overborrowing?
The larger the proportion of capital raised through external soruces of finance the higher the cash outlflow on interestpayments
58
Overstocking
Bad inventory management leaves money tied up in stocks leading to money being wasted with no return
59
How to improve cash flow position
Increase cash inflow Decrease cash outflow Source additional sources of finance
60
How can cash inflow be increased
Cash only sales - decreased customer base Tighter credit control - only giving credit to people who can pay it back on time Change pricing policy - cut costs to get rid of exess stocks Improve product portfolio - diversification allows a spreading risks and several sources of cash inflow
61
Hiw can cash outflow be decreased
Seek preferential credit terms Seek alternate suppliers Better stock control Leasing Reduce expenses
62
What can innacurate CFF's be caused by
Incorrect market research Competitior behaviour Human resources - decreased productivty Changing fashions and tastes Economic change External shocks

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