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Business studies > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

What are financial objectives?

A

Monetary targets that a business aims to meet within a certain amount of time
-Return on investment
-Capital structure
-Revenue
-Costs
-Profit
-Cash flow

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2
Q

What’s the return on investment?

A

how much the business makes back from their initial investment

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3
Q

What’s the equation for Return on investment?

A

(operating profit/capital invested) X 100

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4
Q

What’s long term funding?

A

amount of capital that’s been invested in a business and will stay in the business for over a year.

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5
Q

Sources of long term funding

A

-Equity
-Debt

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6
Q

What is gearing?

A

The proportion of long term funding that is debt

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7
Q

What’s the equation for gearing?

A

(Debt/long term funding) X 100

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8
Q

What’s a revenue objective?

A

targets set for the amount of money coming into a business from sales in a set period of time.

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9
Q

What’s a cost objective?

A

limits set for amount of money to be spent on expenditure in a set period of time.

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10
Q

What’s the equation for profit?

A

Revenue-Total costs

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11
Q

What’s a profit objective?

A

Targets sets for the amount of surplus to be achieved in a set period of time

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12
Q

Equation for sales revenue

A

Quantity sold X selling price

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13
Q

Equation for gross profit

A

Sales revenue-cost of sales

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14
Q

What are expenses?

A

All other costs associated with the trading of the business

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15
Q

Equation for Operating profit

A

gross profit-expenses

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16
Q

Equation for Profit for the year

A

Operating profit-interest and taxation

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17
Q

What’s cash flow?

A

The movement of money into and out of a business/

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18
Q

what’s the difference between cash and profit?

A

Cash is the physical existence of money within business

Profit is in financial records when revenue is greater than costs

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19
Q

External influences on financial objectives

A

-Competitors
-Consumers
-Economic conditions
-External environment

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20
Q

Internal influences on financial objectives

A

-Corporate and other functional objectives
-Characteristics of the firm
-Relationship between owners and directors
-Public or private sector

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21
Q

What are budgets?

A

Budgets are forecast of plans for future finances of a business

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22
Q

Examples of a budget

A

-Income
-Expenditure
-Profit

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23
Q

What is an expenditure budget?

A

A limit on the amount to be spent in a given period of time

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24
Q

What’s a profit budget?

A

A target set for the surplus between income and expenditure in a given period of time.

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25
Q

What are the problems with setting a budget?

A

-Dependent upon prediction and forecasts
-Costs are subject to change
-Actions of competitors are unknown
-Managers may lack experience
-Bias
-Takes time and effort

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26
Q

What’s variance?

A

The difference between actual income, expenditure or profit and figure that had been budgeted

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27
Q

What’s adverse variance?

A

Variance that’s bad for business
-expenditure higher than budget
-Income lower than budget

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28
Q

What’s a favourable variance?

A

Variance that’s good for a business
-Expenditure lower than budget
-Income higher than budget
-Profit higher than budget

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29
Q

What are possible causes of variances?

A

-Action of competitors
-Action of suppliers
-Changes in economy
-Internal inefficiency
-Internal decision making

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30
Q

How can variance inform decision making?

A

-Change budgets
-Staff training
-Reward staff
-Change suppliers
-Reallocate budgets
-New marketing tactics
-Review product portfolio

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31
Q

Advantages of budgets

A

-Provides a quantifiable target at which outcomes can be measured
-Informs decision making
-Motivates budget holders due to increased responsibility

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32
Q

Disadvantages of budgets

A

-Potential for conflict
-May be restrictive
-Time consuming

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33
Q

What’s a cash flow forecast?

A

A statement that predicts cash inflows and outflows in the future

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34
Q

What’s a cash flow statement?

A

A statement that shows what happened to cash inflows and outflows

35
Q

Whats the equation for net cash flow?

A

Cash inflows - Cash outflows

36
Q

Whats the equation for net cash flow?

A

Cash inflows - Cash outflows

37
Q

What are cash flow forecasts useful for?

A

-Identify the timing and significance of any potential shortfalls
-Identify possible corrective action
-Help secure finance from investors or the bank
-Give confidence about short term survival
-Provide a guide against which to measure actual cash flow

38
Q

What factors affect cash flow

A

-Transaction types (sales, purchases, payment terms)
-Timings of cash flows (Seasonal sales, Timings of payments in and out)
-Nature of the business (start-up capital and costs, time taken from input to output, stock holdings)

39
Q

What might a business do if cash inflows are too slow?

A

-offering discounts for early payments
-Penalties for late payments
-Chase customers for payment

40
Q

What’s a receivable?

A

Money a business is owed from customers

41
Q

What might a business do if cash outflows are too quick?

A

Negotiating longer payment terms from suppliers

42
Q

What’s a payable?

A

Money a business owes to suppliers

43
Q

What are the causes of cash flow problems

A

-Credit sales
-Overtrading
-Internal management
-Seasonality
-Unexpected events

44
Q

How can a business improve cash flow?

A

-Increasing the volume of the inflow of cash
-Speeding up the timing of the inflow of cash
-Reducing the volume of outflows
-Slowing down the timing of outflow of cash

45
Q

How can a business improve cash inflows?

A

-Overdrafts
-Short term loan
-Debt factoring-selling a business’ debts
-Selling assets
-Sale and leaseback-turing an asset into cash while still being able to use it through a lease agreement
-Cash payments from customers
-Credit control-process of chasing payments from debtors

46
Q

How can a business improve outflows?

A

-Delaying payment to suppliers
-Stock management
-Reduce overhead spending

47
Q

What are the difficulties fo improving cash flow?

A

-Damage to firm’s reputation
-Potential loss of customers
-Administrative costs and time
-Loss of discounts or need to offer discounts
-May affect profitability

48
Q

What is break even?

A

The point at which the business isn’t making a profit or loss

49
Q

What’s break even output?

A

The number of items that must be sold to reach break even point

50
Q

What’s the equation for contribution per unit?

A

Selling price per unit - variable cost per unit

51
Q

Whats the equation for contribution?

A

Selling price - variable costs

52
Q

What’s the equation for total contribution?

A

Total sales revenue - total variable costs

53
Q

What’s the equation for break even point?

A

Fixed costs/contribution per unit

54
Q

What’s margin of safety?

A

How much actual output is above break even level of output

55
Q

What are the strengths of break even?

A

-Allows business to know the minimum number of sales before making a profit
-Calculate the level of profit or loss at different levels
-Predict outcomes of changing variables
-Provides a target
-Integral for business planning
-Aids decision making

56
Q

What are the weaknesses of break even?

A

-Based on predicted costs and revenues
-Fixed costs may vary in the long run
-Ignores changes in variable costs or selling price
-Only indicates the number of sales needed

57
Q

What does profitability mean?

A

Measures the financial performance of a business by comparing profits achieved to a second variable

58
Q

What are the 3 profitability ratios in Finance?

A

-Gross profit margin
-Operating profit margin
-Profit for the year margin

59
Q

What’s the equation for gross profit margin (GPM)?

A

(Gross profit/sales revenue) X 100

60
Q

What’s the equation for operating profit margin (OPM)?

A

(Operating profit/sales revenue) X 100

61
Q

What’s the equation for profit for the year margin?

A

(Profit for the year/sales revenue) X 100

62
Q

How can business improve profits/profitability?

A

-Sell product for a higher price
-Sell more at the current price
-Sell the same at the same price but reduce costs

63
Q

What’s the difference between internal and external sources of finance?

A

Internal-money from within the business
External-money from outside the business

64
Q

What are some examples of sources for finance?

A

-Debt factoring
-Overdrafts
-Retained profits
-Share capital
-Loan
-Venture capital

65
Q

What’s debt factoring?

A

The process of selling the debts owed to a business to a financial institution
The business receives funds immediately however at a reduced rate

66
Q

Pros of debt factoring

A

-Receives large amount of debt immediately
-Good source of short term finance to address cash flow problems
-Debts are chased by experts saving managers time
-Reduces the risk of bad debts

67
Q

Disadvantages of debt factoring

A

-Reduces profitability of the firm
-May damage the reputation of the firm as they’re seen to be in need of short term finance

68
Q

What’s an overdraft?

A

The ability to overspend on an account up to an agreed sum
(bank account goes below zero or minus numbers)

69
Q

What are the pros of overdrafts?

A

-Only borrowed when required (flexible)
-Only pay for the money borrowed
-Quick and easy to arrange
-No charges for paying off the overdraft

70
Q

What are the disadvantages of overdrafts

A

-The bank can call it any time
-Only available from your current bank account
-Interest payments tend to be variable making it harder to budget
-Banks may secure the overdraft against business’ assets

71
Q

What’s retained profit?

A

Profit kept within a business

72
Q

Pros of retained profit

A

-Avoids interest payments
-Doesn’t dilute the business ownership

73
Q

Cons of retained profit

A

-Only an option if the profits exist within the business
-May cause shareholder dissatisfaction
-Reduces the security blanket of keeping retained profit

74
Q

What’s share capital?

A

Finance raised from the sales of shares

75
Q

Pros of share capital

A

-Only need to pay dividends if a profit is being made
-Possible to raise large amounts of finance
-No interest payment

76
Q

Cons of share capital

A

-Loss of ownership as shareholders are part owners
-Potential risk of loss of control for a PLC
-Complex and costly process if issuing shares

77
Q

What’s a loan?

A

A set amount of money provided for a specific purpose to be repaid later with interest

78
Q

Pros of loans

A

-Quick and easy to secure
-Fixed interest rates allow firms to budget
-Improved cash flow
-The borrower retains ownership of the company

79
Q

Cons of loans

A

-Interest must be paid regardless of financial -performance
-A highly geared firm may be seen as high risk
-Collateral is normally provided
-Often more expensive than other forms of finance
-Can be charged a penalty for early payment

80
Q

What’s venture capital

A

Investment from an established business into another business in return for a percentage equity in the business

81
Q

Pros of venture capital

A

-Potential for large sums of money
-Expertise to help the business
-Makes it easier to attract other sources of finance
-Provides the required capital for expansion

82
Q

Cons of venture capital

A

-Long and complex process
-Expert financial projections are likely to be required
-Initially expensive for the firm
Partial loss of ownership
-Risk of conflict or perceived interference

83
Q

What’s crowdfunding?

A

Involves raising finance from a large number of people each investing different, often small amounts of money

Business studies (11 decks)

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