Unit 5 Flashcards
(74 cards)
1
Q
financial objective
A
all types of businesses must have profit as a financial objective
2
Q
key financial objectives
A
- Profit = targets for revenue & costs
- Cash flow
- Return on investment
- Capital structure
3
Q
return on investment meaning as an objective
A
meaning how much profit is made from an investment?
4
Q
capital structure meaning as an objective
A
meaning where is the capital or funding coming from?
5
Q
what are the 3 types of profit?
A
- gross profit
- operating profit
- profit for the year
6
Q
what is the equation for gross profit?
A
revenue - cost of sales
7
Q
what is the equation for operating profit?
A
gross profit - expenses
8
Q
what is the equation for profit of the year?
A
operating profit - tax
9
Q
what is cashflow?
A
the amount of money available in the business’ bank account to pay for its day-to-day expenses
10
Q
cashflow as an objective
A
A positive cash flow enables a business to pay their suppliers & lenders & avoid the risk of being taken to court & put into liquidation
11
Q
equation for cashlow
A
cash inflow - cash outflow = net cashflow
12
Q
equation for profit
A
revenue - total costs
13
Q
links between profit and cashflow
A
- Revenues eventually turn into cash inflows
- Costs eventually turn into cash outflows
- A business with a consistently negative cash flow is unlikely to make a profit
14
Q
return on investment as an objective
A
Return on investment measures the profit made as a % of the initial investment
15
Q
equation for return of investment
A
(profit made from investment / cost of investment) x 100
16
Q
2 main capital sources
A
- shareholders
- banks
17
Q
capital structure as an objective
A
- shareholder= equity
- banks = debt
18
Q
why is equity safe?
A
- capital obtained from the sale of shares doesn’t have to be repaid
- doesn’t make a profit no dividend is due to shareholders
19
Q
why is debt dangerous?
A
- loan must be repaid with interest whether the business has enough cash flow or not
- bank can take court action = risk of liquidation
20
Q
ideal capital structure
A
less than 50% of a business’ capital should come from banks
21
Q
equation for gearing
A
(loan capital / total capital borrowed) x 100
22
Q
benefits of having clear financial objectives
A
- Specific & measurable way of assessing success or failure
- clear targets for managers to achieve
- used to reward managers for achieving these targets (bonus payments)
- Enables shareholders to anticipate how much dividend they will receive & to compare the return on investment with other investment options
23
Q
what is a budget in measuring financial performance?
A
financial plan for the future anticipating the revenues, costs & profit of a business
24
Q
budgets
A
budget shows forecasted (planned) & actual figures for revenue, expenses & profit
25
calculating budgets
means calculating & investigating the differences between actual results & the budgeted figures
26
what is a variance?
is a difference between an actual & a budgeted figure
27
equation for variance
budgeted figure - actual figure
28
favourable variance
better than expected
e.g. costs lower than expected
e.g. revenue/profits higher than expected
29
adverse variance
worse than expected
e.g. costs higher than expected
e.g. revenue/profits lower than expected
30
example of an adverse variance ending in good result
higher production costs than budget (adverse variance) due to sales being significantly higher than budgeted (favourable budget)
31
managing cashflow
A cash flow forecast is a budget* for the cash flowing into & out of a business’ account over a period of time.
32
what is liquidity
Liquidity is the amount of cash available in a business’ bank account
33
key words in cash flow forecast
- Net cash flow
- Opening balance
- Closing balance
34
value of cash flow forecasts
- show a surplus of cash which could be invested or used for expansion
- show cash flow issues= will the business run out of cash?
- manage cash flow issues by taking actions: get an overdraft, a loan or change timings of cash outflows
35
what are receivables?q
money owed to the business by customers who haven’t paid their invoice yet (future cash inflows)
36
what are payables?
money the business owes to its suppliers (future cash outflows)
37
solving unexpected cashflow problems
- Ask for or increase an overdraft
- Apply for a short-term loan
- Debt-factoring
38
what is debt factoring?
when a business sells its accounts receivables to a third party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms.
39
pros of debt factoring
- A quick way to turn receivables into cash
- Avoids having to borrow money
- It is not a debt
- No need to chase customers for payment
40
cons of debt factoring
- This service has a cost (% of the receivables &/or a fee)
- Some customers may disapprove of having to deal with a debt factoring company
41
contribution per unit
contributes towards paying for the fixed costs
42
equation for contribution per unit
selling price - variable cost
43
total contribution
- the contribution from all the units sold
- pays for the fixed costs. Any overflow is profit
44
equation for total contribution
actual output x contribution per unit
45
what id break even?
the production level at which total revenues equal total expenses.
46
break even equation
fixed cost / contribution per unit
47
or break even equation
fixed cost / (selling price - variable cost)
48
what is margin of safety?
the difference between the actual output & the break even point.m
49
margin of safety equation
Actual output - breakeven output
50
comparing profitability
compare profit with sales
51
equation for profit margins
(Profit* / Sales revenue) x 100
52
assessing profit margins
- Compare the figure with previous year(s)
- Compare the figure with competitors
53
improving profit
- Increase sales
- Reduce fixed costs
- Reduce variable costs
54
how to increase sales
- Increase promotions
- Reduce price (if -1
55
how to reduce fixed costs
- Find cheaper premises
- Reduce staff number
- Replace staff by machines
- Increase capacity utilisation
56
how to lower variable costs
- Find cheaper suppliers
- Find ways of achieving purchasing economies of scale (bulk buying)
57
internal sources of finance
- Retained profit
- Sale of asset(s)
58
short term external sources of finance
- Overdraft
- Trade credit
- Debt factoring
59
long term external sources of finance
- Bank loan
- Venture capital
- Crowdfunding
- Share capital
60
criteria for choosing source of finance
- available to the business? (sole trader, Ltd or Plc)
- Amount needed
- interest
- Risks
- Impact on control of the business
- Long vs short term impact
61
pros of selling fixed assets
- no interest
- no control given up
- quick form of cashc
62
cons of selling fixed assets
-finite
- risk of not receiving value and buyer
63
pros of overdraft
- quick and simple to organise
- bespoke to business
- no control given up
- short term debt not included in gearing ratio
64
cons of overdraft
- interest = costs
- bank has power to cancel overdraft
- consistent use of overdraft can damage credit rating
65
pros of trade credit
- simple to arrange and maintain if meet terms
- cheap form of short term finance
-no control given up
66
cons of trade credit
- risk of spoiling relationship with supplier if terms not met
- late fines
67
pros of bank loans
-keep control
- bespoke to business needs
- frequent repayments may improve credit score
68
cons of bank loans
- assets taken is not payed
- no flexibility
- risk credit score
- gearing increased
69
pros of crowdfunding
- no repayments
- exposure of business = marketing
- good feedback = large amount of investors align with business
70
cons of crowdfunding
- profits shared
- risk of business reputation
- limited expertise of investors
70
pros of venture capital
- no repayment
- reduce personal risk
- venture capitalists provide expertise
71
cons of venture capital
- control given
- venture capitalists looking to exit as wants money
72
pros of new share issue
- no interest
- if plc can raise large amount of finance
- employee incentive
73
cons of new share issue
- give up share of business
- dividends
- take over risk
- flotation to become plc
