Unit 5 Flashcards by Myles Barnett

When someone judges a business what will be the first thing they look at ?

Financial information

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What are the benefits of setting financial information ?

+ they may act as a measure of performance
+ they provide targets which can be a focus for decision making
+ potential investors or creditors may be able to assess the viability of the business

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What is cashflow ?

The difference between the actual amount of money a business receives and the actual amount it pays out

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What is profit ?

The difference between all the sales revenue and expenditure (all costs)

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What are examples of what can cause cashflow problems ?

holding large amounts of inventory (stock)
having sales on long credit periods
using cash to purchase fixed assets

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What is gross profit ?

sales revenue - costs of production

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What is operating profit ?

sales revenue - all costs (including expenses)

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what is profit of the year ?

Operating profit - tax

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What are examples of cash flow objectives ?

. Targets for monthly closing balances
. Reduction of seasonality In sales
. Reduction in bank borrowings
. Targets for achieving payment from customers
. Extension of the businesses credit period to pay suppliers

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What is capital expenditure ?

the money spent on fixed assets (buildings and equipment)

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When does investment occur ?

+ when a business first sets up
+ as a business grows and develops

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What is the calculation for return on investment ?

(Profit from investment / cost of invested) x 100

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What is the capital structure referring to ?

long-term capital of the business

*equity (share capital and *borrowing (loan)

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What is the calculation for gearing ratio ?

(Non- current liabilities / equity + non current liabilities) x 100

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What are the external influences on financial objectives and decisions ?

. competitors actions
. market forces (e.g. changes in taste and fashion)
. Economic factors
. Political factors
. Technology

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What are the internal influences on financial objectives and decisions ?

. Corporate objectives
. Resources available
. Operational factors (qty of labour)

What are income budgets ?

forecasted earnings from sales

What are expenditure budgets ?

Forecasted spending of a business

What are profit and loss budgets ?

calculating the difference between the forecasted sales income and the forecasted expenditure

What is the 3 stage process of setting budgets ?

1). Prepare for income budgets
2). Construct expenditure budgets
3). Forecast profit or loss (by comparing income and expenditure budgets)

What are the main reasons budgets are set ?

. An essential element of a business plan

. Budgets can help businesses to decide whether or not to go ahead with a business idea

. Budgets can help with pricing decisions

what are some difficulties in setting up budgets ?

no historical evidence of the business
a business may lack the experience to estimate costs such as those for raw materials or wages
unexpected actions from competitors (price cuts)

what is a favorable variance ?

occurs when costs are lower than expected or profits are higher than expected

what is an adverse variance ?

when costs are higher than expected or profits are lower than expected =

what are the benefits of budgeting ?

+ targets can be set for each part of the business + inefficiency and waste can be identified + budgets can help improve internal communication + budgets make managers think about the financial implications

what are the drawbacks of budgeting ?

- budgets can be inflexible - budgets have to be accurate to have meaning

what is profit per unit also known as ?

contribution per unit

What is the value of breakeven analysis ?

+ a business can estimate the level of sales required before it would start to make a profit + can support loan applications + estimate profits or losses

What are the drawbacks of breakeven analysis ?

- no costs are truly fixed - sals revenue assumes all output produced is sold at a uniform price

Why is data beneficial for decision making and planning ?

Because data is analytical, scientific decision making can be done

What are the main internal sources of finance ?

. Retained profits . Sales of existing assets . Cut down on stock levels . Share capital

What are the main external sources of finance ?

Shares Bank loans Share capital Bank overdraft Crowdfunding Debt factoring Venture capital Trade credit

What are some cashflow problems ?

Poor management (lack of receivables etc.) Giving too much trade credit Overtrading Unexpected expenditure

What are some methods of improving cashflow ?

Debt factoring (selling debt) Making customers pay on time (less trade credit) Persuading suppliers to offer longer periods of trade credit

What are some methods of improving profits ?

. Increasing prices . Cutting costs of production . Using capacity as full as possible . Increasing efficiency (avoiding waste)

What are some difficulties of improving cashflow ?

- debt factoring will reduce profit margins concerning customers - customers may be put off by reduced credit periods

What are some difficulties of improving profit ?

- increasing prices may attract criticism from customers - cutting costs is likely to result in a fall in the quality of raw materials - increasing efficiency may result in redundancies if technology is introduced