Unit 5: Finance Flashcards
(133 cards)
1
Q
Name 5 types of financial objectives
A
- revenue obj
- cost obj
- profit obj
- cash flow obj
- objectives for investment
- return on investment obj
- objectives relating to debts as a proportion of loans by long-term funding
2
Q
Give 3 benefits of setting financial objectives
A
- acts as focus for decision making and effort
- key context for making investment decisions
- reduced risk of business failure
- helps co-ordinate the different business functions
- important measure of success/ failure
3
Q
Give 3 difficulties in using financial objectives
A
- external changes may affect ability to achieve financial objective
- certain objectives may be difficult to measure accurately
- financial objectives may conflict
4
Q
What are the three major forms of revenue objectives
A
- sales maximisation
- targeting a specific increase in sales revenue
- exceeding the sales of a competitor
5
Q
Give 3 cost minimisation objectives
A
- achieving a certain cost reduction in the purchase of raw materials
- reducing wage cost per unit
- lowering levels of wastage
- relocating a business to a ‘least-cost’ site
- improving efficiency of production
6
Q
Give 3 benefits of cost minimisation
A
- lower unit costs (competitiveness)
- higher gross profit margin
- higher return investment
- improved cash flow
7
Q
What are the 3 main profit targets
A
- profit maximisation
- targeting a specific increase in profit
- exceed industry/ market profit margins
8
Q
Why is setting profit maximisation difficult to set
A
It’s hard to know if it’s been achieved
9
Q
Give an example of a cash flow objective
A
- spreading costs more evenly
- reduce amount held in inventories
- reduce bank overdraft by a certain sum by end of the year
10
Q
How do you calculate return on investment
A
Financial gain from investment - cost of investment
11
Q
How do you calculate return on investment as a percentage
A
(Return on investment ÷ cost of investment) x 100
12
Q
What 4 things should return on investment enable a business to recognise
A
- trends in financial performance
- changing levels of return for activities
- the total level of investment it should undertake
- the relative financial returns on different investments
13
Q
Give 3 factors that influence investment decisions and objectives
A
- expected return on investment
- interest rates
- attitude to risk/ org confidence
- nature of production
- expected demand
- availability of finance
14
Q
What is debt capital and give an example
A
Borrowed funds such as bank loans or debentures
15
Q
What is debentures
A
When external sources provide funding to a business in return for regular fixed interest payments and an agreed repayment date. This is usually for a long period of 10 years or longer
16
Q
What is equity capital
A
Funds provided by shareholders
17
Q
What’s more risky debt capital or equity capital
A
Debt capital because it has to be repaid
18
Q
Give 2 reasons why high level of debt could be an objective
A
- interest rates are very low and therefore cheaper than dividends
- profits and cash flow strong so debts can be repaid easily
19
Q
Give the 2 reasons for higher equity in capital structure
A
- there’s a greater business risk
- more flexibility is required
20
Q
What’s the equation for debts as a proportion of long term funding
A
(debts ÷ long term funding) x 100
21
Q
Give 3 internal influences on financial objectives
A
- business objectives
- finance
- HR
- operational factors
- available resources
- nature of product
22
Q
Give 3 external influences on financial objectives
A
- PESTLE
- market factors
- competition
- suppliers
23
Q
Give 3 examples of cash inflows
A
- The receipts of cash (typically from sales of products)
- payments by trade receivables
- Loans received
- Sale of assets and interest received
24
Q
Give 3 examples of cash outflows
A
- payments of cash
- payments to creditors
- loans repaid/ given
- purchase of assets
25
Give two reasons why profitable firms may be short of cash
- the firm has built up its inventory levels
- firm’s sales is on credit
- firm has used its profit to pay dividends to shareholders or repay long term loans
- company has purchased non-current assets
26
What are the 3 key measures of profit
- gross profit
- operating profit
- profit of the year
27
What does gross profit show
How efficiently a business is converting raw materials into finished products
28
What is regarded as the best measure of profit
Operating profit
29
What is profit of the year
Profit that is left after the tax has been accounted for
30
Which measurement of profit is useful to shareholders
Profit of the year
31
What is a budget
A financial plan for the future based on estimates of income and expenditure
32
Give 4 uses of budgets in management
- establish priorities and set targets
- forecast outcomes
- allocate resources
- improve efficiency
- control income and expenditure
- provide direction and coordination
33
What are the 4 principles of budgeting
- managerial responsibilities are clearly defined
- performance is monitored against the budget
- corrective action taken if results differ significantly from the budget
- unaccounted for variances are investigated
34
What is the historical budgeting approach
The use of last years figures as a basis of budget
35
What is an advantage and a problem with the historical budgeting approach
**Advantage**: realistic bc it’s based on actual results
**Problem**: circumstances may have changed and doesn’t encourage efficiency
36
What is the zero budgeting approach
Costs and revenue is set to zero and the budget is based on new proposals for sales and costs
37
What is a problem with the zero budgeting approach
It makes budgeting more complicated and time consuming
38
What are the 3 types of budgets
Income/revenue/sales budget
Expenditure/cost budget
Profit budget
39
Give 3 costs that can be found in expenditure budgets
- raw materials
- labour costs
- capital costs
- rent
- marketing expenditure
- administration costs
40
What is a capital budget and name 3 costs in it
A budget for a new business or project
- construction costs
- premises
- legal costs
- furniture/office equip
- insurance
41
What should you take into consideration when analysing the market
- market size and growth
- market share
- market prospects
42
What should you take into consideration when making the sales budget
- sales forecast
- new products
- pricing changes
43
What should you take into consideration when making the costs budget
- the sales budget
- changes in supplier’s prices
- contingencies
44
What is a variance
The difference between budgeted and actual figures
45
Give 2 possible causes of a favourable variance
- stronger market demand than expected
- selling price increased higher than budget
- cautious sales and cost assumptions
- competitor weakness led to higher sales
46
Give 2 possible causes of an adverse variance
- unexpected events leads to unbudgeted costs
- overspends by budget holders
- sales forecast proves over optimistic
- effects of market conditions
47
What do adverse variances indicate
- may indicate inefficiency
- may indicate external influences making it more difficult to meet objectives
48
What do favourable variances indicate
- may indicate efficiency
- may indicate external influences making it easier to meet objectives
49
give 3 things the significance of a variance depend on
- was the variance foreseen
- size
- cause
- whether it’s a temporary problem or a result of a long term trend
50
Give 4 reasons for setting budgets
- to ensure the org doesn’t overspend
- to turn obj into practical reality
- to gain financial support
- to improve efficiency
- allocate resources
- establish priorities and set targets
51
Give 3 problems with setting budgets
- managers may not know enough about the division/department
- unforeseen changes will undermine process
- budgets are only as good as the data being used
- can lead to inflexibility in decision making
- takes time to complete, manage and review
52
Give a behaviour implication of setting budgets
- demotivating if it’s imposed rather than negotiated
- unrealistic targets are demotivating
- can lead to departmental rivalry
53
Give 3 features of a good budget
- monitored at regular intervals
- consistent with aims of business
- based on opinion of many ppl
- flexible
- challenging but realistic targets
54
Give 3 causes of cash flow problems
- low profits/losses
- too much production capacity
- excessive inventory held
- allowing customers too much credit/ too long to pay
- seasonal demand
- overtrading - growing business too fast
55
Name 3 sources to compile a cash flow forecast
- previous cash flow forecasts
- cash flow statements
- consumer/ market research
- banks
- consultants/national enterprise network advisors
- early drafts of the cash flow forecast
56
What are the key items in a cash flow forcast
- cash inflows
- cash outflows
- net cash flow
- opening balance and closing balance
57
How do you calculate closing cash balance
Opening cash balance + net cash flow
58
why are cash flow forecasts valuable
cash flow forecasts enables the org to foresee times in the future when the org will be short of liquidity. If shortages are anticipated far enough in advance the other may be able to take measures to prevent it from occurring
59
Give 3 benefits of forecasting cash flow
- identifying potential cash flow problem in advance
- guides from towards appropriate approach
- provides evidence in support of request for financial assistance
- identify possibility of holding too much cash
- makes sure there’s sufficient cash available to pay suppliers and make other payments
60
Give 3 thing that can negatively impact the cash flow forecasts
- changes in economy
- changes in consumer taste
- inaccurate market research
- competition
- uncertainty
61
What is breakeven
The point at which revenue and total costs are the same
62
Contribution ignores variable cost
TRUE or FALSE
False - it ignores fixed costs
63
What does contribution look at
The profit made on individual products
64
How do you calculate contribution per unit
Selling price per unit - variable cost per unit
65
What is total contribution
The difference between total revenue and total variable costs
66
What are the two ways to calculate total contribution
1) contribution per unit x number of units sold
2) sales revenue - total VC
67
What are the 4 assumptions of breakeven analysis
- the selling price remains the same regardless of number of units sold
- fixed costs remain the same regardless of number of units of output
- VC vary in direct proportion to output
- every unit of output that is produced is sold
68
How do you calculate break-even output
Fixed costs ÷ contribution per unit
69
Where is the breakeven point on a chart
Where the total revenue and total costs cross over
70
What is the margin of safety
Difference between actual output and breakeven output
71
How do you calculate margin of safety
Actual output - breakeven output
72
Does a change in output have an impact on breakeven output
No
73
How do you calculate target profit output
(Fixed costs + target profit) ÷ contribution per unit
74
Give 3 strengths of breakeven analysis
- calculations quick and easy
- orgs can use it to assess whether a project/product is viable by seeing the level of output needed to make a profit
- business can use it to determine the most profitable price
- indicates level of risk involved
- illustrates importance of keeping FC to a minimum
- useful to know when to expect to reach profit level bc it can help an org get financial support
75
Give 3 weaknesses of breakeven analysis
- info may be unreliable
- sales unlikely to be same as output
- in practice, the selling price may change as more is sold
- fixed costs won’t stay the same as output changes
- most businesses sell more than one product
- assumes VC per unit are always the same but ignores factors like bulk buying
76
What does profitability mean
The ability of a business to generate profit or the efficiency of a business in generating profit
77
Give two useful insights of profitability ratios
- if the business is making profit
- how efficient is the org at turning revenues into profits
- how does the profit achieved compare with the rest of the industry
78
How do you calculate gross profit margin
(Gross profit ÷ revenue) x 100
79
How do you calculate operating profit margin
(Operating profit ÷ revenue) x 100
80
How do you calculate profit for year margin
(Profit for year ÷ revenue) x 100
81
What comparisons should business make to draw conclusions about profitability
- comparisons to competitors
- comparisons over time
- comparison to a standard
82
What is working capital
The amount of money needed to meet everyday financial obligations (the difference between current assets and current liabilities)
83
What is the working capital cycle
The length of time it takes for a firm to convert into net current assets and labilities to cash
84
How do you calculate the length of working capital cycle
(Length of time goods held as inventories + time taken for receivable to pay) - period of credit received from payables
85
From a cash flow perspective, what does the ideal working capital situation look like
- holding low inventory levels that sell quickly
- receivables paying their debt very quick
- payables allowing orgs a long period of time to pay for the items supplied
86
What factors influence the length of time goods are held as inventories
- nature of product
- competition
87
What factors influence the time taken for receivables to pay
- bargaining power
- type of product
88
Give two ways to manage amounts owed by customers
- cash discounts for prompt payments
- credit control (policies)
- improve record keeping
89
Give two ways to manage amounts paid to suppliers
- use trade credit
- delayed payments - have to be careful with doing this
90
Give two ways to manage inventory
- keep smaller balances
- should computerise ordering to improve efficiency
91
Give two ways to improve cash position in the short term
- reduce current assets
- increase current liabilities
- sell surplus fixed assets
92
Give two ways to improve cash position in the long term
- increase equity finance
- increase long term liabilities
- reduce net outflow on fixed assets
93
What is management accounting
The creation of financial info for use by internal users in the organisation to predict, plan, review and control the financial performance
94
What is financial accounting
The provision of financial info to show external users the financial position of the org; concentrates on historical data
95
Give 4 examples of management accounting data
- revenue, cost and profit objectives
- decision trees
- investment data
- capital structure data and sources of finance
- cash flow forecasts and their outcomes
- budgets and their incomes
- breakeven charts
96
Give 3 examples of financial accounting data
- cash flow statements
- data on profitability
- capital structure data and sources of finance
- income statements
- balance sheets (SOFP)
97
What are the 3 things finance is needed for
- business set up
- day to day trading
- growth and development
98
Is a long term source of finance ideal for capital expenditure or revenue expenditure
Capital expenditure
99
What type of source of finance is debt factoring
External source of short-term finance
100
What is debt factoring
A financial arrangement in which a business sells its receivables to a third party business
101
Give 2 advantages of debt factoring
- improved cash flow in short term
- lower administration costs
- reduced risk of bad debts
- increased efficiency (can encourage orgs to be more careful w/ their provision of credit)
102
Give 2 disadvantages of debt factoring
- loss of revenue
- high costs (have to pay factoring company for its service)
- customer relations problems
103
What type of source of finance is a bank overdraft
External source of short term finance
104
What are 2 advantages of bank overdrafts
- extremely flexible and relatively easy to arrange
- interest only paid on amount of overdraft
- security not usually required
105
What are 2 disadvantages of bank overdrafts
- banks usually charge a higher interest rate for overdraft than a loan
- banks can demand immediate repayment
- flexible rate = difficult to budget
- paperwork needed e.g. cash flow forecasts
106
What source of finance is retained profits
Internal source of long term finance
107
Give 2 advantages of retained profits
- cheap source of finance
- no security required
- independent and confidentiality
- shareholder goodwill
108
Give 2 disadvantages of retained profits
- funds can be misused
- possibility of overcapitalisation
- this is an opportunity cost for shareholders
109
What source of finance is ordinary share capital
External source of long term finance
110
What is ordinary share capital
When a company issues shares and shareholders buy shares = more cash and shareholders
111
Give 2 advantages of ordinary share capital
- limited liability encourages shareholders to invest
- new shareholders = more expertise
- its permanent and the org doesn’t have to repay
- increasing ordinary share capital can make it easier to borrow funds from bank
112
Give 2 disadvantages of ordinary share capital
- possible high dividend payments
- conflict of obj and values
- possible loss of control of original owners
113
What source of finance is a bank loan
External source of long term finance
114
Give 2 advantages of a bank loan
- easy budgeting
- lower interest rates than overdraft
- designed to meet needs of company
115
Give 2 disadvantages of a bank loan
- inflexibility
- limitations of amount available (size of loan may be limited to collateral available)
- potential expense
116
What type of finance is venture capital
External source of long term finance
117
Give 2 advantages of venture capital
- suited to high risk companies
- brings better disciple to business management and strategy
- source of advice and contacts
118
Give 2 disadvantages of venture capital
- requires high rate of return
- loss of control
- venture capitalist may exert too much influence
119
What is venture capital
Specialist investors in private companies who seek a large share of the share capital and representation on the board in return for funding for large investments such as expansion plans
120
What source of finance is crowdfunding
External source of short term finance
121
What is crowdfunding
Where businesses raise finance online by detailing their project online and inviting ppl to help provide funding. It can also be based on a loan with agreed interest
122
Give 2 advantages of crowdfunding
- provides a form of free marketing
- good credit rating not required (good for new businesses)
- business in full control of what’s offered
- relatively easy to set up campaign
123
Give 2 disadvantages of crowdfunding
- the crowdfunding platform will take a percentage of the amount invested
- lots of competition
- no guarantee the finance raising target will be met
- leaking valuable info about business ideas
124
Name 3 factors that influence the choice of the source finance
- legal structure of business (sole traders rely on personal finance while LTDs sell shares)
- use of finance
- amount required
- firms profit levels
- level of risk
- views of owners
125
Give 3 ways a business can improve cash flow
- bank overdraft
- debt factoring
- sales and leaseback
- leasing of non current assets
- improving working capital
126
What is sales and leaseback
The process of selling assets to raise cash. The property is generally rented back so the firm can still use them for an agreed period of time
127
What is leasing of non current assets
Where businesses get their machinery from a leasing company so the outflow of cash is more even. This will also reduce costs such as maintenance because it’s the leasing company’s problem not the business’s
128
Give 3 external factors that make it difficult to improve profit
- competition
- market conditions
- consumers incomes
- environmental issues
- demographic factors
- interest rates
129
What problem may a business face changing the prices of their product(s)
The impact is difficult to predict bc the effect depends on the price elasticity of demand and the profit margin, both of which may be unknown when the decision is made
130
What problem may a business face when reducing wages to increase profit
Morale might be negatively effected which could lead to lower labour productivity and higher staff turnover
131
What problem may a business face when cutting the marketing budget to increase profit
less brand awareness and the sales potential is cut
132
What problem may a business face when trying to increase sales to increase profit
To increase sales, the business neeeds to have effective marketing, high quality production and effective coordination of all departments which will add to expenditure and so possibly not increase profits
133
Give 3 difficulties improving cash flow
- seasonal demand
- overdrawing which can put a strain on working capital
- over investment in long term assets = inadequate cash flow
- unforeseen changes
- low profits/ losses can make creditors/investors less likely to put money into a business not expecting to make a profit
