Unit 5 - Finance Flashcards
(73 cards)
1
Q
Budget
A
A financial plan for the future concerning the revenues and costs of a business
2
Q
Managers use budgeting to… (2)
A
- help control spending
- to help plan when money is coming in (inflow)
3
Q
Variances
A
The difference between the budgeted amount and the actual amount
4
Q
Uses of budgets in management (5)
A
- to set targets
- provides direction and coordination
-Allocate resources - control income and expenditure
- forecast outcomes
5
Q
What is historical budgeting
A
Using last years figures as a basis for the budget and is based on actual results.
( however circumstances may of changed and doesn’t encourage efficiency)
6
Q
What is zero budgeting
A
Budget is based on new proposals for costs and sales and budgeted costs and revenues are set to zero.
(More realistic but time consuming )
7
Q
Types of Budget (3)
A
- Revenue (income) budget - expected revenues and sales.
- Cost ( expenditure) budget - expected costs based on sales budget
- Profit budget - based on the combined sales and cost budgets
8
Q
What is a favourable budget
A
Having more money than we expected/ budgeted for
9
Q
What is an adverse budget
A
When we have less money than expected / budgeted. ( figure will be negative)
10
Q
Variation calculation
A
Variation = actual - expected (budgeted)
11
Q
Reasons why a budget may be favourable (4)
A
- switching to a cheaper supplier / buying in bulk
- rising demand for the product
- competition is going out of business.
- improved productivity.
12
Q
Reasons why a budget may be adverse
A
- inflation on raw materials and staff costs can lead to higher costs
- products going out of fashion can lead to reduced sales
- higher tariffs ( tax on foreign imports and exports) and weaker currency exchange rates can’t cause impact costs to rise
13
Q
Problems and limitations of budgets (4)
A
- can lead to inflexibility in decision making
- need to be changed as circumstances change
- can result in short term decisions to keep within the budget
- take time to complete and manage
14
Q
What is break even
A
The point at which profit is zero, so the revenue from selling products is the same as the total costs incurred in producing/ providing them.
15
Q
Break even point calculation
A
BEP = FIXED COSTS / (SELLING PRICE - VARIABLE COST PER UNIT)
16
Q
Contribution calculation
A
CONTRIBUTION = SELLING PRICE - VARIABLE COSTS OF PRODUCTION
17
Q
Total contribution
A
TOTAL CONTRIBUTION = CONTRIBUTION PER UNIT X QUANTITY
18
Q
profit calculation (2)
A
- PROFIT = TOTAL CONTRIBUTION - FIXED COSTS
- PROFIT = CONTRIBUTION PER UNIT X MARGIN OF SAFETY
19
Q
What is the margin of safety
A
A measure of how close business is to its break even level
20
Q
Margin of safety calculation
A
MARGIN OF SAFETY = OUTPUT - BEP
21
Q
Revenue changes to the BEP (3)
A
- an increase in selling price will decrease the BEP
- revenue line steepens as price increases because more contribution is being made on each unit.
- extra contribution means fixed costs can be covered more quickly
22
Q
Variable costs changes to the BEP (3)
A
- an increase to variable costs increases the BEP
- VC line and total cost line becomes steeper as less contribution is being made on each unit
- smaller contribution means fixed costs can’t be covered as quickly so more needs to be produced to make break even
23
Q
Fixed costs changes to the BEP
A
- increase in fixed costs increases BEP
- Higher costs means more needs to be produced to cover them
24
Q
Benefits of BEP analysis (3)
A
- helps management and finance provide bettered understand the viability and risk of a business idea
- focuses on what output is required before a business reaches profitability
-margin of safety calculation shows how much sales forecast can prove over optimistic before before losses are incurred
25
Limitations of BEP analysis (3)
- unrealistic assumptions
- variable costs don’t always stay the same
-a planning aid rather than a decision making tool
26
What is cash flow
A measure of how and when money is flowing in and out of a business
27
Net flow calculation
NETFLOW = INFLOW - OUTFLOW
28
How does money flow in to a business (4)
- selling products
- profit on investments
-Interests on savings
- renting out property
29
How does money flow out of a business (4)
- rent
- wages and salaries
- repaying loans
-tax
30
What is liquidity
A measure of how easily a firm can turn its assets into cash
31
Assets in order of liquidity ( most first)
Cash
Cheque
Money owed by customer
Inventory
Property
3 year debenture
32
Why produce a cash flow forecast?
- gives advanced warning of cash shortages
- ensures you can afford to pay suppliers and employees on time
- spot problems with customer payments
- provide reassurance to investors and lenders that the business is being managed properly
33
Closing balance
CLOSING BALANCE = OPENING BALANCE + NET FLOW
34
What is a cash flow problem
When a business doesn’t have enough cash to be able to pay its liabilities
35
Why might a business experience a cash flow problem? (5)
- loss making
- inaccurate/ poor / overly optimistic forecasting
- excess stock
- Bad debts
- seasonal demand
36
Managing accounts owed by customers (4)
- credit control - decide how much credit to give and the repayments terms
- debt factoring - sell accounts receivables to a 3rd party at discount
- cash discounts
- improved record keeping
37
Advantages and disadvantages of debt factoring
+ provides instant working capital
- short term debt
38
Advantages and disadvantages of cash discounts
+ access funds faster so improves cash flow
- can reduce profit margins
- cards are more convenient to customer
39
Advantages and disadvantages of improved record keeping
+ accurate forecasting and timely invoicing
- time consuming
40
How to manage accounts owed by suppliers (3)
- agree longer credit terms with suppliers to give you more time to repay
- spread payments into manageable chunks over more time
- find cheaper suppliers
41
How to manage inventory (3)
- keep smaller balance ( just in time stocks )
- computerise ordering to improve efficiency
- improve stock control
42
What is profit in absolute terms
The £ value of profit earned
43
What is profit in relative terms
The profit seemed as a proportion of sales achieved or investment made
44
Gross profit margin calculation
GPM = (GROSS PROFIT / REVENUE ) X 100
45
Gross profit (also the same as contribution) calculation
GROSS PROFIT = REVENUE - COST OF SALES
46
What is operating profit
What is left after all the normal running costs of a business have even taken from its revenue
47
Operating profit margin calculation
OPM = (OPERATING PROFIT / REVENUE) X100
48
What does operating profit tell us ? (3)
- how efficiently a business turns its sales into operating profit
- how efficiently the core business is run
- whether a business is able to add value during production
49
Operating profit calculation
OP = GROSS PROFIT - OPERATING EXPENSES
50
Profit for the year margin calculation
PFTYM= (PROFIT FOR THE YEAR / REVENUE) X 100
51
What is a bank overdraft
A short term finance which lets you borrow money through current account by taking more money than you have in the bank
52
+ and - of bank overdraft
+ you can borrow what you need to
+ in control
- likely to be charged for borrowing
- high rates of interest
53
What is crowd funding
A long term finance which is a way of raising money to finance projects and businesses as it enables fundraisers to collect money for a larger number of people via online platforms
54
+ and - of crowd funding
+ money may not need to be repaid
+ funds often come from investors
- potential failure to meet goals and not recieve money
55
What is a grant
A short term finance that is a sum of money awarded to an organisation in anticipation of it being applied for an agreed purpose
56
+ and - of a grant
+ money doesn’t need to be repaid
+ widely available
+ boost credibility
- contractually bound as you mission needs to meet their needs
- spending is controlled
- have to wait a long time
57
What is retained profit /savings
A short term finance and is the amount of a business’s net income that is kept within its accounts rather than paid out to shareholders
58
+ and - of retained profit / savings
+Indicator of the long term financial stability of the business.
+ increased stock value
+ boosts your corporate liquidity therefore, have a financial safety net
- missed investment opportunities
- increased risk
- increased tax implications
59
What is a hire purchase
A short term finance which is a system where one pays for something in regular instalments
60
+ and - of a hire purchase
+ option to get newer and higher specification assets
+ flexibility
+ allows businesses to manage cash flows
- risk of asset being repossessed if payments are missed
- you don’t own the asset until the final payment
61
What is a mortgage
A long term finance which is a loan used to purchase and maintain a house
62
+ and - of a mortgage
+ lower interest rates than other types of loans
+ can improve your credit score
+ possible long term stability and flexibility
- must payback more than you borrow
- risk of not keeping up with payments
63
What is share capital
A long term finance which is the money company raise by issuing common / preferred stock
64
+ and - of share capital
+ more money so more investors
+ support from shareholders
+ seen as more stable
- takes away control from the original owner
- high risk of takeover
65
What is a venture capital
A short term gain and long term commitment and is a form of equity finance by a venture capitalist/ investment firm
66
+ and - of venture capital
+ business get access to support, advice and contacts
- loss of control
- loss of profit due to less shares
67
How to improve profitability (6)
- increase the quantity of goods sold
- change selling price
- reduce variable costs
- reduce fixed costs
- reduce product range
- outsource non essential functions
68
What is a financial objective
The goals / targets related to the financial performance of a business
69
Main types of financial objectives (8)
- revenue objectives
- cost objectives
- profit objectives
- cash flow objectives
- investment level objectives
- capital structure objectives
- return on investment objectives
- objectives relating to debts
70
Benefits of financial objectives
+ improve coordination
+ improve efficiency
+ allows shareholders to assess whether the business is a worthwhile investment
+ enables external stakeholders to confirm the financial validity of a business
71
Disadvantages of financial objectives
- difficult to set realistic objectives
- external changes may be out of control of business
- difficult to measure accurately
- impossible to determine success or failure
72
What is return on investment
Financial gains from investments - cost of the investment
73
Return of investment % calculation
ROI = (RETURN ON INVESTMENT / COST OF THE INVESTMENT) X100
