Flashcards in Unit 5 - finance Deck (42):
Name 4 areas for financial objectives
Return on investment
Cash flow targets
Profit and shareholder returns
What is cash flow?
The amount of money that flows into and out of a business over a period of time
What is overtrading?
When a firm tries to grow to quickly
What can be the consequences of overtrading?
A firm can run out of money as money is going out far faster than it is co I got in, especially if trade credit periods are offered to customers
What is gross profit?
The difference between revenue and the direct costs of producing a good or service
What is operating profit?
When the direct costs and overheads have been deducted from the revenue
What is profit for the year?
Revenue minus direct costs of production, overheads and taxes and interests
How do you calculate a profit margin?
(Specific type of) profit / sales revenue X100
Name 3 cash flow targets
Reducing receivables days
Increasing payables days (credit period)
Reduce seasonal swings in cash flow
What is capital expenditure?
Money spent on long-term investment into a business
What is revenue expenditure?
Money spent on the day to day running of the firm, e.g. Buying raw materials
How do you calculate return on Investment?
Net profit/amount invested X100
Define a business' capital structure
The way in which it has raised its long term finance
What are the two sources of long term funding for a business?
Borrowing and share capital
Name 3 external influences on financial objectives
Whether the market is growing or not
What other businesses are doing, e.g. To keep up?
Changes in legislation may mean firm needs to adapt
Name 3 internal influences on financial decisions and objectives
Overall corporate objectives
Resources, from finance to workers
When may cash flow be more important to a business than profit
When it is first set up
During a recession
What is a budget?
A financial plan that estimates the revenues, profits and costs over a specified future time period
What are the 3 things that are budgeted?
Expenditure, revenue and profit
What is variance analysis?
The process of explaining the differences between budgeted figures and actual figures
What is an adverse variance?
If the actual profit is lower than expected
What is a favourable variance?
If the actual profit is higher than the expected
What is a cash flow forecast?
A prediction of money coming into and out of the business
What is net cash flow?
The difference all cash in and all cash out
What is the opening balance on a cash flow forecast?
The closing balance carried forward from the previous month
What is the closing balance on a cash flow forecast?
The sum of the net cash flow and opening balance
Why is it important to do a cash flow forecast?
To stop the business running out of cash
To help apply for loans
What is break even?
When a businesses sales revenue is equal to its total costs
What is on each of the axis on a break even graph?
X axis- output
Y axis-costs and revenues
What is contribution?
The difference between sales revenue and variable costs
HOw do you calculate contribution per unit?
Sales revenue - variable costs/output
Sales price per unit - variable cost per unit
How do you calculate break even output?
Fixed costs/contribution per unit
How can you use contribution to calculate profit?
Total contribution - fixed costs
WHat effect will a rise in price have on the break even output?
It will go down
WHat does 'service a debt' mean?
Refers to being able to make repayments on any loans
Why is selling more than one product a problem when calculating break even?
The selling price per unit will be different
WHat is the difference between profit and profit margin?
Profit is just a figure, the profit margin compares the profit to something, usually sales revenue
What is retained profit?
The profit that is reinvested in the business rather than being laid out to shareholders in dividends
Name some external sources of finance
Long term loan
(Trade credit - not actual finance but helps finances)
Name some internal sources of finance?
Sale of assets
Name an advantage and disadvantages of an overdraft
-the facility is always there
-often high interest
-usually only small amounts