what to do with profits Flashcards
(31 cards)
what does finance entail
to make money, a company must spend money
what is financial management
art of managing a business so that it can achieve its goals
what is the chief sources of a business’ finance?
sales
whats the difference between finance and accounting
accounting - collect and present financial data
finance - use data collected by accounting to make financial decisions
what is financial planning
prepare financial plan: projection of revenues and expenditure over a period of time
what is investing
investing the funds of the business in projects and investments, to earn high returns, in relation to its risk
what is financing
obtaining funding for the operations and investments of the business. its also finding a balance between borrowed funds/debt and ownership funds/equity
what are the 3 goals of a financial manager
-maximise value of the firm
-considering short - and long-term consequences of the
businesses’ actions
-maximising profits
what are financial ratios
relationship between two elements of a firms financial statements
what can financial ratios be compared with
firms past ratios
ratios of competitors
industry averages
what are the two profitability ratios
return on total assets
return on shareholders
whats the formula for return on total assets
(operating profit+investment income)/average total assets x 100
whats the formula for return on shareholders equity
(opp profit + inv inc - fin costs) / avg shareholders equity x 100
two ratios for profit margins
gross profit margin
net profit margin
formula for gross profit margin
gross profit/sales x 100
formula for net profit margin
net profit/net sales x 100
formula for earnings per share
attributable earnings / avg nr of ordinary shares issued
what are retained earnings
profits that arent paid out
how do retained earnings effect equity capital
they grow equity capital, without additional underwriting costs
what are the 5 ways to apply retained earnings in the business
- investing surplus funds
- expanding existing capacity and capabilities
- creation of new product lines
- expanding externally through mergers and acquisitions
- purchasing patents
what are the benefits of expansion
- catering to a growing customer base
- economies of scale leading to cost efficiencies
what are the benefits of new capabilities
- increases efficiency and productivity
- ability to respond to evolving market demands
what are the benefits of new product lines
-diversifying product offerings helps capture new market segments and mitigate risks
-expanding customer base
-generating additional revenue streams
what are the 2 sources of return for shareholders
- dividends
- capital growth
