Finance

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  • Finance
    • Financial Objectives
      • Financial objectives are specific goals relating to the financial performance of the business
        • Revenue objectives - this includes revenue growth and sales maximisation
        • Cost objectives- includes reducing costs and cost minimisation
        • Profit objectives - including increasing profits or remaining liquid
        • Cash flow objectives
          • Increasing or decreasing the level of investment
          • Return on investment = operating profit / capital invested X 100
          • Capital structure - loan capital and share capital
    • Measurements of profit
      • Gross profit
        • Gross profit is income received from sales minus the costs of goods and services sold
        • Gross profit = revenue - direct costs
      • Operating profit
        • Operating profit is the financial surplus arising form a trading activities
        • Operating profit = revenue - all costs
      • Profit for the year
        • Profit for the year measures profit taking into account all expenditure and taxation
    • Budgets
      • Budgets are financial plans that forecast revenue from sales and expected costs over time
        • Revenue or earning budgets - set out expected revenue. They need to know expected sales and selling price
        • Expenditure budgets - these plan the expenditure of the business
        • Profit budgets - these are made by combing sales revenue and expenditure budgets to calculate expected profits
    • Annalysing budgets and variance analysis
      • Businesses will compare their budgeted and forecasted numbers with the ones from trading
      • Variance analysis
        • Favourable variance = actual figures are better than budgeted figures
        • Adverse Variance = actual figures are worse than budgeted figures
    • Cash-Flow forecasts
      • A cash flow forecast gives advanced warning of potential problems and ensures cash is available
        • They show the cash in, cash out and the net monthly cash flow.
        • From this businesses will look at the net monthly cash flow,the closing balances and the payables and receivables.
    • Break even analysis
      • Break-even output is the level of output or production at which total costs equal revenue from sales
        • Contribution = total sales - total variable costs
        • Contribution per unit = selling price per unit - variable costs
        • Total contribution = contribution per unit  X number of units sold
        • Profit = contribution - fixed costs
        • Break-even outputs = fixed costs / contribution per unit
    • Profit margins
      • A profit margin is a ratio that expresses a businesses profit over a trading period
        • Gross profit margin = gross profit / revenue X 100
        • Operating profit margin = operating profit / revenue X 100
        • Profit for the year margin = profit for the year / revenue X 100
    • Internal sources of finance
      • Retained profit = using the profits made over a trading year in the next.
      • Sale of assets = firms can raise finance by selling assets that they no longer require
        • This can lead to sale and leaseback
    • External sources of finance
      • Overdraft = allows businesses to borrow up to an agreed limit for as long as it wishes
      • Debt factoring = businesses sell the debts to a debt factorer
      • Loans = a financial institution gives the businesses a sum of money which they pay back with interest
      • Venture capital = funds given to the business by investors
      • Share capital = money given to the business in return for shares
    • Causes of cash flow problems
      • Overtrading -when a business expands rapidly without funds to finance the expansion.
      • Allowing too much trade credit
      • Poor credit control
      • Inaccurate cash flow forecasting
  • To control the firms working capital in order to ensure that they remain profitable and liquid

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