Finance
- Created by: Meganallam
- Created on: 02-01-19 19:51
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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
- Financial objectives are specific goals relating to the financial performance of the business
- 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
- Gross profit
- 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
- Budgets are financial plans that forecast revenue from sales and expected costs over time
- 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.
- A cash flow forecast gives advanced warning of potential problems and ensures cash is available
- 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
- Break-even output is the level of output or production at which total costs equal revenue from sales
- 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
- A profit margin is a ratio that expresses a businesses profit over a trading period
- 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
- Financial Objectives
- To control the firms working capital in order to ensure that they remain profitable and liquid
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