Finance

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State 3 benefits of setting financial objectives
provides a focus for the entire business, measures success or failure of a business, reduced risk of failing.
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Internal influences on objectives
corporate objectives (they should conflict each other), finance eg how much cash flow is there?, HR(will training be needed?), marketing
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What are the external influences on objectives?
PESTLE - Political, economical, social, technological, legal, environmental
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What is the net profit calculation?
sales - variable costs - fixed costs = net profit
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What is the net cash flow calculation?
cash inflow - cash outflow = net cash flow
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Gross profit
revenue - cost of sales, shows how well the business adds value to the raw materials that is purchase. gross profit margin; (gross profit / revenue) X 100
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Operating profit
gross profit - operating expenses, shows how efficient the business is, looks at how much it costs to run the business. (operating profit / revenue) X 100 is the margin.
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Profit for the year
operating profit - all other expenses + any exceptional items. shows the profit that is available to the business, can be retained or given to shareholders via dividends. Margin calculated by; profit of the year / revenue x 100
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Why is a positive cash flow important for a business and their objectives?
means they can reduce bank borrowing,
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Gearing %
examines who is taking the risk in the business. is it the owners or the external lenders? calculated as; (external borrowing / Capital employed) X 100
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Gearing % evaluation
if the value is over 50% then the majority of risk is taken by external lenders, not the owners. the higher the % the greater risk of bankruptcy (when a business can't pay off long term debts)
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Debt / equity ratio
examines whether shareholders funds are sufficient to cover debts of the business - calculated by total liabilities / shareholder equity
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Debt / equity ratio evaluation
if the value is over 1:1 then majority of risk being taken by external lenders. another way of expressing gearing.
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Why is cash flow so important?
enables them to survive, they can use the money to keep it running. it puts the business in a stable position as they are less likely to borrow from banks etc
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Budgets
they are financial plans for a future period of time. used to control income, establish priorities, provides direction, monitor staff and performance.
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How do you construct a budget?
info gathered from analysing markets and looking at previous budgets.
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Where does a business get its info from to construct a budget?
government data, bank of England data, market research
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Disadvantages of budgeting
inaccurate assumptions can make a budget unrealistic. leads to inflexibility in decision making, time consuming
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Behavioural changes caused by budgeting
demotivating for employees if they are imposed rather than negotiated with them. unrealistic targets demotivate. budgetary slack occurs if targets are set too low.
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A variance
a variance arises when there is a difference between actual and budget figures. can be either favourable (better than expected), unfavourable (worse than expected)
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Significance of a variance depends on what factors?
whether its positive or negative, was it foreseen?, how big is the variance in relation to size, is it temporary?
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Contribution
looks at profit made on individual products. used in calculating how many items need to be sold to cover the businesses total costs.
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Contribution calculation
total sales revenue - total variable costs
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Contribution per unit calculation
selling price per unit - variable costs per unit
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Profit calculation
total contribution - fixed costs
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Break even point calculation
fixed costs / contribution per unit
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Strengths of a break even analysis
focuses on how long it will be till a business becomes profitable, helps entrepreneurs understand the risk of a business idea, quick and easy
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Limitations of a break even analysis
unrealistic assumptions; can be different levels of output etc, sales unlikely to be the same as the output, variable costs don't always stay the same
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What is cash flow?
the movement of cash into and out of a business over a period of time
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Whats the purpose of a cash flow forecast?
to help businesses get loans, enable a business to assess its working capital, helps avoid unexpected cash flow crises
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What are payables and receivables?
payables are the time it takes to pay back trade creditors and suppliers. receivables are the time it takes for debtors and customers to pay you back.
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Why is profit so important?
reward for tasking risks, a return on investment, key source of finance, can be used to motivate
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How can a business improve its cash flow?
manage its working capital well, choose the right sources of finances needed
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What does working capital management focus on?
the right balance between offering customers credit and ensuring they pay on time, holding the correct stock levels, have good relationships with suppliers
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Managing debtors
(This is trade credit for customers), policies are in place for credit and repayment conditions, control doubtful debtors by chasing or threatening with legal action etc
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Why is managing trade credit so important?
its an important source of finance for a business, helps with cash flow.
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What are ways of improving profit?
increasing the quantity sold, increasing the selling price, reduce variable costs per unit, increase output , reduce fixed costs, reduce product range
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Other cards in this set

Card 2

Front

Internal influences on objectives

Back

corporate objectives (they should conflict each other), finance eg how much cash flow is there?, HR(will training be needed?), marketing

Card 3

Front

What are the external influences on objectives?

Back

Preview of the front of card 3

Card 4

Front

What is the net profit calculation?

Back

Preview of the front of card 4

Card 5

Front

What is the net cash flow calculation?

Back

Preview of the front of card 5
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