FINANCE

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benefits of setting financial objectives?
provide direction and can be used to measure financial performance
support decision making - investments, budgets
motivate employees and teams
1 of 49
what is the difference between cash flow and profit?
cash flow is the difference between the amount of money a business receives (inflows) and the money business spends (outflows)
whereas profit is the difference between sales revenue and total costs (expenditure)
2 of 49
what are 3 reasons a business could face cash flow problems?
- holding large amount of inventory
- having sales on long credit periods
- using cash to purchase fixed assets
3 of 49
formula for gross profit
sales revenue - direct CoP = gross profit

direct CoP = eg direct labour, materials
4 of 49
both formulas for operating profit?
sales revenue - total costs of production = operating profit

gross profit - expenses (indirect CoP) = operating profit
5 of 49
formula for profit of the year ?
operating profit + other income - other expenditure = profit for the year

profit for the year does not include other expenditure eg interest payments or tax or other incomes such as interest / money received
6 of 49
what are 5 examples of cash flow objectives ? and why is having them important ?
can help with cash flow management - survival and sustainable growth
- reduction of seasonality in sales
- targets for monthly closing balances
- extension of business' credit period to pay suppliers
7 of 49
formula for return on investment ?
return on investment (or profit from investment) / capital invested (investment cost) x100
8 of 49
what is a benefit and caution when calculating return on investment ?
adv - calculate the efficient of a project
- helps decide between two investments - decision making
dis - only forecasts, could be influenced by managers own bias towards a particular investment
9 of 49
what is meant by equity ?
money a business raises through the issue of shares eg higher equity means sold more shares
10 of 49
what is long term capital made up of ?
equity (share capital) + borrowing (loan capital) = total capital
11 of 49
formula for gearing ratio ?
gearing ratio = loan capital / total capital X100

business may use it when setting targets in terms of proportion of long term capital that is debt
12 of 49
what can setting a target of reducing long term funding from debt protect a business from?
if there is an increase in interest rates as this could significantly reduce a business' profits
13 of 49
formula for sales revenue ?
quantity sold x selling price per item
14 of 49
external influences on financial objectives and decisions ?
- corporate objectives eg objective of growth could lead to a decline in performance in ST as money is used to finance growth
- resources available eg skilled labour
- operational factors eg physical capacity
- shareholders actions
15 of 49
external factors that influence financial objectives and decisions ?
- competitor actions eg price cuts
- market forces eg fashion changes
- economic factors eg IR, inflation
- political factors eg legalisation, increase in NMW, health n safety laws - increase costs
- technology eg greater efficiency, but significant c
16 of 49
what are income budgets ?
forecasted earnings from sales, sometimes called sales budget
for a new business they will be based on market research , income budgets are drawn up for the next financial year on a monthly basis
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what is an expenditure budget ?
the expected spending of a business
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how is profit / loss budget calculated?
forecast sales income - forecast expenditure budget
19 of 49
how do you show a loss on a cash flow forecast ?
put the figure in ()
eg profit loss = (16,000)
eg profit gain = 16,000
20 of 49
how can a business improve its cash flow ?
- can reduce credit period given to customers - increase how quickly they can receive their receivables - incentives or penalties
- negotiate longer trade credit w payables
- debt factoring - sell debt off to another business
- cut unnecessary spending
21 of 49
difficulties in setting budgets ?
- no historical evidence available - cant see sales levels or fluctuations
- forecasting costs can be problematic - lack experience
- competitors reactions - promotion budget may have to increase - increasing costs
22 of 49
when does a favourable variance occur?
when costs are lower than forecast, or profit / revenue is higher
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when does an adverse variance occur ?
when costs are higher then forecasted or profit / revenue is lower
24 of 49
what are possible responses to an adverse variance in budgeting ?
- reduce costs eg buying less expensive materials HIDO quality - brand image
- increase advertising - increase sales HIDO increases costs - risky ?
- reduce prices to increase sales - relies on demand being elastic
25 of 49
benefits of budgeting ?
- inefficiency and waste can be identified
- focus decision making
- prevent overspending
- improve internal communication
- delegated budgets can improve motivation by giving employees authority n opportunity to fulfil their higher level needs - Masl
26 of 49
formula for net cash flow ?
total cash in - total cash out
27 of 49
what are the four lines on a break even chart ?
fixed costs - horizontal
variable costs - start from 0 and diagonal upwards line
total cost - same line as VC but start from FC
sales revenue - start from 0, steep diagonal upwards line that crosses over TC
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where is the break even point on a break even chart ?
where sales revenue meets (=) total costs
29 of 49
what is the sales operating point (SOP) on break even chart
actual or forecasted level of company's output
30 of 49
where is the margin of safety on a break even chart
the difference between the SOP and break even point
31 of 49
where is profit and loss made on break even chart
there is a loss before break even point and there is a gain after the break even point
shaded area between SR and TC
32 of 49
what is contribution ?
the amount of money left over after variable costs have been subtracted from sales revenue
sales revenue - variable costs
or
unit contribution x output = total contribution
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formula for contribution per unit ?
saes price per unit - variable cost per unit
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what can contribution be used to calculate ?
the break even point
the level of profit
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calculation for break even ?
fixed costs / contribution per unit
36 of 49
benefits of break even analysis ?
- starting a new business - estimate levels of sale before making profit
- supporting loan applications - banks more willing if have financial planning eg BEA
- measuring profit n losses at any level of output
- modelling what if scenarios - what will h
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disadvantages of break even analysis ?
- no costs are truly fixed so straight line isnt accurate
- TC line takes no account into discounts available for bulk buying
- sales revenue assumes all output is sold at a uniform price which isnt realistic
- accuracy of data ? data collecting is exp
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gross profit margin ?
gross profit / sales revenue X100
39 of 49
operating profit margin?
operating profit / sales revenue x 100
40 of 49
profit for year margin
profit for the year / sales revenue x 100
41 of 49
when assessing performance of a business what comparisons should be made?
comparisons with previous years' figures or the performance of smaller businesses
42 of 49
how might it be possible for a business to have an improving gross profit margin but a falling operating profit margin ?
gross profit might be improving as a result of falling direct costs of production but if the indirect costs are increasing at a higher rate, the operating profit could be falling
43 of 49
the analysis of cash inflow and outflows is important because...
- forecast period of times when cash outflows might exceed cash inflows n take action eg arrange a loan to avoid not being able o pay on time
- plan when n how to finance major items of expenditure eg machinery
- assess whether idea will generate enough
44 of 49
formula for payable days and receivable days
receivable days = receivables / revenue x 365
payable days = payables / cost of sales x 365
45 of 49
what are three internal sources of finance?
- retained profits - no interest or dividend payment
- selling assets - large amounts of £, has to be sure wont need in future
- cut down stock levels
46 of 49
what are long term external sources of finance?
- equity - provided by owners or shareholders -receive a share/profit through dividends
- bank loan - interest payments
- venture capital - mainly small - medium sized businesses that struggle to raise £ from traditional sources - provide loan in return
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short term external sources of finance ?
- bank overdraft
- bank loan
- trade creditors
- debit factoring
48 of 49
why might cash flows problems occur ?
- poor CF management - don't forecast/monitor CF, fail to chase up customers who haven't paid
- offering too much trade credit (interest free loan
- overtrading - expands too rapidly w out planning how to finance the expansion
- unexpected expenditure -
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Other cards in this set

Card 2

Front

what is the difference between cash flow and profit?

Back

cash flow is the difference between the amount of money a business receives (inflows) and the money business spends (outflows)
whereas profit is the difference between sales revenue and total costs (expenditure)

Card 3

Front

what are 3 reasons a business could face cash flow problems?

Back

Preview of the front of card 3

Card 4

Front

formula for gross profit

Back

Preview of the front of card 4

Card 5

Front

both formulas for operating profit?

Back

Preview of the front of card 5
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