unit 5 finance

what is profit (formula)?
total revenue - total costs
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how many types of profit are there?
3 -gross, operating and profit for the year
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what is gross profit?
revenue - cost of sales
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what is operating profit?
used most often for a comparison tool as it doesnt include taxes gross profit-admin expenses
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what is profit for the year?
shows the final profit made by the firm includes money deducted from taxes, loan repayments and sales of assets
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what is cash flow?
money coming in and out of the business
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what are examples of cash inflows?
sales from products and assets, subsidies, loans, sponsors, selling shares, grants, investments
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what are some examples of cash outflows?
wages,taxes,dividens,rent,electric,repairs,waste, unit costs, loan re payments, costs of raw materials
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what can lead to poor cash flow?
not collecting money from debtors enough,holding too much stock and paying creditors before you receive any money from debtors
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whats net cash flow?
inflows - outflows
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what does liquiity mean?
a business' ability to convert assets into cash quickly
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what do profit margins show?
how good a business is at making profit from their revenue, good indicator of how well we control our different costs
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whats the formula for profit margins (operating,gross and PFTY)
gross,operating or PFTY / sales revenue (x100)
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what are the 8 financial objectives
revenue, costs, profit, cash flow, return on investment, capital structure,debts as a proportion of long term funding, objectives for investment level.
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whats the formual for return on investment?
return on investment / initial investment (x100) (return on investment is the financial gains - cost of investment)
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do we want high or low levels of return
high
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whats the formula for debts as a proportion of long term funding?
debts / long term funding (long term funding= all equity + long term debts)
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whats a budget
an agreed financial plan for a business funding and expenditure and profit
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whats a variance?
the comparison to see the actual spending amount with the budgeted number
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whats an adverse variance?
when you've spent more than you've budgeted or received less revenue than expected
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whats a favourable variance?
where you've spent less or received more revenue than budgeted
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advantages of budgeting?
can motivate employees and make them feel involved, can show our control of spending, helps us assess where our money is going, could improve efficiency, can force business' to assess their objectives
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disadvantages of budgeting?
can be delegated to people who may not have a lot of knowledge, based largely on intuition, can demotivate if too ambitious
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whats cash flow forecasting?
estimating the future cash flow of a business for a given time
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what are the cash inflows
money coming into the business
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what are the cash outflows?
the money going out of the business
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whats net cash flow
inflows-outflows
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whats the opening balance?
last months closing balance
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whats the closing balance?
opening balance + net cash flow
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why is cash flow forecasting helpful?
can help determine when a business needs spare money for overdrafts or needing to buy new space etc, helpful as business don't usually have regular cash flow e.g seasonal periods
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whats break even?
the amount of product needed to sell before the business starts to make a profit
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whats contribution?
the amount of money needed by a single purchase of a product to contribute to cover fixed costs of a business
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whats contribution cost per unit (formula)?
selling price - variable costs (cost of sales)
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whats total contribution
contribution per unit x selling price
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whats break even (formula)?
fixed costs / contribution per unit
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whats needed in a break even chart
fixed costs, variable costs, total costs and revenue
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what is margin of safety?
the amount at which a business' demand can fall before the firm starts making loss
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whats the formula for margin of safety?
sales - break even point (units(
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advantages of using breakeven charts
looks at the time period it will take to make profit, shows risks of ideas for finance, illustrates the importance of keeping fixed costs to a minimum
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disadvantages of using break even charts?
unrealistic- products aren't consistently sold or sold at the same price, fixed costs could change, sales unlikely to be the same as output, its a planning aid rather than a decision making tool
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whats profitability?
the ability for a business to generate profit or the efficiency of a business in generating a profit. its about relating that amount of profit to the size of the business
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how do you calculate profit margins?
gross/operating/PFTY / sales revenue (x100)
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whats management accounting
management looks at financial info fo the use of internal users in the business in order to help predict, plan and review the financial performance of the business
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whats financial accounting?
the provision of financial info to show external users the financial position of the business, looks at more historical data.
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what are internal and external sources of finance
internal is money provided/exists within the business. external- funds injected from outside of the business.
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whats short term finance
needed for a limited period of time (less than a year)
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whats long term finance?
finance needed for over a year
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whats retained profit
profit made from the business can be short or long term source of finance, internal source of finance, the business re invests its previous years profit back into the business
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whats debt factoring
where a business can selll any of its unpaid bills owed to gain instant cash back (80%). its an internal and short term source of finance
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what are overdrafts?
offered by banks where you can borrow unto an agreed limit
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whats venture captial
a mix of a loan and share captial which is provided to the business by either a person to organisation
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what are loans
money offered by a bank for a specific agreed purpose
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whats share captial?
selling shares either privately of publicly
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what are debentures?
a special type of long term loan repaid at a future date usually 15 years, long term finance
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whats crowd funding?
where a business can try to raise small amount of money from a large amount of people, typically via the internet.
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how could a plc or ltd raise finance?
through share capital
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how could a sole trader raise finance?
through personal finance
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Other cards in this set

Card 2

Front

how many types of profit are there?

Back

3 -gross, operating and profit for the year

Card 3

Front

what is gross profit?

Back

Preview of the front of card 3

Card 4

Front

what is operating profit?

Back

Preview of the front of card 4

Card 5

Front

what is profit for the year?

Back

Preview of the front of card 5
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