3.5: finance

• What are financial objectives?

  Financial goals a business wants to achieve
• Who sets financial objectives?

  Financial managers
• What can financial objectives be based on to ensure relevance?

  Past financial data
• What are the 3 types of financial objectives?

  • Revenue objectives
  • Cost objectives
  • Profit objectives
• What is cash flow?

  Money flowing in and out daily
• Why are cash flow objectives put in place?

  To prevent cash flow problems
• What does ROI stand for?

  Return on investment
• What does ROI measure?

  Efficiency of an investment
• What is the ROI formula?

  (ROI / Cost of investment) X 100
• What does capital structure refer to?

  How a business raises capital
• What combination makes up capital structure?

  Debt capital and equity capital
• What are two internal factors that influence financial objectives?

  Overall objectives and business status
• What are 5 external factors that influence financial objectives?

  • Availability of finance
  • Competitors
  • The economy
  • Shareholders
  • Environmental and ethical influences
• How does the economy influence financial objectives?

  Ambitious targets in boom, restrained in downturn
• What is the percentage change in profit formula?

  ((Current year’s profit - previous year’s profit) / previous year’s profit) X 100
• What are the 3 types of profit?

  • Gross profit
  • Operating profit
  • Profit for the year (net profit)
• What is the gross profit formula?

  Gross profit = sales revenues - cost of sales
• What is the operating profit formula?

  Operating profit = gross profit - operating expenses
• What is the profit for the year formula?

  Profit for the year = operating profit - net finance costs - tax
• What is the gross profit margin formula?

  (Gross profit / sales revenue) X 100
• What is the operating profit margin formula?

  (Operating profit / sales revenue) X 100
• What is the net profit margin formula?

  (Net profit / sales revenue) X 100
• Give examples of cash inflows.

  • Sales revenue
  • Payment from debtors
  • Sale of assets
  • Owners’ capital invested
  • Sources of finance
• What is the difference between credit sales and cash sales?

  Cash sales appear in the month of sale
• Give examples of cash outflows.

  • Purchasing stock
  • Wages
  • Paying debts
  • Purchasing assets
• Give 6 ways that businesses can improve cash flow.

  1. Overdrafts
  2. Hold less stock
  3. Reduce time between payments
  4. Credit controllers manage debtors
  5. Debt factoring
  6. Sale and leaseback
• What is the difference between cash payments and credit payments?

  Cash payments appear in the month of purchase
• What 2 things is the length of the cash flow cycle dependent on?

  Type of product and credit payments
• What are cash flow forecasts?

  Expected money flow in and out over time
• Why isn’t cash forecasting always accurate?

  Based on false assumptions and changing conditions
• Give two reasons why a cash flow forecast is useful for small businesses.

  • Supports loan applications
  • Indicates large payment months
• What is a budget?

  A financial plan for the future
• What are the three types of budget?

  • Income
  • Expenditure
  • Profit
• What are budget holders?

  Responsible for spending or generating money
• Give 3 advantages of budgeting.

  • Helps achieve targets
  • Controls income and expenditure
  • Assists in decision-making
• Give 3 drawbacks of budgets.

  • Can cause rivalry for funds
  • Restrictive
  • Time-consuming to set and review
• What are the two methods used to set budgets?

  • Zero-based budgeting
  • Historical budgeting
• What is zero-based budgeting?

  Developing budgets from scratch
• What is liquidity?

  Ability to pay short-term debts
• What is variance?

  Difference between actual and budgeted figures