Finance

What is the purpose of a budget?

To plan and control income and expenditure

What is a sales budget?

Forecast of expected sales revenue

What is a cost budget?

Forecast of expected costs

What is a cash budget?

Forecast of cash inflows and outflows

What is variance analysis?

Comparing actual figures to budgeted figures

What is a favourable variance?

Actual outcome better than budgeted

What is an adverse variance?

Actual outcome worse than budgeted

Why are budgets useful?

Aid planning, coordination and control

What is zero-based budgeting?

Budgets built from scratch each period

What is incremental budgeting?

Using previous budget with small changes

What is a limitation of budgeting?

Forecasts may be inaccurate

What is cash flow?

Movement of cash into and out of business

What is a cash inflow?

Cash entering the business

What is a cash outflow?

Cash leaving the business

What is a cash flow forecast?

Prediction of future cash movements

Why is cash flow important?

Ensures business can meet payments

What causes cash flow problems?

High outflows or delayed inflows

What is insolvency?

Unable to pay debts when due

How can a business improve cash flow?

Speed up inflows or delay outflows

What is trade credit?

Buy now pay later arrangement

What is working capital?

Current assets minus current liabilities

Why is working capital important?

Funds day-to-day operations

What is overtrading?

Growing too quickly without enough cash

What is contingency planning?

Preparing for unexpected financial issues

What is a profit and loss account?

Shows revenue, costs and profit

What is revenue?

Money earned from sales

What is cost of sales?

Direct cost of producing goods sold

What is gross profit?

Revenue minus cost of sales

What is operating profit?

Gross profit minus operating expenses

What is profit for the year?

Final profit after all expenses

What is depreciation?

Reduction in value of fixed assets

What is an intangible asset?

Non-physical asset with value

What is goodwill?

Value of reputation and customer loyalty

What is retained profit?

Profit kept in business after dividends

What is a balance sheet?

Snapshot of assets and liabilities

What are non-current assets?

Assets kept longer than one year

What are current assets?

Assets expected to convert to cash within a year

What are current liabilities?

Debts due within one year

What are non-current liabilities?

Debts due after more than one year

What is shareholders’ equity?

Owners’ claim on business assets

What is capital employed?

Total long-term finance used

What is liquidity?

Ability to meet short-term debts

What is the current ratio?

Current assets divided by current liabilities

What is the acid test ratio?

Liquid assets divided by current liabilities

Why is inventory removed in acid test?

Inventory may not quickly become cash

What does a high current ratio suggest?

Good short-term financial position

What does a low liquidity ratio suggest?

Possible cash flow problems

What is gearing?

Level of debt compared to equity

How is gearing calculated?

Non-current liabilities divided by capital employed x100

What is high gearing?

Large proportion of finance from debt

Why is high gearing risky?

Interest payments increase financial risk

What is ROCE?

Return on capital employed

How is ROCE calculated?

Operating profit divided by capital employed x100

Why is ROCE useful?

Measures efficiency of capital use

What is net profit margin?

Profit after costs as percentage of revenue

How is net profit margin calculated?

Operating profit divided by revenue x100

What is gross profit margin?

Gross profit as percentage of revenue

Why are profit margins important?

Measure profitability and efficiency

What does rising profit margin show?

Improved efficiency or pricing

What is ARR?

Average annual return on investment

How is ARR calculated?

Average annual profit divided by investment x100

What is payback?

Time taken to recover investment cost

Why is payback useful?

Measures investment risk and liquidity

What is a limitation of payback?

Ignores profit after payback period

What is net present value?

Present value of future cash flows minus cost

Why is NPV used?

Accounts for time value of money

What does positive NPV mean?

Investment should increase wealth

What is discounting?

Reducing future cash flow values to present values

What is the time value of money?

Money today worth more than future money

What is a decision tree?

Diagram showing risks and outcomes

What is expected value?

Probability multiplied by outcome

Why use decision trees?

Aid risky business decisions

What is break-even output?

Sales level where total costs equal revenue

How is break-even calculated?

Fixed costs divided by contribution per unit

What is contribution?

Selling price minus variable cost

What are fixed costs?

Costs unaffected by output level

What are variable costs?

Costs that change with output

Why is break-even analysis useful?

Shows minimum sales needed

What is margin of safety?

Difference between actual and break-even sales

Why is a large margin of safety good?

Lower risk of losses

What is a limitation of break-even analysis?

Assumes costs and prices stay constant

What is internal finance?

Finance from within the business

What is external finance?

Finance from outside sources

What is retained profit?

Profit reinvested into business

What is sale of assets?

Selling assets to raise finance

What is a bank loan?

Borrowed money repaid with interest

What is an overdraft?

Bank allows spending beyond balance

What is trade credit finance?

Delayed payment to suppliers

What is leasing?

Renting assets instead of buying

What is venture capital?

Investment from specialist investors

What is crowdfunding?

Raising finance from many individuals online

What is share capital?

Money raised from selling shares

What is debenture finance?

Long-term borrowed capital

Why might a business issue shares?

Raise finance without repayments

What is a dividend?

Payment to shareholders from profit

What is equity finance?

Finance from selling ownership shares

What is debt finance?

Borrowing money to repay later

Advantage of debt finance?

Owners keep control

Disadvantage of debt finance?

Interest must be paid

Advantage of equity finance?

No compulsory repayments