Unit 5 : Finance

Internal influences on financial objectives

• overall corperate objectives

• operational capacity

• recourses available

External influences on financial objectives

• market factors

• actions of rivals

• PESTLE analysis

What is return on investment

how much a business makes back from an investment, ie the NPV

Return on investment formula

net profit/amount invested. x 100

What are financial objectives and what would an example be

the focused aims of the finance function, ie: to reach cash flow targets

What is capital structure

The way a business has raised it’s long term finance

What is a capital structure objective

• to be below 50% capital gearing, so rely less on loans

formula for capital gearing

borrowing/ total capital employeed (borrowing+equity) x 100

gross profit formula

revenue - cost of sales

gross profit margin formula

gross profit/ sales revenue. x 100

operating profit margin formula

operating profit/sales revenue x 100

What are some examples of profit objectives

A percentage increase of profit compared to previous data

What is capital expenditure

one-off expenditure on investments, ie assets like factories

Why is capital expenditure important for a business

because it finances new equipment/facilities and therefore increases growth and competitiveness

What is an income budget

the planned vs actual level of sales

how do we measure the difference between actual investment cost and budgetted cost

through variance analysis

What is an adverse variance

When the profit is lower than expected due to either lower revenue or higher costs

What is a favourable variance

When costs are lower than expected or revenue is higher than expected so more profit

What is the cash flow cycle

The regular pattern of inflows and outflows of cash over a period eg month

net cash flow formula

cash in - cash out

What is a cash flow forecast

Predicition of money coming in and out of a business

What is an opening balance

The month befores closing balance

closing balance formula

net cash flow + opening balance

What is a surplus

A positive cash balance at month end

What are the 3 main reasons for budgetting

• Ensures good planning

• Asseses peformance

• Can motivate, employees and shareholders

What is a breakeven chart

When a business’s total costs are equal to total revenue, the chart shows the output and costs of when this happens

What is plotted on the x axis on a breakeven chart

maximum output of the business

What is plotted on the y axis of a breakeven chart

costs and revenue

What is plotted on a breakeven chart

• total revenue

• fixed costs

• variable costs

• total costs

What is contribution formula

sales revenue - variable costs

contribution per unit formula

sales revenue-variable costs/ output

breakeven output formula

fixed costs/contribution per unit

What is the margin of safety

the amount a business sales can fall before the business starts to make a loss

Margin of safety formula

actual output - breakeven output

Benefits of using breakeven analysis

• simple and easy to use

• supports being able to get a bank loan

• useful in analysing how rising costs may affect profability

Limitations of using breakeven analysis

• assumes all products are sold

• assumes costs stay the same

• difficult for multi product businesses

What are 2 internal sources of finance

• retained profit

• sale of assets

what are the 3 external short term finance methods to improve cash flow

• overdrafts

• debt factoring

• trade credit from suppliers

Long term finance methods

• equity from shareholders

• borrowing loans from a bank

• venture capital, when business is high risk high growth can secure high loans from ndividual shareholders

• debentures, when the bank issues safety over assets

methods in improving cash flow

• speed up inflows through chasing recievables

• slow down outflows through credit terms

• debt factoring

What is a Cash Flow Deficit

When outflows are greater than cash inflows

What is Debt factoring

A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.

What is Share capital

The total value of capital raised from shareholders by the issue of shares

What is venture capital

Money that is invested in new or emerging companies that are perceived as having great profit potential

What is a debenture

an unsecured debt, usually with a maturity of 10 years or more

What is Retained profit

Profit which is kept back in the business and used to pay for investment in the business.

What is crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

What is sale of assets

when a business sells off its unwanted or unused assets to raise funds