Financial management flashcards

Topic 5: Financial management

Gross profit, profit from operations and profit for the year

Gross profit = revenue − cost of sales. Profit from operations = gross profit − operating expenses. Profit for the year = profit from operations − finance costs − tax.

Revenue £200,000; cost of sales £120,000; operating expenses £52,000. Margins?

Gross profit £80,000 (40.0%). Profit from operations £28,000 (14.0%).

Return on investment: formula and example

Profit gained ÷ amount invested × 100. A £50,000 press adding £6,500 a year: 13%.

Debt as a share of long-term funding

Long-term debt ÷ (long-term debt + equity) × 100. £90,000 loans and £210,000 equity: 90 ÷ 300 = 30%.

Variance: how to label it

Variance = actual − budget, labelled by its effect on profit. Revenue above budget is favourable; costs above budget are adverse; costs below budget are favourable. Example: materials budget £15,000, actual £16,200 → £1,200 adverse.

Price £15, variable cost £6, fixed costs £27,000. Break-even, and profit at 3,600 units?

Contribution £9; break-even 27,000 ÷ 9 = 3,000 units. Margin of safety 600; profit 9 × 3,600 − 27,000 = £5,400.

Effect on break-even of higher price, higher variable cost, higher fixed costs

Higher price: revenue line steeper, break-even falls. Higher variable cost: total cost line steeper, break-even rises. Higher fixed costs: total cost line starts higher, break-even rises.

Output needed for a target profit

(Fixed costs + target profit) ÷ contribution per unit. Round break-even and target outputs up to a whole unit.

Receivables vs payables

Receivables: money owed to the business by customers. Payables: money the business owes to suppliers.

Debt factoring: invoices £20,000, 90% advanced, 2% fee

Advance now: £18,000. Fee: £400. Total received: £19,600. Gives immediate cash, but costs a fee and the factor deals with customers.

Sources of finance in the specification: internal and external

Internal: retained profits. External: debt factoring, overdrafts, loans, share capital, venture capital. Short term: overdraft, factoring. Long term: loans, share capital, venture capital, retained profit.

Ways to improve cash flow, and a difficulty

Chase receivables, early-payment discounts, factoring, longer supplier terms, lower stock, delay capital spending, overdraft, sell spare assets. Difficulties: discounts cut income; tighter credit loses customers; suppliers may refuse terms.