What is the first step in determining a business’s financial needs?
Collect key financial information about itself
Key financial information includes balance sheets, income statements, cash flow statements, and budgets/forecasts.
What factors determine the financial needs of a business?
- The size of business
- The current phase of the business cycle
- Future plans for growth and development
- Capacity to source finance - debt/equity
- Management skills for assessing financial needs and planning
What is the purpose of budgets in financial management?
Provide information in quantitative terms about what a business requires to achieve a particular objective
Budgets enable monitoring and review of objectives and control of finance.
What are the three main types of budgets?
- Operating budgets
- Project budgets
- Financial budgets
What is the double entry system in accounting?
A system that ensures if the entries don’t balance, it indicates something is wrong
This system is crucial for maintaining accurate financial records.
What is a financial risk?
Risks to a business of being unable to cover its financial obligations
For example, debt borrowings can lead to bankruptcy.
What are financial controls?
Policies and procedures that ensure plans of a business will be achieved efficiently
Common causes of financial issues include theft, fraud, and errors in record systems.
Common controls are:
Clear authorisation and responsibility for tasks in a business
Separation/rotation of duties
Control of cash (banking cash daily)
Protection of assets
List advantages of debt finance.
- Funds are readily available
- Increased funds lead to increased profits
- Interest payments are tax deductible
- Will not dilute current ownership
List disadvantages of debt finance.
- Increased risk due to interest charges
- Security is required
- Regular payments need to be made
- Debt can be expensive
What is equity financing?
Relates to the external source of finance in the business
It does not have to be repaid unless the owner leaves the business.
List advantages of equity financing.
- Does not have to be repaid
- Cheaper than other sources of finance
- Less risk for the business and owner
List disadvantages of equity financing.
- Lower profits and returns for the owner
- Ownership is diluted
- Long, expensive process to obtain funds
What is the cash flow statement?
A monthly financial statement that indicates the movement of cash in, around, and out of a business
It provides information about liquidity and the ability to pay debts.
What does the income statement show?
An annual summary of the income earned and the expenses incurred throughout trading
It indicates whether the business made or lost money.
What does the balance sheet represent?
A business’s assets and liabilities at a particular point in time
It measures the net worth of a business.
What is liquidity in financial ratios?
Extent to which a business can meet short-term obligations
The higher the ratio, the more capable the business is in meeting short-term financial obligations.
What is the formula for the current ratio?
Current assets ÷ Current liabilities
An acceptable ratio is 2:1.
What does the gearing ratio indicate?
Proportion of debt and equity used to finance activities of a business
Higher gearing indicates higher risk but potentially higher profits.
What is profitability in financial ratios?
Earning performance of the business and its capacity to maximize profits
It shows how effectively resources are used.
What is the formula for the gross profit ratio?
Gross profit (revenue - COGS) ÷ Sales
A high gross profit ratio, such as over 50%, is preferred.
What is the acceptable ratio for the net profit ratio?
Preferably high, such as 13-20%
It represents the profit or return to owners.
What is comparative ratio analysis?
Analysis that involves comparing performance with past performance, similar businesses, and against industry standards
It helps in discovering strengths and weaknesses.
What is the limitation of financial reports regarding normalised earnings?
The process of removing one-time or unusual influences
For example, a pandemic may impact financial results, not reflecting normal performance.
What is capitalising expenses?
Recording an expense as an asset on the balance sheet rather than as an expense on the income statement
This can distort the appearance of profitability.
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finance role/influence45
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finance processes32
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finance strategies30
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operations role/influences39
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operations processes34
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operations strategies31
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marketing role/influences32
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marketing processes31
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marketing strategies55
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HR Processes30
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Effectiveness of HR29
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HR role/influences62
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HR strategies27
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case studies - marketing influences10
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case studies - marketing process3
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case studies - marketing strategies6
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case studies: hr influences3
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case studies - hr process4
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case studies - operations influences3
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case studies - operations strategies3
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case studies - hr strategies6
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case studies - operation strategies3
