What are the 6 steps for Planning and Implementing?
- Addressing current financial position
- Determining Financial needs
- Developing budgets
- Maintaining Record systems
- Assessing Financial Risks
- Establishing Financial Controls
What is determining financial needs?
To determine where a business is headed and how it will get there, it is important to know what its financial needs are
What is Developing budgets?
Budgets map the expected inflows and outflows of money for a particular part of the business over a given period of time
What is Maintaining Record systems?
Managers need accurate, organised records to run the business effectively and meet legal disclosure requirements.
What is Assessing Financial Risks?
Financial risk is the chance a business can’t meet debts, so managers must assess and manage risks to avoid potential bankruptcy.
What is Establishing Financial Controls?
Financial controls are policies and tools like budgets that help managers ensure business plans are efficiently achieved and track performance against goals.
What is Debt Finance?
Debt finance requires regular repayments, increasing risk due to interest, fees, and the need to repay the principal.
What is Equity Finance?
Equity finance is low-cost and low-risk with no repayments, but can lead to lower profits and returns.
What is a Cash Flow Statement?
Cash flowing in and out of a business over a period of time
Why Monitor Cash?
Monitoring cash ensures bills are paid on time, avoids legal issues, protects credit rating, and keeps operations running smoothly.
What is Cash Accounting?
Registers only money that literally moves from entity to entity therefore unpaid invoice does not appear
What is Accrual Accounting?
Registers any transaction/money moved owed or owed regardless of cash movement therefore unpaid invoice does appear
What is an Income Statement?
An income statement shows a business’s revenue, expenses, and profit or loss over a specific time period.
What is a Balance Sheet?
A balance sheet shows a business’s assets and liabilities at a specific point in time.
What is Vertical Analysis?
Vertical analysis compares figures within one financial year; for example, expressing gross profit as a percentage of sales and comparing debt to equity
What is Horizontal analysis?
Horizontal analysis compares figures from different financial years; for example, comparing 2011 and 2012
What is Trend Analysis?
Trend analysis compares figures for periods of three to five years
What is Liquidity?
Liquidity measures a business’s ability to pay short-term debts using current assets and liabilities within 12 months.
What does a 2:1 liquidity ratio generally indicate for a firm?
It indicates a sound financial position, meaning the firm has twice as many assets as liabilities; however, this can vary by industry and external factors.
What is the current ratio for liquidity
Current ratio = Current assets/Current liabilities
What is Gearing (Leverage)?
Gearing ratios assess a firm’s long-term solvency by comparing debt to equity, indicating risk for creditors and investors.
In which types of industries are higher debt-to-equity ratios commonly seen?
- High-risk, high-profit industries (e.g., mining)
- Businesses less affected by economic fluctuations (e.g., grocery stores)
- Manufacturing industries with strong markets and profit potential
What is the Debt to Equity Ratio?
Debt to equity ratio = Total liabilities/owners equity
What factors should a business consider when deciding its ideal level of gearing?
- Return on investment
- Cost of debt
- Size and stability of earnings
- Liquidity of assets
- Purpose of short-term debt
