Please enable JavaScript.

Coggle requires JavaScript to display documents.

Management of finance (Ratios (Use of accounting ratios (Make comparisons…

- - - - Check their jobs are safe, see if their is a likely pay rise/ bonus
    - - Check tax payments
    - - Check liquidity to ensure they will receive capital back.
    - - Check all areas of profitability, liquidity and efficiency of the business
    - - Check liquidity for payments for trade credit, to see if the business is doing well or not (rely on more sales)
  - - - Measures the businesses ability to pay off its short term debts
        
        Current ratio
        
        Current assets/ current liabilities = x: 1
        
        Shows the businesses ability to pay it's short term debts. The ideal ratio is 2:1 if any lower than 1:1 than the business won't be able to pay off it's short term debts. If the ratio is too high then the capital should be put back into the business.
        
        Ways to improve
        
        Try to increase current assets, seek ways to reduce liabilities
        
        Acid test ratio
        
        Current assets - inventory/ current liabilities = _ x : 1
        
        In a time of struggle (e.g. need to pay off bank loan early) for Aquamarine Power Limited an acid test ratio displays their ability to pay off its short term debts. This is without having to sell any inventory, as it’s difficult to gain capital quickly through selling stock. A result of 1:1 is ideal as the business is in a difficult situation and are not bothered about the percentage of profits produced.
    - - Measures the businesses ability to pay short term debts and calculates the turnover of inventory.
        
        Rate of inventory turnover
        
        Cost of sales/ average inventory*
        
        Measures the length of time inventory is held
        
        *opening inventory + closing inventory/ 2
        
        Why it may change
        
        Increase/ decrease in cost of sales, change in re-order level, introduction of JIT.
    - - Measure how profitable the business is. They analyse expenses, costs of inventory and selling price
        
        Profit for the year percentage
        
        Profit for year/ sales x 100
        
        The percentage of profit gained by the business once the overall expenses have been deducted.
        
        Ways to improve
        
        Try to improve their gross profit, identify expenses that can be reduced
        
        Return on equity
        
        Profit for the year/ equity x 100
        
        How much capital an owner/ shareholder will get back from their investment.
        
        The investor should compare the ROE with the return offered by other investment opportunities.
        
        Gross profit percentage
        
        Gross profit/ sales x 100
        
        Displays the profit gained from purchasing and trading stock, the higher the percentage the more gross profit is made from each purchase made by customers.
        
        Ways to improve
        
        Increase selling price, find cheaper supplier, negotiate discounts with suppliers.
        
        Mark up
        
        Gross profit/ cost of sales x100
        
        The percentage of profit made from each sale
- - - - Low sales
        
        Increase sales
      - High drawings
        
        Limit drawing
      - High interest rates
        
        Change bank
      - Expensive raw materials
        
        Purchase cheaper inventory (change supplier)
      - Excessive customer credit
        
        Reduce customer credit
      - Change in demand
        
        Have a sale
      - Cash tied up in inventory
        
        Reduce inventory level
      - Not chasing up on late trade payables, ie poor credit control
        
        Debt factoring- ie sell off debts to a factoring company
    - - Cash flows shows all the businesses capital flowing in and out of the business.
      - Helps with decision making
      - Used to predict the businesses financial situation
      - Monitor and control individual departments or the business as a whole.
      - To asses the possibility of a businesses start-up or business expansion.
- - - - When the business withdraws more money than that is available in their bank account
        
        Advantages
        
        Helps to solve cash flow problems
        
        Easy and quick to arrange with the bank
        
        Disadvatages
        
        Needs to be repaid back quickly due to interest rates being high.
    - - A certain percentage of the profit gained by the business is reinvested back into the business
        
        Advantages
        
        The business does not go into debt
        
        Ownership is not diluted
        
        Disadvantages
        
        Limited amount of funds available,
    - - When a business would sell off parts of the business that are of no use to them, for example machinery, vehicles and building
        
        Advantages
        
        Gain a large source of finance which could then be used to fund projects.
        
        Disadvanatge
        
        Will not gain the full value of the asset as it's value decreases over time.
    - - Capital from the government, that does not have to be paid back.
        
        Advantages
        
        Does not need to be paid back
        
        May take a long time to acquire as there are lots of forms that need to be filled out.
        
        Disadvantages
        
        Usually has conditions attached. May take a long
    - - When a business purchases goods from a supplier with a delayed payment.
        
        Advantage
        
        Can sell goods using materials not yet paid for, therefore improving cash flow
        
        Disadvantage
        
        Trade credit is at the discretion of the supplier, therefore losing out on cash discounts.
    - - When a business sells it's debts off to a factor company. The debt factory immediately gives the business a % of the money owed, then later on once the debt has been collected the business will receive the remainder of the money.
  - - - When the owner of the business invest their own money into the business.
        
        Advantages
        
        Owner has complete control
        
        Reduces the amount of capital the business will then have to borrow
        
        Disadvantages
        
        If the owner has unlimited liability, therefore meaning the owner would then risk losing their own savings
        
        Savings could be small and not last long
    - - When a business borrows money from the bank, and pays it off over time with added interest.
        
        Advantages
        
        You can pay back the bank in regular fixed instalments, meaning they don’t have to pay a large sum of money all at once which could of put the business at risk of failing.
        
        Easier for businesses to budget
        
        Disadvantages
        
        Interest could be expensive.
    - - Putting more shares on the stock market
        
        Advantages
        
        Large amounts of capital can be raised quickly and easily
        
        No debt is incured
        
        Disadvantages
        
        Can not control who buys and how many shares people purchase, which could then lead to loss of control
        
        Profits are shared between more shareholders
    - - Venture Capitalists provide finance when banks decide a loan is too risky
        
        Advantage
        
        Businesses with poor credit ratings may be able to gain finance
        
        Disadvantage
        
        Expect higher returns on their investment
        
        May want part ownership of the company, leading to a loss of control
    - - When a business pays a small deposit and then pays the remainder of the cost is paid in fixed instalments of an agreed period.
        
        Advantages
        
        Spreads the cost of purchase
        
        Disadvantages
        
        Interest added
        
        Asset not owned until last payment is made
    - - When a business rents equipment or premises rather than purchasing them outright
        
        Advantages
        
        Equipment can be changed regularly, meaning can keep up to date
        
        Disadvantages
        
        May be more expensive in the long run compared to buying it outright
        
        The businesses does not own the leased items and is therefore not an asset to them
    - - Sold by companies to investors as a way of raising finance for use within the company.
      - They pay the holder a fixed amount of money every year until its maturity date, at which time the holder will be able to sell the debenture back to the company for its market price.
- - - - An Income statement is an outline of all the capital that has gone in and out of the business within a period of time this allows the businesses to measure their performance through being able to see the level of profit/ loss they have made, and what led them to this position (what the money has been used for), allows them to measure their performance.
    - - A Statement of financial position is a glimpse of the business's financial position at a particular point in time. A Statement of financial position shows the businesses assets and liabilities along with it’s degree of working equity.
        Shows the total value of a business at that moment in time.