2.3 Flashcards
why do businesses need finance
to start up
to grow and expand
to pay debts
help in slow trading periods
to buy stock
what are the 3 types of internal finance
owners capital
retained profit
sale of assets
what are the advantages and disadvantages of owners capital
+/ don’t have to pay back
no debt
don’t pay interest
immediately available
-/ often not a large sum of money
may not get the money back
when may owners capital be used
buying stock
small costs
some equiptment
what are the advantages and disadvantages of retained profit
+/ not paid back
sustainable way to grow
immediately available
-/ can’t be used to start up
not a large sum of money
unpredictable
when may retained profit be used
new staff
new location
equipment
stock
general expansion
what are the advantages and disadvantages of sale of assets
+/ large sums of money can be raised
not paid back
short term finance
-/ no longer benefit from the asset
less attractive to investors
may take a while to sell
define retained profit
profits which are reinvested back into the business
what is a profit and loss statement
statement of comprehensive income, summary of profit & loss through the year
what are the advantages and disadvantages of doing a profit & loss statement
+/ tracks the businesses performance
can be used for forecasting
-/ not a full representation
takes time
what is a balance sheet
snapshot of a businesses assets & liabilities at a particular time
what are the advantages and disadvantages of balance sheets
+/ helps investors judge if the business is worth investing in
evaluates effectiveness of assets
-/ doesn’t show how a business has done overtime
uses figures not margins so its harder to compare
what is a cash flow forecast
predicts the amount of money that will flow in and out of the business
what are the advantages and disadvantages of cash flow forecasts
+/ attracts potential investors
plan finance ahead of time
-/ bias may overinflate numbers
doesn’t take into account outside factors
needs regular updates
what are the 3 profit margin calculations
operating profit/
sales revenue X100
net profit/
sales revenue X100
gross profit/
sales revenue X100
what are the advantages and disadvantages of profit margins
+/ easier to compare
more accurate way of representing data
shows where costs could be reduced
-/ takes time to calculate
what are liquidity calculations
focus on short term & makes use of current assets and liabilities
what are the advantages and disadvantages of liquidity calculations
+/ shows if too much money is tied up in assets
prepares businesses for loss
checks debts can be paid
-/ goes off expected sales which can fluctuate
define budgets
financial plan & agree spending limit within a business based on objectives
what are the advantages and disadvantages of budgets
+/ better financial decisions made
can be used to measure success against objectives
anticipate problems
motivates managers
-/ business is dynamic
may feel the need to spend the entire budget
why are business plans needed
to gain certain forms of finance and reduce risk, map out a route to a businesses objectives and helps to attract investors, they are important to give owners direction in where to lead the business
what is cash inflow (give examples)
money coming into the business also known as receipts
owners capital
investors
loan
grant
sales revenue
what is cash outflow (give examples)
money going out of the business also known as payments
loan repayment
rent
stock costs
wages
advertising
what factors influence cash flow
customer trends
economic variables
competitors actions
how can cash flow be improved
short term loan
reduce expenses
delay paying bills
what are the limitations of cash flow forecasts
bias - overinflating figures
don’t take into account external factors
requires regular updates
takes a long time to create
what is limited liability
when a business owner is only liable for their original investments should the business go into debt as they have a separate legal identity
what is unlimited liability
if a business has debts the owner must pay all out of their own pocket
how do you calculate gross profit
sales revenue - cost of sales
how do you calculate operating profit
gross profit - expenses
how do you calculate net profit
operating profit - interest
what is a zero based budget
not allocated a budget instead you must justify the expense
what is a historical based budget
budget based on previous performance of sales and costs
what is variance analysis
variance is the difference between the budgeted and actual figure
