2.3.2 Financial information and decisions making Flashcards
why might a business need to raise finance
- to start up business
- to invest in business growth
- to buy new equipment
- to solve cashflow problems
- to move to new premises
define bank loan
amount of money borrowed from bank usually for stated purpose. loan for fixed period of time
- external
- medium term
cost of bank loan
money tat’s been borrowed has to be repaid, together with interest
define leasing
method of obtaining items for a stated period of tie. at end of lease items usually returned to owner
- external
- medium term
cost of leasing
monthly or annual payments made for right to use equipment. payment will include amount for cost of obtaining finance to fund purchase of leased equipment
define hire purchase
system of obtaining items in return for a monthly payment over a given period of time. items don’t become property of user until final payment has been made
- external
- medium term
cost of hire purchase
deposit has to be made, followed by monthly payments which may include and interest payment
define taking a new partner
selling off part of business to new partner
- external
- long term
cost of taking a new partner
new partner will have a say in running of business and will be entitled to share of any profits
define trade credit
when business sells goods it sometimes allows other business to take goods away without paying for them immediately. goods will have to be paid for within an agreed time period usually 30,60 or 90 days
- external
- short term
cost of trade credit
period of credit is usually interest free
define retained profit
profit made by business that’s kept back for its own use. may be used to help finance purchase of things
- internal
- medium term
cost of retained profit
no costs however, there is opportunity cost involved as once profit has been used it can’t be used for something else
define sale of assets
selling off,and turning into cash something that business owns ,as they may no longer need it, may fund purchase of equipment and/or buildings
- internal
- medium term
cost of sale of assets
no cost involved other than opportunity cost f not being able to use asset again
define mortgage
borrowing money which requires some form of security. used to help fund purchase of property. at end you own property
- external
- long term
cost of mortgage
money that has bee borrowed has to be repaid, together with interest , and need to deposit 10% of original property price
define overdraft
arrangement with bank where business will be able to withdraw more money from its bank account than it actually has
- external
- short term
cost of overdraft
interest is charged on daily amount of money that business owes to bank
define grants
amount of money usually made available for specific purpose by government and/or local councils
- external
- medium term
cost of grants
don’t usually need repaying, finance obtained from grant usually has to be used for specific purpose
define owner investment
when existing owners of business invests more money in it
-internal
long term
cost of owner investment
no cost involved
define cash in bank
money owned by business and built up overtime following successful trading.
- internal
- short term
cost of cash in bank
no costs other than opportunity cost
define share issue
source of finance used by limited companies to raise finance in return for a ‘share’ in business. may be used to fund major business development
- external
- long term
cost of share issue
dividends may have to be paid on shares, and each share represents part-ownership of business. shareholders are entitled to have say in running of business
advantages of grants
- free of interest
- no need to repay, doesn’t raise debts for business
disadvantages of grants
- may not be available, may not get full amount required and so need to raise money in another way
- may be conditions attached
advantages of a lease
- no need to find deposit, so easier in short run
- asset readily available, so can start production quickly
- maintenance may be covered as part of lease agreements, means reduce costs and means less hassle
advantages of retained profit
- no interest has to be paid
- no need to repay money
- no cost to raise finance
disadvantages of retained profit
- only available to businesses that make a profit
advantages of a loan
- repayment spread over time
- business knows amount to be paid in instalments which helps budgeting
disadvantages of a loan
- interest has to be paid
- business may need to risk an asset as security
advantages of cash in bank
- no interest has to be paid
- debt not added
disadvantages of cash in bank
- only available to businesses that have profit
- opportunity cost and no money for urgent matters
define cash flow
movement of money into and out of a business bank account
define inflows/income
money received by business
define outflows/expenditure
money paid out by business
define net cash flow
difference between inflows and outflows (inflows-outflows)
define positive net cash flow
inflows are greater than outflows
define negative net cash flow
inflows are not enough to cover outflows
define opening/closing balance
amount of money in business’ account at any particular time (beginning and end of month)
how could tom’s toys solve their cash flow problem
- increase income by investigating own money or applying for bigger loan
- reduce expenditure by cutting down staff hours or finding cheaper supplier of stock
- ask suppliers for trade credit
benefits of a cash flow forecast
- enable business to assess business’s ability to meet debts as they fall due
- identify imminent cash flow problems + enable business to plan and seek ways, well in advance, to prevent potential cashshortage
- can help control business by setting targets relating to cash flow
- helps business make key decisions
limitations of a cash flow forecast
- figures might be different to actual, as forecast figures might be based on inadequate research/info
- very difficult to forecast accurately, even with best research because there are factors affecting forecast figures that are outside a business’s control, some of which difficult to predict
why do business’s seek to make a profit
- as reward for risk taken by shareholders or owners
- to re-invest in business for growth
define gross profit
amount of profit made by business as result of buying and selling goods or services but without paying for any of day-to-day running of business
calculation for gross profit
revenue - cost of buying goods
define net profit
profit made as result of buying and selling goods, but also makes an allowance for cost involved in running business
calculation for net profit
gross profit - expenses
why is keeping financial records important
- to know whether or not the business is making profit
- to be prepared for external organisations, such as auditors and the inland revenue
- to be able to use records to plan for future
define expenses
cost of running business that occurs as part of a company’s operating activities during a specified accounting period
define profit margin
ratio of profit over revenue, expressed as a percentage, mainly an indication of ability of a company to control costs
gross profit margin calculation
gross profit/revenue x100
net profit margin calculation
net profit margin/revenue x100
why is it important to calculate net and gross profit at different points
- profit can be compared over time
- profit can be compared with competitors
options for decreasing expenditure
- cut wages, as sales decrease won’t need as many staff
- cut stock prices, go to cheaper supplier
- cut expenses
- ask supplier if payment can be delayed
options for increasing income
- increase revenue, increase price however less people may buy product so quantity sold goes down or lower prices to increase quantity sold, not guarranteed
- invest own money, may not have own money
- apply for bigger loan, bank may be reluctant yo give bigger loan as isn’t certain that Tom’s toys will be able to pay back
