3.6 - Finance Flashcards
What is meant by sources of business?
The capital needed to start up, run and grow the business
What is an internal source of finance?
Capital found within the business
What is a external source of finance?
Capital found outside the business
What are some examples of internal sources of finance?
Selling assets
Retained profit
Personal savings
What are some examples of external sources of finance?
Share capital Trade credits Hire purchases Loans from family and friends Government grants Bank loans or mortgages
What is meant by selling assets?
A business can sell its assets to raise cash. They are usually a cheap source of finance because the business does not have to pay interest
What is meant by retained profits?
This is profit that the business has effectively saved whilst it has been operating (running)
What is meant by personal savings?
This is personal money that is invested by the owner of a company. It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund their business venture
What is meant by hire purchases?
This is when a business buys something and instead of paying for it upfront pays for it in instalments
What is meant by loans from friends and family?
Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment
What is meant by trade credit?
Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later
What is meant by government grants?
A government may give grants (money) to companies to research things that the government is interested in
What is meant by bank loans or mortgages?
Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed
What is meant by share capital?
A firm can sell share capital (some of its shares) to other people or companies. They give away a percentage of the company in return for getting finance invested in the business
What is cash flow?
The amount of money moving in and out of a business on a day to day basis
Money in to a business = ?
Receipts
Money moving out of a business = ?
Payments
Why is cash flow important?
Helps the business to survive
Helps them to pay bills, and pay staff
Helps identify problems and find solutions
Why might inflows in cash flow change?
- Seasonal changes affect demand
- New competitors affect sales
- Trends changing
- Something could damage the brand image
Why might outflows in a cash flow change?
- Find cheaper suppliers
- Business expands means more payments need to be made e.g bills
- Staff retention —> more training, recruitment
What is opening balance?
Money you have at the start of the month
What is closing balance?
Money you have at the end of the month
Net cash flow = ?
Receipts - payments
Closing balance = ?
Net cash flow + opening balance
What is a liquidity problem?
If a business experiences problems where they do not have enough cash to cover their payments
What is a cash flow problem?
When a business doesn’t have any cash
Causes of cash flow problems
- Economic changes
- Suppliers could increase their price
- Seasonal changes
- Competition
- Stock - too much / not managing stock well
Resolutions to cash flow problems
- Discounting prices
- JIT - don’t hold any useless stock
- Offer new products / USP - diversification
- Sell assets
- Shut for periods of the year - seasonal
- Source of finance
- Trade credit - ask suppliers
What is the difference between cash flow and profit?
Cash flow = sales, short term
Profit = other forms of income, long term
What is meant by the term ‘breakeven’?
Where a business does not make a profit or loss
Total revenue = total costs
What is the meaning of equity?
A share of the business
Why are external sources of finance more expensive?
External financing tends to be more expensive than internal financing because a business normally has to pay interest on the money they acquire
Examples of major businesses investments
- New machinery
- New buildings
- Vehicles
What is average rate of return (ARR) used for?
Average rate of return (ARR) is a way of measuring how good an investment project is for a business
What are financial statements?
Financial statements are a formal record of the financial activities and the financial position of a business
What are the three finanical statements?
- Income statement
- Cash flow statement
- Statement of financial position/balance sheet
What is a statement of financial position?
This reports the assets, liabilities and equity of a company on a given date. It essentially shows what a business owns and what it owes
What is an income statement?
- An income statement shows a business’ financial performance over a period of time. It shows the revenue, costs and profits of a firm
- An income statement shows how much a business is profitable
What is a cash flow statement?
The cash flow statement gives an overview of the cash that has come in and out of the business in the past year. It also gives the net cash flow, opening cash balance and closing cash balance.
What are the 3 most importnat things in a balance sheet?
- Liabilities
- Assets
- Equity
What are the 3 most importnat things in an income statement?
- Profit
- Revenue
- Costs
Why is it important to measure financial position?
- Measure profit
- See if they’ve met their objectives
- Share prices rises
- Sales revenue increasing
How do income statements help a business?
- If a business is making a loss it shows the directors what is causing it
- Important as you can make comparisons to other firms
- Identify which costs need to be reduced
How do businesses use financial information to analyse performance?
- Compare all 3 types of profit - to see what your business is spending on the most
- Compare to competitors
- Compare to your targets
- Compare to previous years
Assets = ?
Resources a business owns
Liabilities = ?
Resources a business owes
What are non current assets?
Resources used often that are difficult to turn into cash. Usually owned for a long period of time
What are current assets?
Short term assets that can be turned into cash within 12 months
What are non current liabilities?
Debts due to be repaid after more than 12 months e.g mortgage, loan
What are current liabilities?
Debts due to be repaid within one year e.g overdraft, suppliers, dividends
What is a creditor?
Someone a business owes money to
What is a fixed cost?
A cost that stays the same as output changes
What is variable costs?
Costs that change as output changes
