3.6 Finance Flashcards
1 pros and cons of using family and friends for cash
pros
-easy to arrange
-money free of interest
cons
-money might not be enough
-could fall out with friends
1 what is retained profit
profit spent but kept within the business
1 pros and cons of retained profit for cash
pros
-no interest payments
-can be arranged immediately
cons
-only available to profitable businesses
-shareholders may oppose the decisions
1 what is selling assets
when a business sells items they no longer need
1 pros and cons of selling assets for cash
pros
-no interest payments
-may keep assets
cons
-dont have suitable assets
-leasing assets back means regular payments
1 what is bank loans
what is a mortgage
money obtained from a bank that is paid back over a period of time
a loan used to buy a property
1 pros and cons of bank loans and mortgages
pros
-arranged quickly
-allows repayment over a long time period
cons
-interest has to be paid
-banks may require assets as collateral
1 what is selling shares for cash
inviting people to buy a part of the business
1 pros and cons of selling shares
pros
-no interest payments
cons
-owners may lose control
-only available to companies
1 pros and cons of government grants
pros
-dont have to be repaid
cons
-meet strict conditions
-invest money along side the grant
1 what is an over draft
when a bank allows a business to spend more than whats in their accout
1 pros and cons of an overdraft
pros
-easily arranged
-only interest if you use it
cons
-interest paid
-fee charged
1 what is trade credit
when a business gets a time period to pay for their items
1 pros and cons of trade credit
pros
-no interest
cons
-if payment is delayed the supplier may stop supplying
1 what influences a new business on choosing a source of finance
amount of personal finance available
legal structure
how risky the business is judged to be
1 what influences an established business on choosing a source of finance
profitability of the business
assets owned
past history
future prospects
legal structure
amount of finance needed
2 what is cash
notes, coins and bank deposits that provide firms with spending power to pay their bills and expenses
2 what is cash flow
the money that flows in and out of a business ona day to day basis
2 what are the elements of cash flow
cash flow INTO the business as receipts
-from cash received from selling products
cash flow OUT as payments
-pay wages, suppliers etc
2 what is net cash flow
difference between money in and money out
2 what is the difference between profit and cash flow
the challenge for managers to make sure there is always enough cash to pay expenses when they are due
running out of cash threatens the survival of the business
2 what happens if a business runs out of money
they become insolvent
must raise extra finance or cease trading
planning is important, drawing up a cash flow forecast
may need an overdraft
2 what is cash inflows
payments into a firm made by customers
2 what is net cash flow
cash inflow - cash outflow
2 what is cash outflows
payments made by a business
2 what does a cash flow forecast show
cash inflows (receipts)
cash outflow (payments)
net cash flow
opening balance
closing balance
2 what is the closing balance
opening balance + net cash flow
2 what is opening balance
closing balance from previous month
2 why is it important to forecast cashflow
identify periods of cash short fall
identify periods of cash surplus
secure additional funding
2 consequences of cash flow problems
relationships with suppliers may deteriorate
workers leave
cease trading
2 causes of cash flow problems
poor planning
external factors
inadequate credit control
excessive stock hold
heavy investing
over trading
2 how to improve cash flow problems
increasing cash inflows
-over drafts
-sale of assets
-short credit terms
decreasing cash outflows
-delay paying creditors
-lease not buy
-reduce spending
2 what is debt factoring
when a company sells money that is owed to them to a factoring company so that they can get the money owed sooner
2 what is credit crunch
when banks are unwilling to lend money to business because they fear the business may not be able to pay it back
3 what is the two profit equations
total revenue - cost = profit
total revenue = cost + profit
3 what is total revenue equation
selling price x quantity = total revenue
3 what is total cost euqation
total fixed cost + total variable costs = total cost
total cost = total revenue - profit
3 what are total fixed costs
always stay the same, no matter the quantity sold
3 what are total variable costs equations
unit cost x quantity sold/made = variable costs
3 why should you include financial calculations about revenue, cost and profit in a business plan
see how much it will cost to run the business
see if it is viable
to show to investors
produce financial targets and objectives
plan and monitor finances
3 what is share issue
selling a share or part ownership of a company
4 what is an income statement
shows the trading and profits or losses of a business over a given period of time
4 why is an income statement neccessary
its a legal requirement to provide one
to publish accounts
ensure the right amount of tax is paid
4 why is an income statement helpful
allows shareholders to see how much profit has been made and if it is maintainable
can compare with other business in relations to previous years to see how well a company has performed
4 why is an income statement helpful to banks
allows them to see if they are likely to get back any money that they chose to lend
4 equation for gross profit margin
gross profit / revenue x 100
4 equation for net profit margin
operating profit (net profit) / revenue x 100
4 what is a statement of financial position
a snapshot of what a business owns
what a business owes on a given day
usually last day of financial year
aka balance sheet
4 what is an asset
something a business owns
4 what is a liability
something a business owes
4 why do business use financial documents
to monitor and record what is is doing
helpful and necessary
4 if net profit is 2700 in 2016 (revenue = 5400)
and gross profit is 3900 in 2016
what is net profit margin and gross profit margin
NPM = 27000/5400 x100 = 50%
GPM = 3900/5400 x100 = 72.2%
4 name some assets
stocks
cash
debtors
buildings
4 name some liabilities
mortgage
loans
4 what do businesses invest in
need assets to use to produce goods and services
land and buildings
machinery and vehicles
new products
training staff
research and development
4 what is average rate of return
method of deciding whether an investment is worth it
compares average yearly profit from an investment through its life with the cost of it initially
given as a percentage
higher % is better
4 how do you calculate average rate of return
get total profit
subtract cost of investment from total profit
divide (profit - cost of investment) by number of years
this gets average yearly profit
then..
ARoR = average yearly profit / cost of investment x 100
4 if total profit is 185,000
years is 3
cost of investment is 125,000
what is average rate of return
185000/3=61666.67
61666.67/125000 x100 = 49.33%
4 what is break even point
volume of sales needed to ensure total revenue = total costs
no profit or loss is made
4 what is margin of safety
how much current level of production exceeds the break even level of output
4 what is a financial statement
the records of the financial dealings of the business of their day to day transactions
net assets always equals total equity
also called a balance sheet
4 what are non-current assets
things that a business needs to operate and that have a value but which are hard to convert into cash
eg, land, buildings,cars, machinery
4 what are current assets
things that can be easily converted into cash
LIQUID
eg, inventory, cash
4 what are current liabilities
debts that a business has to pay in the next 12 months
eg, raw material suppliers, overdrafts
4 what are non-current liabilities
debts the business owes that have more than 12 months pay back time
eg, long-term loans, mortgages
4 what is total equity
where the money for the investment has come from
eg, shareholder funds
4 what is GPM if
sales revenue = 178
cost of sales = 99
gross profit = 178-99 = 79
GPM = 79/178 x100 = 44%
