5. Financial information and decisions Flashcards
1
Q
Hire Purchase.
A
Buying specific goods with a loan, often provided by a finance house.
2
Q
Leasing.
A
Renting or hiring equipment or property.
3
Q
Retained Profit.
A
The profit held by a business rather than returning it to the owners.
4
Q
Short-Term Finance.
A
Money borrowed for one year or less.
5
Q
Debenture.
A
A long-term loan to a business.
6
Q
Gearing.
A
The amount of capital raised from loans in relation to the amount raised from the sales of shares.
7
Q
Long-Term Finance.
A
Money borrowed for more than one year.
8
Q
Mortgage.
A
Long-term loan secured with property.
9
Q
Share Capital.
A
Money raised from the sale of shares in a limited company.
10
Q
Venture Capitalists.
A
Specialists (individuals or financial institutions), which provide funds for businesses, usually in exchange for an equity stake.
11
Q
Working Capital Cycle.
A
The flow of liquid resources into and out of a business.
12
Q
Cash Outflows.
A
The flow of money out of a business.
13
Q
Working Capital.
A
The funds left over to meet day-to- day expenses after current debts have been paid. It is calculated by current assets minus current liabilities.
14
Q
Budget.
A
A plan that shows how much money a business expects to spend or receive in a specified period.
15
Q
Cash Flow.
A
the flow of money into and out of a business.
16
Q
Cash Flow Forecast.
A
The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month.
17
Q
Cash Inflows.
A
The flow of money into a business.
18
Q
Liquid Asset.
A
An asset, which is easily changed into cash.
19
Q
Net Cash Flow.
A
The difference between the cash flowing in and the cash flowing out of a business in a given time period.
20
Q
Costs.
A
Expenses that must be met when setting up and running a business.
21
Q
Direct Cost.
A
A cost which can be clearly identified with a particular unit of output.
22
Q
Fixed Costs.
A
Costs that do not vary with the level of output.
23
Q
Indirect Cost or Overhead.
A
A cost, which cannot be identified with a particular unit of output. It is incurred by the whole organisation or department.
24
Q
Total Costs.
A
Fixed cost and variable cost added together.
25
Total Revenue.
The money generated from the sale of output. It is price multiplied by quantity.
26
Variable Costs.
Costs, which rise as output levels are increased.
27
Break Even.
The level of output where total costs & total revenue are exactly the same. Neither a profit nor a loss is made.
28
Break-Even Chart.
A graph, which shows total cost and total revenue. The break-even pint is where total cost and total revenue intersect.
29
Margin of Safety.
The amount of output available to be sold above the break-even point where the business makes a profit.
30
Distributed Profit.
Profit that is returned to the owners of a business.
31
Dividend.
Money paid to shareholders (owners of the business) when profit is distributed.
32
Gross Profit.
Sales revenue less cost of sales.
33
Net profit.
Gross profit less expenses.
34
Profit.
The money left over after all costs have been subtracted from revenue.
35
Profit and Loss Account or Income Statement.
A financial document showing a firm’s income and expenditure in a particular time period.
36
Profit and Loss Account.
Shows how net profit is calculated by subtracting expenses from gross profit.
37
Profit and Loss Appropriation Account.
Shows how the profit after tax is distributed between owners and the business.
38
Retained Profit.
Profit that is kept by the business and may be used in the future.
39
Trading Account.
Shows how gross profit is calculated by subtracting cost of sales from turnover.
40
Assets.
Resources used or owned by the business in production.
41
Balance Sheet.
A summary at a point in time of business assets, liabilities and capital.
42
Capital.
A source of funds provided by the owners of the business used to buy assets.
43
Current Assets.
Assets likely to be changed into cash within a year.
44
Current Liabilities.
Debts that have to be repaid within a year.
45
Current Liabilities.
Debts that have to be repaid within a year.
46
Drawings.
The money taken from the business by the owner for personal use.
47
Fixed Assets.
Assets with a life span of more than one year.
48
Liabilities.
The debts of the business, which provide a source of funds.
49
Long-Term Liabilities.
Debts that are payable after 12 months.
50
Net Assets.
The total at the bottom of the first part of the balance sheet. It is the value of all assets less the value of all liabilities.
51
Net Current Assets.
Current assets minus current liabilities. Also, known as working capital.
52
Auditing.
An accounting procedure, which checks thoroughly the accuracy of a company’s accounts.
53
Acid Test Ratio.
Similar to the current ratio but excludes sticks from current assets. Sometimes called the quick ratio.
54
Current Ratio.
Assesses the firm’s liquidity by dividing current liabilities into current assets.
55
Gross Profit Margin or Mark-Up.
Grossed profit expressed as a percentage of turnover.
56
Return on Capital Employed (ROCE).
The profit of a business as a percentage of the total amount of money used to generate it.
57
Net Profit Margin.
Net profit expressed as a percentage of turnover.
58
Ratio Analysis.
A numerical approach to investigating accounts by comparing two related figures.
59
Reasons why business need finance
Starting up a business
Additional working capital
Expansion of an existing business
60
Types of sources of finance
Internal finance - when the finance is obtained inside a business
External finance - when the finance is obtained outside the business
Long term of finance - finance that is available for more than one year usually used to purchase long term fixed assets
Short term of finance - provides the working capital for the business for its day to day operations
61
Retained profit definition and advantages/disadvantages
Internal source of finance
A share of profit that is reinvested back into the business
does not have to be repaid
no interest needs to be paid
new business wont have retained profits
reinvesting the profits may leave less for the owners
62
Sales of existing assets
Assets that are no longer needed in the business is sold
better use of tied up capital in the business
does not increase debts for the business
takes time to sell
new business don’t have assets to sell
63
Owners savings
Internal source of finance
When the owner invests his/her own money in the business
It should be available to the firm quickly
No interest is paid
Savings may be too low
Risky if the business has unlimited liability
64
Bank loans
External finance, long term finance
A sum of money obtained by the bank which must be repaid and on which interest is payable
Quick to arrange
Can be varying time lengths
Large companies get charge lower interest rates
Bank loan must be repaid eventually + interest
Security or collateral is usually required (if the bank loan is not paid then they can take your assets)
Which is bad for new business as they have to use personal possessions
65
Factoring debts
External finance , short term finance
When an outside business collects your debtors debts immediately and take a small percentage of it
immediate cash is available to the business
the business does not receive 100 percent of the debts
66
Crowd funding
Short term finance, external finance
When people invest/fund a small amount of money via the internet to your business
allows to public reaction to the new business (if people are not prepared to invest then it may not be a good idea)
fast way
easy for new businesses to get some finance
media and interest and publicity need to be generated to increase the chance of success
publicising the new idea may cause others to steal it
67
Overdraft
Short term finance, external finance
When a business has the right to overdraw its bank account and needs to be repaid with interest
interest will be paid only on the amount overdrawn
usually cheaper than the short term loans
interest are variables (not fixed like bank loans)
bank may want the money to be repaid at a very short notice
68
Trade credit
Short term finance,
When a business delays paying its suppliers which leaves the business in a better cash position
almost like an interest free loan to the business
supplier may refuse to supply you if payments aren’t made quickly
69
Leasing
Long term finance,
When the business can use an asset without purchasing for it and pay for it monthly
the business does not have to find a large cash sum to purchase the asset to start with
the care and maintenance is handled by the leasing company
the total costs of leasing charges will be higher than purchasing it
70
Alternative sources of capital
Microfinance
- providing financial services including small loans to poor people not served by traditional banks as they don’t profit over such small loans and they don’t have assets to act as a “security” for the loans
Crowdfunding
- the funding of a projects from lots of people donating small amounts of money to your venture typical via the internet, this method is often used if the traditional methods are not accessible
71
Why is cash important to a business
used to pay workers
production of goods/services will stop
the business may be forced into liquidation
used to pay suppliers (if don’t then suppliers might not sell to you)
## used to pay dividends for public shareholders
72
What is cash flow
The motion of cash through a business over a period of time (inflows and outflows)
Inflows - cash going into the business over a period of time eg: a bank loan
Outflows - the sums of money paid out by a business over a period of time eg: salaries
73
Profit definitions and equation
Profit is the surplus after total costs have been subtracted from revenue
Revenue - total costs
Remember: cash flow is not the same as profit! Profitable business can still run out of cash
74
Cash flow forecasts definition
An estimate of the future cash inflows and outflows in a business showing the excepted cash balance at the end of each month
75
Cash flow forecasts (definitions of opening/closing balance and net cash flow)
Net cash flow - the difference between the inflows and outflows at the end of each month
Closing balance - the amount of cash held by the business at the end of each month (it becomes the opening balance the next month)
Opening balance - the amount of cash held by the business at the start of each month
76
Importance of cash flow forecasts
shows how much cash is available to paying bills
helps predict cash for starting a new business
whether the business is holding to much cash which could be used for a profitable use
77
Equations used in cash flow forecast
Net cash flow + closing balance = opening balance
Inflows - out flows = net cash flows
78
Working capital definition and equation
The capital available to a business in short term to pay for day to day expenses
Working capital = current assets - current liabilities
79
Methods to overcome a cash flow product
Increasing bank loans,
Delaying payments to suppliers
Asking debtors to pay faster
Delay or cancel purchases of capital equipment
80
Name the sources of short-term finance.
Overdrafts
Trade credit
Factoring of debts
81
What are overdrafts?
when the bank allows you to spend more money than is in your account
82
Advantages + disadvantages of overdrafts
ads:
interest will be paid only on the amount overdrawn
disads:
interest rates are variable
83
What is trade credit?
A business delays payment to suppliers
84
Advantages + disadvantages of trade credit.
ads:
Almost an interest free loan
disads:
The supplier may refuse discounts
85
What is factoring of debts?
A specialist agent buys the claims on debtors (people who owe the business money) giving the business immediate cash
86
Advantages + disadvantages of
ads:
The collection of debt becomes the problem of the factor and not the business
disads:
The firm does not receive 100% of the value of its debts
87
Name the sources of long-term finance.
bank loans
hire purchase
leasing
issue of shares
long-term loans or debt finance
debentures
88
What are bank loans?
Loan that is payable to the bank over a fixed period of time
89
Advantages + disadvantages of bank loans
ads:
Quick to arrange
disads:
Security or collateral is usually required
Interest must be paid (Revenue -> working capital)
90
What is hire purchasing? How is it different to leasing?
Buying a fixed asset immediately but paying for it over a period of time with interest
Different to Leasing - the property belongs to the company after paying for the last payment
91
Advantages + disadvantages of hire purchase
ads:
The firm doesn’t need large sums of cash to purchase the asset
disads:
High interest payments
92
What is leasing? How is it different to hire purchase?
Using an asset without purchasing it, just paying a monthly sum to use it
Different to Hire Purchase - the company can never own the asset
92
Advantages + disadvantages of hire purchase.
ads:
The care and maintenance of the asset is carried out by the leasing company
disads:
Total cost of leasing is higher than purchase
92
What is issue of shares?
Equity finance for limited companies only (shares are part ownership of the business)
93
Advantages + disadvantages of issue of shares.
ads:
No interest has to be paid
disads:
Dividends will be expected (Dividend is a share of the profit made by the business)
94
What are long-term loans or debt finance?
Borrowing large sums of money that has to be paid over a long period of time
95
Advantages + disadvantages of long-term loans or debt finance.
ads:
Can be used to raise very long term finance, up to 25 years
disads:
Interest must be paid
(the longer the term of finance, the more interest you have to pay)
96
What are debentures?
Long term loan certificates issued by limited companies
97
Advantages + disadvantages of debentures.
ads:
Can be used to raise very long term finance, up to 25 years
disads:
Interest must be paid
98
Name the internal sources of finance.
retained profit
sale of existing assets
sale of inventories to reduce inventory levels
owners retained savings
99
What is retained profit?
the profit kept in the business after the owners and shareholders have taken their share
100
Advantages + disadvantages of retained profit
ads:
Does not have to be repaid
No interest to pay
disads:
New business have no retained profits
Profits might be too low to finance the expansion
Keeping profits reduce payments to owners
101
What is sale of existing assets?
items of value that are no longer required by business
102
Advantages + disadvantages of sale of existing assets
ads:
Makes use of capital tied up
Does not increase debts
disads:
Take time to sell => amount not certain
Not available for new businesses
103
What is sale of inventories to reduce inventory levels?
inventories can be sold to reduce levels
104
Advantages + disadvantages of sale of inventories to reduce inventory levels
ads:
Reduce opportunity cost and storage cost
disads:
Done carefully to avoid not satisfying demand
105
What are owners’ retained savings?
a sole trader or partnership member can put own savings into business
106
Advantages + disadvantages of owners retained savings
ads:
Should be available to firm quickly
No interest paid
disads:
Savings may be too low
Increases risk taken by owners
107
Name the external sources of finance.
issue of shares
bank loans
selling debentures
factoring debts
grants and subsidies
micro-finance
108
What is issue of shares?
Shares can be issued by limited companies
109
Advantages + disadvantages of issue of shares
ads:
No interest paid
Permanent source of capital => not repaid
disads:
Dividends expected by shareholders
Ownership of company could change
110
What are bank loans?
Money borrowed from banks
111
Advantages + disadvantages of bank loans
ads:
Quick to arrange
Large companies often offered low rates of interests
disads:
Bank loan repaid + interest
112
What is selling debentures?
Long-term loan certificates issued by limited companies
113
Advantages + disadvantages of selling debentures
ads:
Can be used to raise very long-term finance
disads:
Must be repaid with interest
114
What is factoring debts?
Specialist agencies (debt factors) buy business debts - this gives the business immediate cash
115
Advantages + disadvantages of factoring debts
ads:
Immediate cash is available to business
Risk of collecting debt becomes factors
disads:
Firm does not receive 100% of its value + debts
116
What are grants and subsidies?
Outside agencies may lend the business money
117
What is micro-finance?
the lending of small amounts of money at low interest to new businesses
118
Advantages + disadvantages of grants and subsidies
ads:
Grants don’t have to be repaid
disads:
Often given with “strings attached”
118
Advantages + disadvantages of grants and subsidies
ads:
Grants don’t have to be repaid
disads:
Often given with “strings attached”
119
Advantages + disadvantages of micro-finance
ads:
Available to meet needs of poor people/ entrepreneur
disads:
Lending conditions are limited (potential high demand)
120
What is finance?
a sum of money for use in a business, which is set aside for a particular reason.
121
Why do businesses need finance?
Setting up the business
Running up the business on a day-to-day basis
Expanding the business.
122
What is a cash-flow forecast?
An estimate of the future cash inflows and outflows of a business
123
Why is cash important?
because it needs to be able to make payments to suppliers, production process, rent, wages etc.
124
How to calculate net cash flow?
inflows - outflows
125
How to calculate closing balance?
opening balance + net cash flow
126
How to overcome short-term cash-flow problems?
Ask trade receivables to pay for more goods more quickly by offering discounts to customers
Negotiate longer credit terms with suppliers
Delay the purchase of non-current assets until the cash flow improves
Find other sources of finance for the purchase of non-current assets
127
What is working capital?
measure the liquidity of the business
-> liquidity is the ability of a business to pay its short term debts.
Working capital is important for day-to-day expenses such as wages, buying raw materials etc.
128
What does the length of the capital cycle depend on?
The level of inventories held by a business and how quickly suppliers are paid
How long it takes to produce goods for sale
How quickly business finds buyers for its products
Length of credit sales
129
What is profit?
a reward to business owners for the risk they take in investing their capital into the business
130
What are profits used to?
Measure success of a business
Measure performance of managers
Decide whether or not to continue making or selling a product
Finance purchase of non-current assets, expand business etc.
Attract investors who will provide additional funds for business
131
Gross profit?
Revenue - cost of sales
132
Profit?
Revenue - total sales
133
Retained profit?
Profit after expenses, taxes and dividends have been paid. Profit that is ploughed back into the business
134
Revenue
selling price * quantity sold
135
What are the differences between profit and cash?
Money invested in businesses increases cash but not profit
Capital expenditure decreases cash but does not decrease profit
Cash is important for the business at all times
Profit is more important for the long-term success of the business
136
What is an ‘income statement’?
Financial record of the business’s profits, costs and revenue over a given period of time
137
Shareholders/owners
Profit after tax belongs to the owner/shareholders
→ see how much they earned for their investment in business
138
Employees
High profit increases job security
Employees might expect to receive a good pay rise if a business is making good levels of profit
Some businesses have profit-sharing schemes, so high profits means high shares of profits for employees
139
Lenders
They want to be sure that profit is enough to pay interest on loans
Is business earning enough profit to be able to repay loans when due?
140
Government
Higher the profit, the more tax the government will receive
141
Suppliers
A firm that is profitable will continue to purchase raw materials and other supplies, which helps supplier earn profit
142
Managers
They can compare profit from one year to next or with competitor’s profits to measure performance of business
Retained profit is an important source of finance for businesses
143
Shareholders
Usually higher the profit higher the dividend payment
Market value of shares will often rise or fall depending on high or low profits earned
144
What are ‘shareholder’s funds’?
Funds/money invested into the business by the owners
145
What is a ‘balance sheet’?
an accounting statement that records owner’s equity, assets and liabilities of a business at a particular date
146
What are ‘assets’?
resources owned by the business
147
What are ‘liabilities’?
debts and payments that will have to be paid in the future
148
What are ‘current assets’?
resources that a business expects to turn to cash before the date of the next balance sheet
149
What are ‘non-current assets’?
resources that a business does not expect to turn into cash within a year
150
What are ‘current liabilities’?
debts and payments a business expects to pay before the date of the next balance sheet
151
What are ‘non-current liabilities’?
debts and payments business expects to pay after more than a year
152
What is ‘owner’s equity’?
money a business owes to its investors which includes capital and retained profit
153
start-up capital
the capital needed by an entrepreneur when first starting a business
154
working capital
the capital needed to finance day-to-day running expenses and pay the short-term debts of a business
155
non-current (fixed) assets
resources owned by a business which will be used for a period longer than one year, for example buildings or machinery
156
capital expenditure
spending by a business on non-current assets such as machinery and buildings
157
long-term finance
debt or equity used to finance the purchase of non-current assets or finance expansion plans. long-term debt is borrowing a business does not expect to repay in less than five years
158
short-term finance
loans or debts that a business expects to pay back within one year
159
retained profit
profit remaining after all expenses, tax, and dividends have been paid and which is ploughed back into the business
160
overdraft
an agreement with the bank which allows a business to spend more money than it has in its account up to an agreed limit. the loan has to be repaid within 12 months
161
trade receivables
amount owed to a business by its customers who bought goods on credit
162
debt factoring
selling trade receivables to improve business liquidity
163
bank loan
provision of finance by a bank which the business will repay with interest over an agreed period of time
164
leasing
obtaining the use of a non-current asset by paying a fixed amount per time period or a fixed period of time. ownership remains with the leasing company
165
hire purchase
the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion of the final repayment
166
mortgage
a long-term loan used for the purchase of land or buildings
167
debenture
a bond issued by a company to raise long-term finance usually at a fixed rate of interest
168
share issue
a source of permanent capital available to limited liability companies
169
equity finance
permanent finance provided by the owners of a limited company
170
micro-finance
small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time
171
crowd-funding
financing a business idea by obtaining small amounts of capital from a large number of people, most often using the internet and social media networks
172
cash-flow forecast
an estimate of the future cash inflows and outflows of a business
173
net cash flow
cash inflow minus cash outflow
174
liquidity
the ability of a business to pay its short-term debts
175
credit sales
goods sold to customers who will pay for these at an agreed date in the future
176
gross profit
the difference between revenue and cost of sales
177
profit
the difference bewteen revenue and total costs
178
total costs
cost of sales plus expenses
179
revenue
the amount earned from the sale of products
180
cost of sales
the cost of purchasing the goods used to make the products sold
181
expenses
day-to-day operating expenses of a business
182
income statement
a financial statement which records the reveneue, costs, and profits of a business for a given period of time
183
income statement
a financial statement which records the reveneue, costs, and profits of a business for a given period of time
184
statement of financial position
an accounting statement that records the assets, liabilities, and owners’ equity of a business at a particular date
185
assets
resources that are owned by a business
186
liabilities
debts of the business that will have to be paid sometime in the future
187
non-current (fixed) assets
resources that a business owns and expects to use for more than one year
188
current asset
resources that the business owns and expects to convert into cash before the date of the next statement of financial position
189
trade receivables
the amount of money owed to the business by customers who have been sold goods on credit
190
current liabilities
debts of the business which it expects to pay before the date of the next statement of financial position
191
trade payables
the amount a business owes to its suppliers for goods bought on credit
192
non-current liabilities
debts of the business which will be payable after more than one year
193
owner’s equity
the amount owned by the business to its owners; includes capital and retained profits
194
shareholder’s equity (funds)
alternative term for owner’s equity, but can only be used in limited liability companies
195
gross profit margin %
ratio between gross profit and revenue
196
profit margin %
ratio between profit before tax and revenue
197
profit margin %
ratio between profit before tax and revenue
198
adding value
selling a product for more than it costs to produce it
199
return on capital employed (ROCE)
ratio between profit before tax and capital employed
200
liquidity
the ability of a business to pay its short-term debts
201
current ratio
ratio between current assets and current liabilities
202
acid test ratio
ratio between liquid assets and current liabilities
203
quantative factors
financial factors and numerical outcomes
204
qualitative factors
non-financial factors and looking beyond numerical outcomes of the business and to assets etc.
205
examples of quantitative factors
cost of site
transport costs
market potential
government incentives
206
examples of qualitative factors
size of available site
legal restrictions
quality of local infrastructure
ethical issues and concerns
207
overdraft
an agreement with the bank which allows a business to spend more money than they have in its account up to an agreed limit. the loan has to be repaid within 12 months
208
trade credit
a business does not always have to pay their bills as soon as they recieve them but they are given period of credit, normally around 30-60 days.
209
personal savings / owners capital
this involves using the owner’s savings. this is good because they do not have to pay any interest. however, there is an opportunity cost with this option.
210
venture capital
money invested into the business in exchange for part ownership of the business. the person investing tends to be a successful entrepreneur.
211
share capital
money invested into the business by selling shares either on the stock exchange or to friends and family.
212
loans
money borrowed from the bank in the long term. the business will have to pay back interest on top of the money they have borrowed.
213
retained profit
profit remaining after all expenses, tax and dividends have been paid. profit which is ploughed back into the business
214
crowd funding
this is when a large number of people each pay a small amount of money to the business.
215
internal funding
funds found within the business
216
external funding
funds found from outside the business
217
working capital
this is the amount of money available for the day to day running of the business, referred to as the difference between current assets and current liabilities
218
debt factoring
selling trade receivables to improve business liquidity
219
sale and leaseback
obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. ownership remains with the leasing company
220
debenture
bonds issued by companies to raise long term finance usually at a fixed rate of interest.
221
debenture
bonds issued by companies to raise long term finance usually at a fixed rate of interest.
222
hire purchase
the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion of the final repayment.
223
micro-finance
small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time.
224
micro-credit
the provision of small-scale loans to the poor for example by credit unions.
225
micro-savings
for example, voluntary local savings clubs provided by charities
226
micro-insurance
especially for people and businesses not traditionally served by commercial insurance
business - a safety net to prevent people from falling back into extreme poverty.
227
remittance management
managing remittance payments sent from one country to another including, for example, transfer payments made through mobile phone solutions.
228
Who usually performs better as clients of micro finance and why?
Women, their participation has more desirable long term development outcomes.
229
start up capital definition
the capital needed by an entrepreneur when first setting up a business
230
working capital definition
the capital needed to finance the day to day running expenses and pay short-term debts of the business
231
non current fixed assets definition
resources owned by a business which will be used for a period longer than one year, for example buildings and machinery
232
capital expenditure definition
spending by a business on non-current assets such as machinery or buildings
233
why do businesses need finance
to set up the business
to pay day to day expenses like wages, suppliers and fuel.
to purchase buildings and other non-current fixed assets
to invest in the latest technology
to finance expansion
to finance R&D
234
long term finance definition
debt or equity used to finance the purchase of non current assets or finance expansion plans. long term debt is borrowing a business does not expect to repay in less than five years
235
short term finance definition
loans or debt that the business expects to pay back within one year
236
why do sole traders and partnerships not use loans often
they are often considered by lenders to be too high risk
237
how can business use some of their working capital to finance capital expenditure
using cash balances (keeping enough for the day to day running of the business)
reducing inventory levels (less warehouse costs)
reducing trade receivables
238
what are the three types of short term external finance
overdraft
trade credit
debt factoring
239
what are the six types of long term external finance
bank loan
hire purchase
leasing
mortgage
debenture
share issue
240
what are the limitations of taking longer to pay the supplier in order to have more money available for longer
any early payment discount will be lost
the supplier may refuse further deliveries to the business until the outstanding payment has been made
if delayed payment occurs too often, then the supplier may demand payment before delivery.
241
trade recievables definition
amount owed to a business by its customers who bought goods on credit
242
bank loan definition
provision of finance by a bank which the business will repay with interest over an agreed period of time
243
bank loans are offered with a _______ or ________ rate of interest
fixed or variable
244
advantage of a fixed rate of interest as opposed to a variable rate
it will not change depending on economic factors
245
mortgage definition
long term loans used for the purchase of land or buildings
246
share issue definition
source of permanent capital available to limited liability companies
247
equity finance definition
permanent finance provided by the owners of a limited company
248
what type of companies can use share issue
public/private limited companiees
249
a company can offer to sell shares up to a maximum number. this is called…
authorised share capital
250
who can private limited companies sell shares to
existing shareholders or private investors (not to public)
251
who can public limited companies offer shares to
the general public
252
does the money raised through a share issue have to be repaid
no it becomes permenant capital
253
benefit of debt financing for long term finance
does not change the ownership of the company. leaders have no say in the running of the company
254
benefit of equity financing for long term finance
it never has to be repaid. there is no ongoing cost. if the business makes a loss it does not have to pau dividends to shareholders.
255
limitation of debt financing for long term finance
interest is charged on the amount borrowed and this increases business costs. interest must be paid even of the business makes a loss. the amount borrowed must be repaid.
256
limitation of equity financing for long term finance
the increase in shareholders ‘dilutes’ the ownership of the company. producing a prospectus to offer the shares for sale is expensive.
257
factors influencing the choice of finance
size and legal form of business (e.g. sole traders and smaller businesses unlikely to get loans)
amount required (large = share issues or debenture, small = bank loans or leasing and hire purchase)
length of time (long term = debentures or share issues, short term = overdraft)
existing borrowing (if the business already has existing borrowing, then borrowing again will be harder.
258
net cash flow
cash inflow minus cash outflow
259
what is positive cash flow
when the cash inflow is greater than the cash outflow
260
what is negative cash flow
when the cash inflow is less than the cash outflow
261
why is having a greater cash inflow and smaller cash outflow better than having a small cash inflow and large cash outflow
any temporary cash shortage may cause problems for the business and result in an increase in borrowing costs
262
what do businesses need to prevent a negative cash flow
an accurate forecast of the size and timing of cash inflows and outflows. this enables businesses to identify any future periods where cash shortages may occur
263
what should a business do as a result of a negative cash flow
the managers need to increase the inflows or reduce the outflows
264
how to finance a short term cash shortage
ask trade receivables to pay more for goods more quickly by offering discounts to customers who have been sold goods on credit.
negotiate longer credit terms with suppliers
delay the purchase of non - current assets until the cash flow improves.
265
why do businesses need cash
to pay wages
to pay suppliers
for rent, heating, lighting and other costs
266
cash flow forecast def
an estimate of the future cash inflows and outflows of the business
267
net cash flow def
cash inflow - cash outflow
268
what does a cash flow forecast aim to do
it enables businesses to identify any future time periods when cash shortages may occur.
269
how can a business finance a short term cash shortage
ask trade receivables to pay more for goods more quickly by offering discounts
negotiate longer credit terms with suppliers
delay the purchase of non-current assets until the cash flow improves
find other sources of finance for the purchase of non-current assets
270
liquidity def
the ability of a business to pay its short term debts
271
a business which does not have enough working capital will be
illiquid
272
what is the working capital cycle
the time it takes from buying raw materials, making these into goods for sale, finding buyers for finished goods, and then receiving payment from customers.
273
credit sales def
goods sold to customers who will pay for these at an agreed rate in the future
274
what does the length of the working capital cycle depend on
level of inventories held by a business
how long production takes
how quickly buyers are found
the length of the credit period given to customers
275
how can a business improve it’s working capital
reducing inventory levels
negotiating longer credit terms with suppliers
reducing the amount of time it takes to receive customer payments.
276
gross profit def
the difference between revenue and cost of sales
277
profit def
the difference between revenue and total costs
278
total costs
costs of sales plus expenses
279
revenue def
the amount earned from the sale of products
280
profit =
revenue - total costs
281
cost of sales def
the cost of purchasing the goods used to make the products sold
282
expenses def
day-to-day operating expenses of the business
283
gross profit =
revenue - cost of sales
284
profit (2) =
gross profit - expenses
285
revenue =
selling price x quantity sold
286
the total cost of a business supplying its goods and services can be divided into
cost of sales and expenses
287
what is profit used for
measuring sucess of a business
measuring success of a manager
decision-making on whether to continue a product or not
finance the purchase of non-current assets, expansion
attract investors who will provide the additional funds needed to finance business expansion
288
give differences between cash and profit
money invested or borrowed increases cash but not profit
capital expenditure decreases cash but not profit
sales of goods on credit increases profit but cash does not increase until payment is received.
289
which is more important for the business long term, cash or profit
profit
290
which is more important for the business short term, cash or profit
cash
291
income statement def
financial statement which records the revenue, costs and profits of a business for a given period of time
292
when does an income statement have to be produced
legally once a year, but may be produced more for managerial use
293
what is the most important figure on an income statement for stakeholder groups
profit
294
use of income statements to owners/shareholders
profit after tax belongs to them.
295
use of income statements to shareholders
usually the higher the profit the higher the dividends
the market value of shares may rise or fall
296
use of income statements to employees
high profit increases job security
can evaluate salary as compared to profit
profit sharing schemes
297
use of income statements to lenders
want to be sure that profit is enough to pay interest and the amount borrowed back
298
use of income statements to the government
the higher the profit the higher the tax recieved by the government wil be
299
use of income statements to suppliers
profitable firms will continue to purchase supplies
300
use of income statements to managers
can compare profit with a past profit or with competitors
retained profit is an important source of finance.
301
balance sheet def
an accounting sheet that records the assets, liabilites and owners’ equity of a business at a paticular date
302
assets
resources that are owned by the business
303
liabilities
debts of the business that wll have to be repaid sometimes in the future
304
non-currerent (or fixed) assets
resources that a business owns and expects to use for more than one year
305
examples of non-current (or fixed) assets
land, buildings, machinery, computers and motor vehicles
306
current assets def
resources that the business owns and expects to convert into cash before the date of the next balance sheet
307
trade recieveable
the amount of money owed to the business by customers who have been sold goods on credit
308
current liabilities
debts of the business which it expects to pay before the date of the next balance sheet
309
trade payable
the amount a business owes to its suppliers for goods bought on credit
310
non-current liabilities
debts of the business which will be pauable after more than one year
311
owner’s equity
the amount owed by the business to its owners; includes capital and retained profit
312
shareholder’s equity (funds)
alternative term for owner’s equity, but can only be used by limited liability companies
313
what does a balance sheet show
the assets the business owns
what the business is owed
what the business owes
how the business finances its activites.
314
how often must a balance sheet produced
once a year
315
how often must an income statement produced
once a year
316
internal sources of finance
owners savings
retained profits
sale of non current fixed assets
use some of the business’’s working capital
317
debt-factoring def
selling trade recievables to improve busines liquidity
318
leasing def
obtaining the use of non-current asset by paying a fixed amount per time period of time. ownership remains with leasing company
319
why should a business check its performance regularly
identify strengths and weaknesses
show whether the business is meeting its objectives
improve future business performance
320
which ratios are used to measure a business’ profitability
gross profit margin
profit margin
return on capital employed
321
gross profit margin % =
(gross profit / revenue) x 100
322
what does gross profit % margin show
gross profit as a percentage of revenue
how much gross profit is earned per $1 of revenue
323
gross profit margin def
ratio between gross profit and revenue
324
gross profit def
difference between revenue and cost of sales (revenue - cost of sales)
325
profit margin def
ratio between profit before tax and revenue
326
profit margin % =
(profit/revenue) x 100
327
how does a business improve its gross profit
increasing revenue without a similar cost in sales - increase in price
reducing cost of sales without similar reduce in revenue - achieved through buying cheaper supplies
328
adding value def
selling a product for more than it cost to produce it
329
what does gross profit ratio measure
the amount of profit made for every $1 of revenue
330
what does profit ratio measure
the amount of profit made for every $1 revenue after allowing for expenses
331
profit def
difference between revenue and total costs
= revenue - (cost of sales + expenses)
332
capital employed
the amount invested in the business by the owners.
333
return on capital employed =
(profit/capital employed) x 100
334
what does it mean if the ROCE increases from one year to the next, or is higher than competitors
the business’s profitability has improved
335
what does ROCE tell us
how much profit is earnt for every $1 invested in the business
336
what is capital employed usually used to buy
profit earning assets such as buildings and machinery
337
liquidity def
the ability of a business to pay its short term debts
338
what does liquidity mean
a business’s access to cash
339
how do you monitor a business’s liquidity
current ratio
acid test ratio
340
what does the current ratio show
the ratio between current assets and current liabilities
341
current ratio =
current assets / current liabilities
342
what is the acid test ratio
ratio between liquid assets and current liabilities
343
problems with the current ratio
some current assets are more difficult to turn into cash than others
344
why are inventories the least liquid of the current assets
the finished goods inventories have to be sold
when they are sold on credit, the business has to wait for customers to pay.
345
acid test ratio =
(current assets - inventories) / current liabilities
346
what does the acid test ratio do that the current asset ratio doesnt
it excludes inventories from current assets. this means it is a better measure of a business’s liquidity.
347
how do owners/shareholders use accounts
Whether they are getting a good return on their investment.
348
how do potential investors use accounts
Interested in the profits and return they might expect to recieve from their investment.
349
how do managers use accounts
Responsible for runnning of business so will want to know if financial objectives have been achieved.
350
how do employees use accounts
Interested in profitability and job security. Could use figures to support claims for higher wages.
351
how do trade payables use accounts
Suppliers can ensure the business is able to pay them back. Interested in liquidity. Will help them to increase their own revenue and profits.
352
how does the government use accounts
Companies have to pay tax, so the higher the progits the higher the tax revenue recieved by government. Expanding companies will also provide employment.
353
how do customers use accounts
Want to know that business will continue supplying them with goods and services meeting their needs and wants.
354
how do lenders use accounts
Banks and other lenders will want to know they will recieve interest on money loaned. Interested in profits and liquidity.
355
revenue =
selling price x quantity sold
356
profit =
gross profit - expenses
357
net cash flow =
inflows - outflows
358
closing balance =
net cash flow + opening balance
359
break even units =
fixed costs/(selling price - variable costs)
360
How is profit made
Profit = revenue - total costs
Therefore reducing costs and increasing revenue will increase profits
361
What is an income statement
Is financial statement that records the income of business and all its costs over period of time
362
Revenue definition and equation
Revenue is the income to business during a period of time from sales of goods and services
Price x quantity sold
363
Cost of sales
Cost of sales also known as variable costs is the cost of production of goods services sold by the business which varies on how many goods and services you make and provided
364
Gross profit definition and equation
Gross profit is the money you have left after paying for the things you sold to customers.
Revenue - costs of sales = gross profit
365
Net profit
The profit made by a business after all costs have been deducted from the revenue
Gross profit - expenses = net profit
366
Income statement
Revenue - 1250
Cost sales - 900
1250 - 900 = 350 = gross profit
Expenses - 155
350 - 155 = 195 = net profit
367
GPM - gross profit margin definition and equation
A main profitability ratio it tells you what your business made after paying for the direct cost of doing business
Gross profit / revenue x 100 = (percentage)
368
NPM - net profit margin
One of the main profitability ratios it measures how much net income or profit is generated as a percentage of revenue
Net profit/ revenue x 100 = net profit margin
369
What is profitability
The measure of how quickly and efficient we can make profit we use profitability ratios to help us analyse the business performance and to compare it to other businesses
370
Balance sheet
Shows the value of a business assets and liabilities at a particular time
It also shows what the company is financed by
371
Assets definition and types
Assets - items of value which are owned by the business
Types
- non current/fixed assets
- current assets
372
Fixed assets definition and examples
Items that are owned by the business for more than twelve months and are hard to turn into cash eg: machinery
373
Current assets
Items that are held by the business for less than twelve months easier to turn into cash eg: products/goods
374
Liabilities definition and examples
Debts owed by the business
current liabilities
long term liabilities
375
Current liabilities
Short term debts owed by the business usually repaid in less than one year eg: creditors
376
Long term liabilities
Long term debts owed by the business usually for more than one year eg: a bank loan
377
Working capital equation and definition
Current assets - current liabilities
Remember working capital is money used on a day to day basis
378
Creditors vs debtors
What customers owes to the business - debtors
What the company owes to their suppliers - creditors
379
Net assets
Net assets = total assets (fixed asset + current assets) - total liabilities (long term liabilities + current liabilities)
380
What is the business financed by
Retained profit - financed put back in the businesss
Share capital - amount invested by the shareholders
Total share holder funds/equity - share capital + retained profit
REMEMBER THE TOTAL SHARE HOLDER FUNDS = THE NET ASSETS (ALWAYS)
381
Liquidity definition
How easy we can turn assets into cash to pay off its short term debts if the business is illiquid and can’t quickly turn assets into cash then the business cannot pay and they may be forced to take an overdraft or sell some of its assets
382
Liquidity ratios definition and types
a type of financial ratio used to determine a company’s ability to pay its short-term debt obligations
current ratio
acid test ratio
383
Current ratio
Current assets/current liabilities = current ratio (decimal)
Ideal figure is 1.5 - 2
If the answer is 1.5 then that means for every dollar that you owe you have $1:50 to pay off your debts
Too low you cant pay off your debts bad
Too high you have too much cash that you can use to expand your business
Exactly 1:1 is okay however it isn’t guaranteed that you can sell your stock (which is a current asset)
384
Acid test ratio
A more accurate ratio as it doesn’t account for stock
Current assets - stock / current liabilities
The ideal figure is now 1 - as you are probably going to sell some stock so your actual figure may be 1.2 - 1.4
385
ROCE - return on capital employed definition and equation
measures how good a business is at generating profits from capital
Net profit/ capital employed x 100
386
Capital employed definition and equation
the total amount of funds used for expansion or for the acquisition of profits
Working capital + total share holder funds + long term loan
(All the long term finance)
387
why do businesses need finance
start up capital
capital for expansion
working capital
388
internal sources of finance examples
retained profits
sale of existing assets
sale of inventories
owners inventories
389
retained profit advantages
not repaid
no interest to pay
390
retained profit disadvantages
not suitable for new businesses
limited amount available
may reduce payment made to owners or return to shareholders
391
sale of existing assets advantages
better use of assets
debts not increased
392
sale of existing assets disadvantages
it takes time
may not have spare assets to sell
393
sale of inventories advantages
reduces storage costs
less capital tied up in inventories
394
sale of inventories disadvantages
if inventories are too low then customers are disappointed as demand is not quickly satisfied
395
owner’s savings advantages
available quickly
no interest paid
396
owner’s savings disadvantages
may not be sufficient
397
short term external sources of finance examples
micro finance
overdraft
trade credit
factoring debt
398
micro finance advantages
available to poorer groups in society
useful if nowhere else to borrow from
no security required
399
micro finance disadvantages
interest needs to be paid
loans usually very small
400
overdraft advantages
interest only paid on amount borrowed
flexible form of borrowing
cheaper than loans in short run
401
overdraft disadvantages
interest rate higher than bank loan
more expensive than loans in long run
often asked to be repaid on demand
402
trade credit advantages
no interest required
403
trade credit disadvantages
needs to be paid or else goods not supplied
404
factoring debt advantages
immediate cash
no risk of debt not being repaid
405
factoring debt disadvantages
receive less than the full amount of debt
406
long term external sources of finance examples
grants and subsidies
bank loans
issue of shares
leasing
crowdfunding
hire purchase
selling debentures
407
grants and subsidies advantages
not repaid
408
grants and subsidies disadvantages
may have certain conditions attached
409
bank loans advantages
quick to arrange
varying repayment period
large companies pay a low rate of interest
410
bank loans disadvantages
repaid with interest
security/collateral required
411
issue of shares advantages
do not have to be repaid
no interest paid
412
issue of shares disadvantages
dividends expected
ownership could change hands
can only be utilised by companies
413
leasing advantages
large cash outlay not required to purchase asset
maintenance paid for by leasing company
414
leasing disadvantages
total payment higher than purchase price of asset
you never get to own the asset
415
crowdfunding advantages
uses internet to raise finance from many investors
fast and cost effective
good test of new business idea
416
crowdfunding disadvantages
gives competitors detail of business idea
may not raise all finance required
417
hire purchase advantages
large cash outlay not required to purchase asset
418
hire purchase disadvantages
interest paid
asset not owned until last payment made
may require a deposit
419
selling debentures advantages
raises long term finance
420
factors affecting choice of source of finance
amount required
size of business organisation
type of business organisation
control over the business
risk and gearing (if it already has loans)
purpose of finance
period of time for which finance is required
421
uses of cash
day to day costs
buying inventories
422
cash inflow comes from
sale of products
sale of assets
borrowed money
investors’ money
423
cash outflow goes from
purchasing goods/components/raw materials using cash
paying bills, rents, wages etc
purchasing non-current assets
repaying loans
paying creditors/accounts payable
424
what is the cash flow cycle
424
what is the cash flow cycle
cash needed to pay for —> materials, wages rent etc —> goods produced —> goods sold —> cash payment for goods sold
425
problems of not having enough cash
cannot pay bills and workers
production will stop
forced into liquidation (selling everything it owns to pay its debts)
426
importance of cash flow forecasts
starting a new business
obtaining a bank loan
managing cash flow to avoid running out of cash
reduce need for an overdraft
helping managers plan ahead
427
short term solutions to cash flow problems
delay payments to suppliers
ask debtors/accounts receivable to pay more money
delay or cancel the payment of capital equipment
take out a bank loan/overdraft
428
long term solutions to cash flow problems
(may increase short term costs)
attract new investors
cut costs
increase efficiency
develop new products to attract more sales
find more ways to increase revenue
429
working capital
current assets - current liabilities
430
importance of profit
rewards entrepreneur
rewards risk taking
retained profit is a source of finance
indicator of success
attracts investors
431
income statement key facts
financial records are called accounts
companies are required by law to produce accounts
these accounts must be accurate and up to date
432
features of income statement
revenue
cost of sales
gross profit
net profit
retained profit
433
who uses income statements
business owners
business managers
potential investors
governments
434
uses of income statements
compare with previous years to judge success of business
compare with competitors to judge success of business
judge if cost of sales has fallen or risen
judge if expenses need reducing
assess how much retained profit is available
assess how much profit is available for dividends/drawings
435
lack of financial records
not knowing how much is owed by business and to whom it is owed
the business not meeting orders if it runs out of cash
not knowing if the business has made a profit or a loss
436
gross profit formula
revenue - cost of sales
437
net profit/profit
gross profit - expenses
438
retained profit
profit left and reinvested back into the business after deduction of all payments
439
cash vs. net profit
a business could have made a profit but have not been paid for the goods yet and therefore does not have any cash in the business
440
contents of a statement of financial position
lists assets and liabilities
shareholder’s funds = total assets - total liabilities
capital employed = shareholder’s funds + long term liabilities
working capital = current assets - current liabilities
441
uses of a statement of financial position
show if a value of a business has increased or decreased
show if a business has sufficient liquidity to pay all its short term debts
analyse how expansion has been paid for
analyse business performance using liquidity ratios
442
how accounts are used
used by shareholders, governments and creditors to check on company performance
lenders decide whether or not to give the loan
managers use them for taking decisions and controlling the operations of a business
other companies use them for comparing performance
443
limitations of accounts
not full details of accounts for external users
ratios based on past data
accounting data over time affected by inflation
different accounting methods used by different companies
444
net profit margin formula & analysis
net profit/revenue x 100
using income statement:
- increase in net profit means gross profit was higher or expenses were lower
- compared with previous years or other companies
445
gross profit margin formula & analysis
gross profit/revenue x 100
using income statement:
- increase in gross profit means increased prices or decreased cost of goods
- compared with previous years or other companies
446
return on capital employed
net profit/capital employed x 100
using income statement and balance sheet:
- compare with previous years and other companies to see if business more efficient or not
- shows profit earned from capital used in business
447
current ratio formula & analysis
current assets/current liabilities
result of 1+ means that business has sufficient current assets to pay current liabilities
<1 then illiquid
>2 then too much working capital
448
Social cost (Calculation)
Social cost = external costs + private costs
449
Social benet (Calculation)
Social benet = external benets + private benets
