6. Finance Flashcards
Things an entrepreneur will need to spend money on in order to start a business?
Renting or buying a building, Vehicles, Advertising the business, Equipment and machinery for the business, Inventories of raw materials
Reasons why an established business would need to raise finance
To expand, improve effciency, develop new products
Internal source of finance
Money that is available from within the business, for example, retained profits from previous years
Owners’ funds
money put into a business by its owner or owners
Trade credit
A period of time which suppliers allow customers before payment for supplies must be made
External source of finance
Refers to money that comes from outside the business, for example, a loan from a bank
Collateral
An asset that a bank holds as security for the repayment of a loan
Mortgages
Loans from banks and building societies that are used to buy land and buildings, such as offices and shops
Overdraft
A flexible loan whixh business can use, whenever necessary, up to an agreed limit
Sources of finance
Retained profits, selling assets, bank loans and mortgages, selling shares, goverment grants
Grant
A sum of money given to an entrepreneur or a business for a specific reason.
Cash flow
The money that flows into and out of a business on a day-to-day basis
Government grants
The goverment encourages people to start to expand businesses because this creates jobs. They can offer a range of grants. The garnts will only cover part of the money needed. Most grants do not have to be repaid
Cash inflow
Money flows into a business and becomes available to it
Reasons why a business might receive cash inflows
Income from sales, loans from banks, money invested by the business’s owners
Cash outflow
When a business makes a payment, it causes an outdlow of cash
What are some actions that can lead to a cash outflow
Buying raw materials, wages, rent or mortgage, interest on loans, tax
Benefits of having a positive cash flow position?
avoids periods in which it has a negative cash balance
does not need to borrow and can avoid paying interest charges
will be more able to arrange long-term loans helps to reduce the risk of a business failing
Cash flow forecast
A plan of the expected inflows and outflows to and from a business over a period of time
Cash flow statement
A record of the cash inflows and outflows that took place over an earlier period of time
Causes of cash flow problems
Poor management, The business making a loss, Offereing customers too long to pay
Profit
Measures the difference between the values of a business’s revenue (sales) and its total costs
Revenue
The income that a firm receives from selling its goods or services. It is also referred to as ‘turnover’. It is measured by the number of units sold multiplied by the price
How to find out revenue
Revenue = number of units sold x price
Sales
The number of products sold by a business
Costs
The spending that is necessary to set up and run a business
Fixed costs
Those costs that do not change when a business changes its output
Variable costs
The costs that vary directly with the business’s level of output
Formula of total variable costs
Total variable costs = variable costs of a single unit x number of units
Or
Total costs - fixed costs
What is Total costs
Fixed costs + variable costs
Formula of total costs
Total costs = fixed costs + variable costs
Loss
The amount by which a business’s costs are larger than its revnue from all sales
Formula to calculate profits (or losses)
Profits (or losses) = revenue - total costs
Investment
Takes place when a business buys an asset, such as a factory, in the hope of making a profit from its use
The average rate of return (ARR)
Compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage
Formula for average rate of return (ARR)
ARR = average yearly profit x 100 divided by cost of investment
Break-even
The level of production at which a business’s total costs and revenue from sales are equal
Break-even chart
Shows a business’s costs and revenues and the level of production needed to break-even
Margin of safety
Measures the amount by which a business’s current level of production exceeds its break-even level of output
Income statement
A financial statement showing a business’s revenues and costs, and thus, its profit or loss over a period of time
Balance sheet
Sets out the assets and liabilities that a business has on a perticular day
Gross profit
A business’s sales revenue minus its cost of sales over a period of time, normally a year
How to figure out gross profit
Gross profit = revenue - cost of sales
Net profit
A business’s sales revenue minus its cost of sales, its overheads and other costs over a period of time, normally a year
Overheads (expenses)
Costs that do not alter when the level of production changes e.g. salaries of managers, interest on loans
Liability
A sum of money that is owed by a business to another business or an individual
Total equity
The part of a company’s money that belongs to shareholders
Financial ratio
Compares two figures from a business’s financial statements
How to find gross profit margin
gross profit margin = gross profit/revenue x 100
How to find net profit margin
net profit margin = net profit/revenue x 100
Stakeholders
Individuals and organisations that are affected by, and affect, the business
How to find out average annual profit
(Total profit - initial costs) / Number of Years
Liquidity
How easy something can be converted
Debt factorising
Method of finance selling of debt
