6 - Finance Flashcards
1
Q
Why does a new Business need to raise finance (5)
A
- Renting or buying a building
- Vehicles - businesses may require cars to visit customers and suppliers as well as vans or lorries to deliver products
- Advertising the business - potential customers wont know about a new business unless it promotes itself
- Equipment and machinery for the business
- Inventories of raw materials - e.g a greengrocer will need to buy inventories of fruit and vegetables to sell
2
Q
Entrepreneur
A
Is someone who is willing to take risks involved in starting a business
3
Q
Inventories
A
Are raw materials that have not yet been used or products that have been, but not sold, these are also called stocks
4
Q
Why would an established business need to raise finance to expand (3)
A
- To pay for additional shops,factories or offices as well as recruit new employees
- e.g Spotify attempted to raise $500 million to fund further global expansion
5
Q
Why would an established business need to raise finance to improve efficiency (2)
A
- To train employees - could lead to an increase in output with fewer resources used
- Purchase new technology used in production
6
Q
Why would an established business need to raise finance to develop new products (2)
A
- Developing new products is an important way for firms to compete
- A business may need to pay for research and advertising e.g Nissan spent £100 million at its factory in Sunderland to enable it to make it new Juke car there
7
Q
Internal sources of finance (4)
A
- Owners’ funds
- Sale of unwanted assets
- Trade credit
- Retained profits
8
Q
External sources of finance (6)
A
- Bank loans and mortgages
- Hire purchase
- Share issues
- Family and friends
- Overdrafts
- Government grants
9
Q
Advantage of Owners’ funds
A
The business does not have to pay any interest
10
Q
Disadvantage of Owners’ funds
A
The owner of a new business may have to use their savings to invest in the business
11
Q
Advantage of retained profits
A
- Can be available immediately to a successful business
* No interest as the money is being borrowed
12
Q
Disadvantages of Retained profits (2)
A
- Only available to successful firms that have made a profit
* Shareholders disappointed if profit is kept within the business and not being paid to them as dividends
13
Q
Advantages of selling assets
A
- Can provide a business with large sums of money
* No interest charges
14
Q
Disadvantages of selling assets (2)
A
- A business may sell an asset which it will need later on
- If a business sells an asset and leases it back, the business will have to pay a sum of money regularly - may reduce a business’s long term profits
15
Q
Trade Credit
A
is a period of time which suppliers allow customers before payment for supplies must be made
16
Q
Advantage of trade credit
A
• No interest charge
17
Q
Disadvantage of trade credit (2)
A
- Very short term
* Only relatively small sums of money can be raised in this way
18
Q
Advantages of bank loans and mortgages
A
- Can be arranged quickly
* Allows repayment over a long period of time
19
Q
Disadvantages of Bank loans and mortgages
A
- Interest has to be paid
* Banks may require an asset as collateral (an asset that a bank holds as security)
20
Q
Advantage of selling shares
A
No interest payments
21
Q
Disadvantages of selling shares
A
- The owner may lose control of the company
* Only available to companies
22
Q
Advantage of Governments grants
A
• Many government grants do not have to be repaid
23
Q
Disadvantages of Governments grants
A
- A business may have to meet struct conditions to receive a grant
- Businesses may have to invest money alongside the grant
24
Q
Factors which influence the choice of sources of finance for an existing business (5)
A
- Past history and future prospects
- The business profitability
- Assets owned by the business
- The amount of finance needed
- The legal structure of the business
25
Factors which influence the choice of sources of finance for a new business
* The amount of personal finance
* How risky the business is judged to be
* The amount of finance needed
* The legal structure of the business
26
How does the amount of personal finance influence the choice of a source of finance (3)
* The more personal finance an entrepreneur has, the less he or she needs to raise from other sources
* They may receive compensation (redundancy pay) which can be used to start up
* Entrepreneurs may sell their homes to raise funds
27
How does the legal structure influence the choice of a source of finance (2)
* A new business may be an Ltd - raising funds by selling shares is possible
* However, an Ltd may only be able to make a limited use of shares as all shareholders have to agree for this source to be used
28
How does risk of a new business influence the choice of a source of finance (2)
* Sources of finances available will be reduced if the business is seen to be risky
* In these circumstances, an entrepreneur may be forced to rely on their own finance or form a company and sell shares within it
29
How does profitability influence the source of finance for an established business (2)
* If a business is profitable they will be able to use retained profits
* If a business is profitable they will be more likely to persuade a bank for a loan
30
How do assets influence the source of finance for an established business
* They can sell them and lease them back if necessary
| * If assets are valuable they can get bank loans due to suitable collateral
31
How does past history and future prospects influence the source of finance for an established business
• If a business is expected to make a profit it puts them in a strong position to get a loan
32
Cash flow
Is the flow of all money into and out of the business
33
Why might a business receive cash inflows (3)
* Income from sales
* Loans from banks
* Money invested by the business' owner
34
Cash outflows (5)
* Buying raw materials
* Wages
* Rent or mortgage
* Interest on loans
* Taxes
35
Benefits of having a positive cash flow (3)
* The business does not need to borrow therefore avoiding interest charges
* The business will be able to arrange more long term loans with banks - as banks will have confidence the business will pay back in time
* Reduces the risk of a business failing
36
What is a cash flow forecast
Is a plan of the expected inflows and outflows to and from a business over a period of time
37
How are cash flow forecasts constructed (4)
Normally organised into 3 sections:
• Cash inflows at the top
• Second section is Cash outflows
• Third section includes Net cash flow, opening balance and closing balance
38
What is the importance of cash flow forecasts
* Managers can identify times when the business will be short of cash
* Managers can take suitable actions to avoid cash shortages becoming a major problem
39
How is rescheduling payments a suitable solution for cash flow problems (2)
* The business may be able to agree with suppliers to be able to delay their payments - this can give the business sufficient time to receive inflows of cash
* Or, the business may be able to persuade customers to pay more quickly - speeds up cash inflows
40
How is cutting costs a suitable solution for cash flow problems (2)
* If a business can reduces its costs (perhaps by employing fewer staff or holding smaller stocks of raw materials) - should lead to reduced cash outflows
* The business could use cheaper sources of fuel and raw materials - however could lead to a reduction in quality and in the long term loss of customers
41
How is using overdrafts a suitable solution for cash flow problems (2)
* Short term and flexible - Can provide the business with the cash it needs as it provides an immediate inflow of cash
* However, is a relatively expensive form of borrowing - if a business uses them extensively it may damage profits
42
How is finding new sources of inflow a suitable solution for cash flow problems (2)
* Many public houses offer accommodation and meals especially in places with tourists - this can generate significant inflows
* However, it can take time to implement and may involve further cash outflows
43
Profit
Measures the difference between the values of a business's revenue (sales) and its total costs
44
Why is cash flow important (3)
* If a business doesn't have enough it won't be able to play its expenses
* If a business does not have cash it wont be able to pay for supplies - suppliers may stops supplying
* If a does not have cash it business wont be able to pay staff - forcing a business to stop
45
Variable costs
Are the costs that vary directly with the business's level of output
46
Fixed costs
Are the costs that do not change when a business changes its output
47
Total costs
Are fixed costs + variable costs
48
Revenue (3)
* Is the income that a firm receives from selling its goods or services
* It is also referred to as 'turnover'
* measured by the number of units sold x the price
49
Costs
Are the spending that is necessary to set up and run a business
50
Profit
Measures the difference between the values of a business's revenue (sales) and its total costs
51
Loss
Is the amount by which a business's costs are larger than it's revenue from all sales
52
What are the main investment projects business' undertake (3)
* Land and buildings - to be able to supply goods and services or expand
* Machinery and vehicles - advances in technology lead to kore productive machinery being available can help business's to compete and more profitable
* New products - can help to compete
53
How to calculate Average rate of return (ARR) (2)
Step 1:
Total profits divided by number of years = average yearly profit
Step 2:
Average yearly profit x 100 divided by cost of investment project = Average rate of return (ARR)
54
Break-even
Is the level of production at which a business's total costs and revenue from sales are equal
55
Margin of safety
Measures the amount by which a business's current level of production exceeds its break-even level of output
56
Advantages of using break-even analysis (3)
* Help managers to see the effects of any changes in costs - helping mangers to prepare for future changes in costs
* Shows the effects of changes in price - e.g managers can use break-even charts to analyse whether a fall in price might lead to the business making a loss rather than a profit
* Banks more likely to agree a loan if a business is able to provide evidence of planning future finances
57
Disadvantages of using break-even analysis (2)
* It assumes that a business sells all of the output it produces which is unlikely (even for a well known business)
* Businesses may operate in markets where costs and prices change rapidly and frequently - making break-even charts of less value as they are inaccurate due to large and frequent changes
58
Why are financial statements important (3)
* It is a legal requirement - if failed to be prepared a business can be fined or in extreme cases forced to cease trading
* Helps the business's managers make decisions on how to improve the business's performance
* Guide investors - helps them to judge whether the investment will earn a profit
59
Main components of an income statement (6)
* Revenue
* Cost of sales
* Gross profit
* Overheads
* Operating profits
* Net profit
60
Main components of a balance sheet (4)
```
• Assets
• Liabilities
• Total equity
• balancing assets and equity
Therefore provides a snapshot of the business's financial position
```
61
Assets
Is anything that is owned by a business
62
Liability
Is a sum of money that is owned by a business to another business or an individual
63
How to interpret financial statements (3)
* Compare with previous years
* Compare with performance of competitors
* Judging financial performance from the perspective of different stakeholders
64
How does comparing with previous years help consider current performance
Key indicators are:
• The revenue from sales of goods and services
• gross and net profits
65
How does comparing with performance of competitors help consider current performance
Compare the two income statements - if a business csn increase its revenue and profits more quickly than others in the same industry its a good sign in financial terms
66
How does judging financial performance from the perspectives of different stakeholders help consider current performance
Shareholder and owners:
• level of sales achieved
• costs the business has paid
• Amount of profit or loss that has been made
Managers - to decide whether decisions are effective
Suppliers - whether or not a business has made a profit guides them to if they will be paid in future
Employees - pay may depend on profits the business makes
67
How to calculate gross profit margin and how it helps to asses financial performance
* Gross profit divided by revenue x 100 = gross profit margin
* Not great as it doesn't include all the costs paid by the business - it only includes a business's cost if sales
68
How to calculate net profit margin and how it helps to asses financial performance
* Net profit divided by revenue x 100 = net profit margin
| * good indicator as its calculation includes all the costs paid by the business
