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Business Studies > 6 - Finance > Flashcards

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
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2
Q

Entrepreneur

A

Is someone who is willing to take risks involved in starting a business

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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

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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
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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
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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
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7
Q

Internal sources of finance (4)

A
  • Owners’ funds
  • Sale of unwanted assets
  • Trade credit
  • Retained profits
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8
Q

External sources of finance (6)

A
  • Bank loans and mortgages
  • Hire purchase
  • Share issues
  • Family and friends
  • Overdrafts
  • Government grants
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9
Q

Advantage of Owners’ funds

A

The business does not have to pay any interest

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10
Q

Disadvantage of Owners’ funds

A

The owner of a new business may have to use their savings to invest in the business

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11
Q

Advantage of retained profits

A
  • Can be available immediately to a successful business

* No interest as the money is being borrowed

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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

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13
Q

Advantages of selling assets

A
  • Can provide a business with large sums of money

* No interest charges

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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
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15
Q

Trade Credit

A

is a period of time which suppliers allow customers before payment for supplies must be made

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16
Q

Advantage of trade credit

A

• No interest charge

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17
Q

Disadvantage of trade credit (2)

A
  • Very short term

* Only relatively small sums of money can be raised in this way

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18
Q

Advantages of bank loans and mortgages

A
  • Can be arranged quickly

* Allows repayment over a long period of time

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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)

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20
Q

Advantage of selling shares

A

No interest payments

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21
Q

Disadvantages of selling shares

A
  • The owner may lose control of the company

* Only available to companies

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22
Q

Advantage of Governments grants

A

• Many government grants do not have to be repaid

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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
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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
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25
Q

Factors which influence the choice of sources of finance for a new business

A
  • The amount of personal finance
  • How risky the business is judged to be
  • The amount of finance needed
  • The legal structure of the business
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26
Q

How does the amount of personal finance influence the choice of a source of finance (3)

A
  • 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
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27
Q

How does the legal structure influence the choice of a source of finance (2)

A
  • 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
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28
Q

How does risk of a new business influence the choice of a source of finance (2)

A
  • 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
Q

How does profitability influence the source of finance for an established business (2)

A
  • 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
Q

How do assets influence the source of finance for an established business

A
  • They can sell them and lease them back if necessary

* If assets are valuable they can get bank loans due to suitable collateral

31
Q

How does past history and future prospects influence the source of finance for an established business

A

• If a business is expected to make a profit it puts them in a strong position to get a loan

32
Q

Cash flow

A

Is the flow of all money into and out of the business

33
Q

Why might a business receive cash inflows (3)

A
  • Income from sales
  • Loans from banks
  • Money invested by the business’ owner
34
Q

Cash outflows (5)

A
  • Buying raw materials
  • Wages
  • Rent or mortgage
  • Interest on loans
  • Taxes
35
Q

Benefits of having a positive cash flow (3)

A
  • 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
Q

What is a cash flow forecast

A

Is a plan of the expected inflows and outflows to and from a business over a period of time

37
Q

How are cash flow forecasts constructed (4)

A

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
Q

What is the importance of cash flow forecasts

A
  • 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
Q

How is rescheduling payments a suitable solution for cash flow problems (2)

A
  • 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
Q

How is cutting costs a suitable solution for cash flow problems (2)

A
  • 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
Q

How is using overdrafts a suitable solution for cash flow problems (2)

A
  • 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
Q

How is finding new sources of inflow a suitable solution for cash flow problems (2)

A
  • 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
Q

Profit

A

Measures the difference between the values of a business’s revenue (sales) and its total costs

44
Q

Why is cash flow important (3)

A
  • 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
Q

Variable costs

A

Are the costs that vary directly with the business’s level of output

46
Q

Fixed costs

A

Are the costs that do not change when a business changes its output

47
Q

Total costs

A

Are fixed costs + variable costs

48
Q

Revenue (3)

A
  • 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
Q

Costs

A

Are the spending that is necessary to set up and run a business

50
Q

Profit

A

Measures the difference between the values of a business’s revenue (sales) and its total costs

51
Q

Loss

A

Is the amount by which a business’s costs are larger than it’s revenue from all sales

52
Q

What are the main investment projects business’ undertake (3)

A
  • 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
Q

How to calculate Average rate of return (ARR) (2)

A

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
Q

Break-even

A

Is the level of production at which a business’s total costs and revenue from sales are equal

55
Q

Margin of safety

A

Measures the amount by which a business’s current level of production exceeds its break-even level of output

56
Q

Advantages of using break-even analysis (3)

A
  • 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
Q

Disadvantages of using break-even analysis (2)

A
  • 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
Q

Why are financial statements important (3)

A
  • 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
Q

Main components of an income statement (6)

A
  • Revenue
  • Cost of sales
  • Gross profit
  • Overheads
  • Operating profits
  • Net profit
60
Q

Main components of a balance sheet (4)

A 
• Assets
• Liabilities 
• Total equity
• balancing assets and equity 
Therefore provides a snapshot of the business's financial position
61
Q

Assets

A

Is anything that is owned by a business

62
Q

Liability

A

Is a sum of money that is owned by a business to another business or an individual

63
Q

How to interpret financial statements (3)

A
  • Compare with previous years
  • Compare with performance of competitors
  • Judging financial performance from the perspective of different stakeholders
64
Q

How does comparing with previous years help consider current performance

A

Key indicators are:
• The revenue from sales of goods and services
• gross and net profits

65
Q

How does comparing with performance of competitors help consider current performance

A

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
Q

How does judging financial performance from the perspectives of different stakeholders help consider current performance

A

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
Q

How to calculate gross profit margin and how it helps to asses financial performance

A
  • 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
Q

How to calculate net profit margin and how it helps to asses financial performance

A
  • Net profit divided by revenue x 100 = net profit margin

* good indicator as its calculation includes all the costs paid by the business

Business Studies (13 decks)

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