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buisness flashcards (Y9, Y10, Y11) > Buisness unit 5.1, 5.2, 5.3, 5.4, 5.5 > Flashcards

Buisness unit 5.1, 5.2, 5.3, 5.4, 5.5 Flashcards

1
Q

what are main reasons why the businesses need finance? 3

A
  • for start up capital
  • for capital for expansion
  • for additional working capital
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2
Q

what is working capital?

A

money needed for paying for day to day activities

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3
Q

what is capital expenditure?

A

money used for long term finance needs

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4
Q

what is revenue expenditure?

A

money needed for day to day expenses

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5
Q

what are the two sources of finance? 2

A
  • internal finance
  • external finance
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6
Q

what is internal finance?

A

money raised from within the buisness

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7
Q

what is external finance?

A

money raised from sources outside the business

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8
Q

what are examples of internal finance? 4

A
  • retained profit
  • sale of existing assets
  • sale of inventory to reduce inventory levels
  • owners savings
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9
Q

what is retained profit?

A

profit reinvested back into the business, after owners have taken their share of profit

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10
Q

what are the benefits and drawbacks of retained profit? 2,2

A

benefits =
- no interest has to be sold–> lower costs
- does not have to be repaid –> lower cash outflow
drawbacks =
- not suitable for a new buisness, no profit last year
- shareholders may not be happy if profit is used as retained profit and not given to them as dividens

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10
Q

what are sales of existing assets?

A

the buisness could sell items of value that they own but are no longer needed

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11
Q

what are the benefits and drawbacks of the sales of existing assets? 2,2

A

benefits =
- makes batter use of unused things and gaining money for them
- money does not have to be repaid unlike loan
drawbacks =
- may not get so much money as the value will decrease over time
- not suitable for new buisness as they have no unused assets yet

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12
Q

what are the sales of inventory to reduce inventory levels?

A

inventory are the stock/raw materials used by a buisness to make a finished product

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12
Q

what are the benefits and drawbacks of sales of inventory to reduce inventory? 2,1

A

benefits =
- can reduce the costs of storing raw materials
- reduces amount of money in inventory
drawbacks =
- if they sell too much inventory, they may not have enough money to produce enough products –> reducing customer satisfaction

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13
Q

what are the benefits and drawbacks of owners savings? 2,2

A

benefits =
- no interest needs to be paid –> lower costs
- does not have to be repaid –> lower cash outflow
drawbacks =
- not enough money
- owners may not want to risk their savings if the buisness fails

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13
Q

what are examples of external sources of finance? 9

A
  • bank loans
  • sale of shares
  • grants from government
  • crowdfunding
  • selling debts to a debt factoring company
  • micro finance
  • debentures
  • overdraft
  • trade credit
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14
Q

what are the benefits and drawbacks of bank loans? 2,2

A

benefits =
- can pay them back in installments
–> improving cashflow
- larger companies can negotiate lower interest rates
drawbacks =
- interest needs to be paid, leading to higher costs
- id loan is not repaid the house can be repossessed by bank –> risky for owners

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15
Q

what are bank loans?

A

money borrowed from the banks and has to be repaid

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16
Q

what are the benefits and drawbacks of selling shares? 2,2

A

benefits =
- no interest had to be paid leading to lower costs
- can obtain large amount of finance of expansion
drawbacks =
- shareholders will be expected to be paid dividends, reducing the amount of profit left over retained profit
- if many shares are sold, the original owners may lose control of the company

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17
Q

what are the benefits and drawbacks of getting grants from the government? 1,1

A

benefits =
- no interest, and does not have to repaid
drawback =
- may have to meet a certain criteria to obtain the loan

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18
Q

what is crowd funding?

A

raising money for a project via the internet from a large number of people

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19
Q

what are the benefits and drawbacks of crowd funding? 2,2

A

benefits =
- no initial fees needed, only if you receive money from investments
- allows the to see the public reaction of the product initially
drawbacks =
- publicising the buiness idea could allow competitoes to copy the idea and procue it ad get it onto the market before them
- if the total amount requested has not been raised, they will have to return all donate money, wasting time

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19
Q

what are the benefits and drawbacks of micro finance? 1,1

A
  • suitable for entrepreneurs who do not have any assets to offer to a bank for a regular loan ​
    drawbacks =
  • may not get enough finance from micro finance ​
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20
Q

what is debt factoring?

A

business selling off their debts to a debt factoring company, the debtor will then now pay the debt factoring company

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21
Q

what are the benefits and drawbacks of debt factoring? 2,1

A

benefits =
- cash is now immediately available for the business as they have received in from the debtor company
- the business no longer has to waste time following up the debtors for the money
drawbakcs =
- business does not receive the full 100% of the value of its debts from the debtor company. Therefore. less revenue for the business ​

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22
Q

what is micro finance?

A

providing financial services, including small loans to poor people, not served by traditional banks. these are usually in developing countries​

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23
Q

what are debentures?

A

long term loans issued by limited companies

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24
Q

what are the benefits and drawbacks of debentures? 1,1

A

benefits =
- allows the business access to large amounts of finance that can be paid over a long period of time, helps slow down cash outflow
drawbacks =
- interest must be paid on these loans, increasing costs

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25
Q

what is leasing?

A

leasing an asset allows the business to use an asset without having to purchase it

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26
Q

what are the benefits and drawbacks of leasing? 2,1

A

benefits =
- the business does not have to find a large cash sum to purchase the asset to to start with so they need to take out a bank loan.​
- the costs will be higher in the long run than purchasing the asset
drawbacks =
-the maintenance of the asset will be carried out by the leasing company, reducing costs for a business ​

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27
Q

what is trade credit?

A

an agreement between a supplier and a business, the business can receive the raw materials they ordered straight away and pay for them at a later date

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28
Q

what are the benefits of trade credit?
1,1

A

benefits =
- cash flow improves as cash out flows are delayed in the short run, improving net cash flow in the short run
drawbacks =
- suppliers often offer businesses discounts to pay straight away, meaning the business will miss out on this, increasing costs

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28
Q

what is an overdraft?

A

arranged by a bank, the bank gives the business the right to ‘overdraw’ from their account. (Take out more money than they have in their bank account.) ​

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29
Q

what are the benefits and drawbacks of overdrafts? 1,2

A

benefits =
- allows the business to be able to pay day to day bills
drawbacks =
- interest will be charged on the overdraft ​
- the bank can ask for the overdraft to be repaid on very short notice​

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30
Q

what will a business not be able to do if they run out of cash? 2

A
  • pay its employees –> employees going on strike and output is stopped
  • pay its suppliers –> cannot product their products
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31
Q

what is a cash flow forecast?

A

a prediction of a firms cash inflows and out flows

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32
Q

what is cash inflow (receipts)?

A

cash received by a buisness (money from sales, money from bank loans)

33
Q

what are cash outflows (payments)?

A

money paid out by the business (paying suppliers, creditors, paying rent)

34
Q

how do you calculate net cash flow?

A

inflow - outflow

35
Q

what is an opening balance?

A

money the business has at the start of the month

36
Q

how do you calculate closing balance?

A

net cash flow + opening balance

37
Q

why is cashflow important for a business? 2

A
  • important when starting a new business
  • managing cashflow
38
Q

how do you solve cash flow problems? 4

A
  • increase/overdraft bank loans
  • delaying payment to suppliers
  • ask debtors (creditors)
  • cancel purchasing equipment
39
Q

working capital is important so the business can pay: 2

A
  • suppliers
  • loans
40
Q

what is an example of working capital? 3

A
  • suppliers
  • bills
  • rent
40
Q

what is working capital?

A

capital available in the ST to pay day to day expenses

41
Q

what is the formula for working capital?

A

current assets - current liabilities

42
Q

what is the importance of profit for private sector businesses?

A
  • a reward for risk - an use this reward to pay more dividends to shareholders to keep them satisfied​
  • a source of finance - profit can be used as retained profit so that the business doesn’t need to get a bank loan and pay interest
  • indicator of success - high profitability will attract future investors to invest in the company. This money can be used for machinery, advertising or R & D
43
Q

what is profit?

A

money made after all costs have been paid. It is used for dividends and retained profit. ​

44
Q

what is cash?

A

money used and needed for day to day expenses

45
Q

what are income statements?

A

shows business owners and managers whether the business has made a profit or a loss. ​

46
Q

what are the key features of income statements? 6

A
  • revenue
  • cost of sales/goods sold
  • gross profit
  • expenses
  • net profit
  • retained profit
47
Q

what sis the formula for revenue?

A

price x quantity

48
Q

what is revenue?

A

money made from sales

49
Q

what are the costs of sales/goods sold?

A

costs to make the product and are made up of variable costs

50
Q

what is the formula for net profit?

A

gross profit - expenses

50
Q

what are expenses?

A

these are all other expenses of the business (fixed costs)

51
Q
A
52
Q

what is retained profit?

A

the amount of profit that is reinvested back into the business, after dividends and taxes are paid

53
Q

what is a statement of financial position?

A

shows the value of a business assets and liabilities at a particular time

53
Q

what are assets?

A

items of value which are owned by the business

54
Q

what are non current assets? (examples too)

A

the items owned by the business for more than one year (buildings, vehicles, land, machinery)

55
Q

what are current assets? (examples too)

A

items owned by a buisness and used within one year (stock, cash, accounts receivables)

56
Q

what are liabilities?

A

debts the business owns

57
Q

what are non current liabilities? (examples too)

A

debts that do not have to be paid within one year (mortgage, long term bank loans)

57
Q

what is total shareholders equity?

A

total sum of monye invested into the business by the owners of the company

58
Q

what is share capital?

A

money put into the buisness by shareholders

59
Q

what are P & L reserves?

A

profit reserved from the previous years profit and put back into the business aka retained profit

60
Q
A
60
Q

what are the two ways the total shareholders equity can be invested in? 2

A
  • share capital
  • P&L reserves
61
Q

what is profitability? 2

A

is the measurement of profit made relative to either:
- the value of sales achieved
- the capital invested in the buisness

62
Q

profitability is measured in percentage and its important to: 2

A
  • investors when deciding where to invest
  • directors and managers to assess whether the business is becoming more or less successful
63
Q
A
63
Q

what is the formula for gross profit margin?

A

gross profit/revenue x 100

64
Q

if gross profit increases what would that suggest? 2

A
  • prices have risen
  • costs of sales have reduced
65
Q

what is the formula for net profit margin?

A

net profit/revenue x 100

66
Q

the higher the net profit is…

A

the more successful managers are a making prift from sales

67
Q

when net profit increases, what would this suggest?

A

this may mean that managers are more efficient by cutting expenses

68
Q

what is the formula for return on capital employed?

A

net profit/capital employed x 100

69
Q
A
70
Q

what is capital employed?

A

is the money invested into the business usually from shareholders and loans

71
Q
A
71
Q

what is the formula for acid test ration?

A

(current assets - inventories)/current liabilities

72
Q

what is the number that is acceptable for acid test ratio?

A

one and above

73
Q

which stakeholders are interested in the accounts of a business?

A
  • managers
  • shareholders
  • creditors
  • banks
  • government
  • employees
74
Q

what is the interest a manger has towards the accounts of a buisness?

A

will help a manager assess whether the business is profitable and has strong liquidity. If not, they can then find solutions

75
Q

what is the interest a shareholder has towards the accounts of a buisness?

A

shareholders will want to see the GPM, NPM and ROCE. They want to see if they will get a good return on their investment

76
Q

what is the interest a creditor has towards the accounts of a buisness?

A

they will want to see the business liquidity ratios. They will want to see if is a business is able to pay back its debts on time. If the business has a low liquidity ratio, the supplier may not trade with the business.

77
Q

what is the interest a bank has towards the accounts of a buisness?

A

the bank will want to see the liquidity ratios. They will not lend to a business that is at risk of being illiquid and can not pay debts

77
Q

what is the interest governments has towards the accounts of a buisness?

A

will want to see a business Income statement as they will want to see how much corporation tax they will be receiving

78
Q

what is the interest employees has towards the accounts of a buisness?

A

employees may want to see a business Income statement to see if they business is very profitable If so then they could try to negotiate a pay rise. ​

buisness flashcards (Y9, Y10, Y11) (6 decks)

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