Business Finance Flashcards
Why do businesses need finance
Pay costs
Buy assets
Internal sources if finance
Retained profit
Owner funds
Selling assets
Trade credit
External sources of finance
Gov grants Loans Hire purchase Overdraft Mortgage Selling shares
Influences on choice of finance
Business type Business profitability Risk in a business Assets in business If person has friends or family Business history Amount of finance
Cash flow
Amount of money coming in and out of the business on a day-to-day basis
Consequence of managing cash badly
If business does not have enough cash to pay costs then business is forced to shut down
Benefits of positive cash flow
- no need to pay interest
- more likely to get loan
- has cash to develop
Cash flow forecast
Expected cash inflows and outflows
Solutions to cash flow problems
Reschedule payments Overdraft Reduce outflows Increase inflows New source of finance
Investment
When a business buys an asset to make profit
Average rate of return
ARR= yearly profit/cost of investment.
*100
Average yearly profit
Average yearly profit = profit/ years
Break even
The level where the costs and revenue are equal
Margin of safety
Amount by which a business current production exceeded its break even level of output
Break even
+ & -
+ shows effect of changing in price
+more likely to get loan
+ shows effect of changing costs
- assumes business sells output
- keeps changing as cost and price keeps changing
Financial statement purpose
Assess performance
Help with decisions
Help investors make decisions
Uk law
Income statement components
Revenue Cost of sales Gross profit Overheads Operating profit Tax and interest Net profit
Statement of financial position components
Fixed assets
Current assets
current liabilities
Non current liabilities
Net assets
Total equity
Income statement
Shows businesses profit and loss over time
Statement of financial position
Shows what a business owns and owes
How are financial statements used
Decision making Shareholders investment Suppliers trust or noy Tax authorities Stakeholders use the info
Finiancial statements use
Compare with competitors
See performance
Gross profit margins
Gross profit margin= gross profit/ revenue *100
Net profit margin
Net profit margin = net profit/ revenue *100
