Business: Unit 5- Finance Flashcards by maria buligoanea

Finance department functions(5)

record financial transactions
prepare final accounts
produce accounting inforation
forecast cashflows
important financial decisions

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businesses need finance for

starting-up a business
- start- up capital
expanding an existing business
- takeover
- development of new product
additional capital
- long-term
- short-term

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start-up capital

finance needed by a new bs to pay for essential fixed and current assets before it can begin trading

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long-term additional capital

Capital Expenditure-> money spent on a fixed asset(which will last for more than one year)

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short-term additional capital

Working Capital-> finance needed by a business to pay its day-to-day costs
Revenue Expenditure-> money spent on day-to-day expenses

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internal sources of finance

retained profit
selling existing assets
selling exisitng inventory
owners’s savings

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retained profit(2+,3-)

+doesn’t have to be repaid
+no interest

new bs odesnt have retained profits
small businesses don’t have enough retained profits
reduces payment to owner

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sale of existing assets(+2,-2)

+better use of capital tied up in business
+no increase in debts

have to have assets to sell
amounts are not certan until the asset is sold

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sale of inventory(1+,1-)

+reduced costs of high inventory levels

-risk against unexpected orders

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owners’ savings(2+,2-)

+time efficient
+no interest

savings may be too low
increased risk taken by owners

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external sources of finance

issue of shares
bank loans
selling debentures
factorising of debts
grants& subsidiaries
micro-finance
crowd funding
debentures

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issue of sahers (2 +, 2 -, 2 issues)

+permanent souce of income->doesn’t have to be paid back
+no interest

dividends are paid after tax
ownership of the company could change hands

rights issue-same shareholders, bigger percentage-higher value of shares
news issue-more shares, new shareholders

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crowd funding

funding a project by raising money from a large number of people who each contribute , typically via the internet

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debentures(definition, 1 +, 1-)

-long-term loan certificates issued by limited companies

+can be used to raise very long-term finance
-must be repaid with interest

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micro-finance

financial services to low-income individuals in developing countries not offered by conventional banks

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bank loans(3+, 2-)

+usually quick to arrange
+they can be for varrying lengths of time
+large companies might have access to better interest rater

a bank loan will have to be rapaid with interest
security/collateral is needed

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factoring of debts(definition, 2 +, 1 -)

debt factors-agencies specialised in buying the claims on debtors of firms for immediate cash

+immediate cash
+risk transferred

-firm receives less than the value of its debt

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short term finance (definition+3 types)

provides working capital needed by business for
day-to-day operations

overdraft
trade credit
factoring of debts

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overdraft(short term source of finance)(2+,2-)

bank gives business the right to overdraw its account
+fliexible
+interest only payed for amount overdrawn

interest rates are variable
bank can ask for the overdraft to be repaid at very short notice

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trade credit(short term source of fincance)(1+,1-)

+interest free loan for the length of time payment is delayed for
-supplier may refuse discounts or supplying the goods

long-term sources of finance(definition and 7 types)

funding obtained for a time-frame exceeding one year

owner’s savings
bank loans
share capital
debentures
grants
leasing
hire purchase

hire purchase(definition, 2 disadvantages)

buying a fixed asset over a long period of time with monthly payments including interest change

cash deposit is payed at the beginning
interest payments can be high

leasing(not owning)(definition, 2 + , 1 -)

allows firm to use an asset without puchase with monthly payments and can be purchased at the end of the period

+firm doesn’t have to find a large cash sum
+maintenance is carried out by the leasing company

-total cost will be higher

How does the business choose between sources of finance?

purpose&time period
amount needed
legal form
control
risk&gearing(does the bs already have loans)

How do financiers decide on sources of finance?

- cash flow - income statement - existing loans - bs plan - share price - dividends

cash inflows(4 e.g)

``` sums of money received by a business during a period of time +clients +borrowing money +sale of assets +investors ```

cash outflows(4 e.g)

sums of money payed out by a business during a period of time - suppliers - paying wages - purchasing assets - repaying loans

good cashflow management(4)

- good forecasting - getting money in the business quicker - getting goods to the market quicker - getting paid as quickly as possible

insolvency

business runs out of cash and cannot pay its suppliers or workers

account

financial records of a firm's transactions

accountants

profesionally qualified people who have responsability for keeping accurate accounts& producing final accounts

final accounts

-at hte end of year, gives details about the profit or loss made over the year and the worth of the loss

depreciation(capital consumption)

-the fall in value of a fixed asset over time

why is profit important

- reward for enterprise - reward for skills - reward for risk-taking - source of finance - indicator of success

income statement(profit&loss)

document that records the income of a business and all costs incurred to earn that income over a period of time

equation for profit, after-tax profit and retain profit

sales revenue - operating expenses = GROSS PROFIT MARGIN +other incomes - depreciation - overheads =PROFIT (pre-tax) -tax = PROFIT(after-tax) -dividends = retained profits for the year

balance sheet

shows worth of a business at one moment in time

assets(def, 2 types)

items of value which are owned by a business ``` FIXED ASSETS(land,buildings) SHORT-TERM ASSET(stocks,cash) ```

liabilities(def and 2 types)

debts owned by the business ``` NON-CURRENT LIABILITIES(loans) CURRENT LIABILITIES(bank overdraft) ```

shareholder's equity

total sum of money invested into the business by owners - > SHARE CAPITAL: money put into the business when shareholders buy newly issued shares - >RETAINED PROFITS: profit owned by shareholders but hasn't been payed in dividends

liquidity

ability of a business to pay back its short-term debts

capital employed

long-term permanent capital invested in a business

profitability

profit made relative to the value of sales or the capital invested

Return on Capital Employed

-amount of money received from the capital put into a business over a year ago -Net Profit _________ capital employed

Gross Profit Margin

-amount of gross profit made for every dollar of products sold gross profit ___________ sales revenue

Profit Margin

-amount of profit made for every dollar of products sold net profit _________ sales revenue

Current Ratio

Current assets ---------------------- current liabilities

Acid test Ratio

Current assets-stocks --------------------------------- current liabilities