Business: Unit 5- Finance Flashcards
Finance department functions(5)
- record financial transactions
- prepare final accounts
- produce accounting inforation
- forecast cashflows
- important financial decisions
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
start-up capital
finance needed by a new bs to pay for essential fixed and current assets before it can begin trading
long-term additional capital
Capital Expenditure-> money spent on a fixed asset(which will last for more than one year)
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
internal sources of finance
- retained profit
- selling existing assets
- selling exisitng inventory
- owners’s savings
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
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
sale of inventory(1+,1-)
+reduced costs of high inventory levels
-risk against unexpected orders
owners’ savings(2+,2-)
+time efficient
+no interest
- savings may be too low
- increased risk taken by owners
external sources of finance
- issue of shares
- bank loans
- selling debentures
- factorising of debts
- grants& subsidiaries
- micro-finance
- crowd funding
- debentures
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
crowd funding
funding a project by raising money from a large number of people who each contribute , typically via the internet
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
micro-finance
financial services to low-income individuals in developing countries not offered by conventional banks
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
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
short term finance (definition+3 types)
provides working capital needed by business for
day-to-day operations
- overdraft
- trade credit
- factoring of debts
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
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 liabilities
Acid test Ratio
current liabilities
