Business Unit 5 ( Finance ) Flashcards
A) What is a Finance Function?
B) What sort of roles do they have?
A) This refers to the Finance Department, usually found in larger businesses. Small business usually employ a firm of accountants to help
B) Calculating Sales Revenues & Production costs
- Calculating profit or less
- Forcasing cash flow
- Managing payments and reciept money
What are some different reasons businesses need finance?
1. Establishing ( Setting up ) a new business - When a business starts up, it will need to buy items before it can produce anything.
2. Funding Expansion - If a business wants to expand, they may need to buy a larger factory.
3. Recruitment - It costs money to advertise jobs & select workers.
4. Marketing - Marketing campaigns need to be fundnded.
What are some different ways of raising finance?
1. Owner’s Captial - The owner’s savings are invested
2. Retained Profit - Profit that is not distrubuted to shareholders as dividends
3. Sale of assests - Goods owned by the business that are sold to raise finance
4. Overdraft - An arrangement with a bank that allow business to spend more money than they have
5. Trade Credit - A business sells goods after agreeing to pay for them at a later date.
6. Taking on a new partner - Adding a new partner who contributes some capital.
7. Loan - A set amount of money, borrowed for a set period of time.
8. Share Issue - Money raised from investors by selling new shares.
9. Crowdfunding - Money is donated or invested by sponsors or the public who are supporters of the business.
Can you provide an; Advantage, Disadvantage & Time Period for the following Sources of Finance?
1. Owner’s Capital
2. Retained Profit
3. Sale of assests
1. Owner’s Captial
- Advantage: No need to repay money, No interest to pay, No cost to raise the finance
- Disadvantage: Owners risk savings, Owners may not have enough savings
- Time Period: Short-Term Finance ( 12 Months )
2. Retained Profit
- Advantage: No need to repay money, No interest to pay, No cost to raise the finance
- Disadvantage: Only available to businesses that have made profit.
- Time Period: Medium-Term Finance ( 1-5 Years )
3. Sale Of Assests
- Advantage: No need to repay money, No interest to pay, Good if selling off old/useless equipment.
- Disadvantage: May be difficult to sell, Producton MAY be put on hold ( if Assests are still in use )
- Time Period: Short, Medium or Long Term
Can you provide an; Advantage, Disadvantage & Time Period for the following Sources of Finance?
1. Loan
2. Overdraft
3. Trade Credit
1. Loan
- Advantage: Repayment if fixed allowing for businesses to plan around it, Money is availabe immediatly after being agreed upon.
- Disadvantage: Interest must be paid, The business may need to give the lender security.
- Time Period: Long-Term Purchases
2. Overdraft
- Advantage: Interest is only payed on amount owed, It is more flexible than a Loan.
- Disadvantage: Interest is charged each day money is owed, The bank can change Overdraft Limit & when its due at any time.
- Time Period: Short-Term Purchases
3. Trade Credit
- Advantage: The business can have goods to sell before paying for them, No interest if repaid in agreed time limit.
- Disadvantage: The goods must be paid for even if they dont sell, Interest is charged if not payed in time
- Time Period: Short-Term ( 12 Months )
Can you provide an; Advantage, Disadvantage & Time Period for the following Sources of Finance?
1. Share Issue
2. Taking on a new partner
3. Crowdfunding
1. Share Issue
- Advantage: No need to repay, No interest to pay, New investors can contribute to the business.
- Disadvantage: Only avaiable to Limit Companies, Profit & business decisions will now have to be shared with shareholders.
- Time Period: Long-Term Finance ( 5+ Years )
2. Taking On A New Partner
- Advantage: No need to repay, No interest to pay, The ne partner may bring new skills.
- Disadvantage: Profit & business decisions will now have to be shared with new partner, Sole traders must become partnerships to do this.
- Time Period: Long-Term Finance ( 5+ Years )
3. Crowdfunding
- Advantage: No need to repay, No interest to pay, Alot of money can be contributed.
- Disadvantage: Interests will be paid if raised through a loan, Ownership will be shared if raised through investment
- Time Period: Short-Term ( 12 Months )
A) Define & Provide examples for;
1A) Internal Finanace
1B) External Finance
B) What are questions businesses may ask when decideing on a source of finance?
1A) Finance raised from within the business. E.g. ( Owner’s captial, retained profit & sales of assets )
1B) External raised from sources outside the business. E.g. ( Overdraft, trade credit, loan, crowd funding & share issues. )
B) Questions to ask:
B1) Do we need external finance or can we finance it ourselves?
B2) How long do we need the finance for?
B3) Do we want to keep control over the business as owners?
B4) Is this source of finance available to our type of business?
What are some different ways a business could increase their revenue?
1. Increase the price of the product ( will only work if customers dont switch to a cheaper competitor )
2. Reduce the price to increase sales
3. Increase its sales by increasing:
- Advertising
- Producing more by having a new factory or shop or buying a competitor
- Selling a wider range of products
What is the formula for:
A) Gross Profit
B) Net Profit
C) Gross Profit Margin
D) Net Profit Margin
A) Total Revenue - Cost of sales = Gross Profit
B) Gross Profit - Expenses = Net Profit
C) ( Gross Profit X 100 ) / Total Revenue
D) ( Net Profit x 100 ) / Total Revenue
What reasons for improvement could there be if the;
A) Gross Profit Margin rises
B) Net Profit Margin rises
A) Gross Profit Reasons
- Total revenue rose faster than cost of sales
- Total revenue fell but cost of sales fell more.
- Total revenue rose & cost of sales fell.
B) Net Profit Margin Reasons
- Gross profit rose faster than expenses
- Gross profit has fallen but expenses fell more
- Gross profit rose and expenses fell
What reasons for worsening performance could there be if the;
A) Gross Profit Margin decreases
B) Net Profit Margin decreases
A) Gross Profit Margin Decreases
- A fall in total revenue and a rise in the cost of sales.
- A rise in total revenue but a bigger rise in cost of sales.
- A fall in total revenue but a smaller fall in cost of sales.
B) Net Profit Margin Decreases
- A fall in gross profit and a rise in expenses
- A rise in gross profit but a smaller fall in expenses
- A fall in gross profit but a bigger rise in expenses
A) What is a Break-Even forecase?
B) Formula for Break-Even output
C) What is the usefulness of break-even analysis in business decision making?
A) A prediction about the break-even quantity, based on estimates of future sales revenue & costs.
B) ( Total Fixed Costs ) / Price - Variable Costs per unit ( This can also be written as Contribution per unit )
C1) Planning the price to charge
1. The break-even forecast shows that the business will not break-even at the proposed selling price.
- ^ The business could try to reduce costs, ( e.g. by buying materials or stock from a cheaper supplier )
- ^ The business may also decide to increase the selling price to reduce Break-Even output.
C2) The forecast shows how much the business must sell to break-even.
- ^ If the business thinks it can sell this amount, it may decide to produce this amount initially & then increase production as they near the Break-Even level.
- ^ Else they might just not produce at all.
What are some limitations/problems with Break-Even forecasts?
1. It is only a forecast, a prediction, so things may change in the future
2. The business may not be able to sell at the planned price; New competition may force the price down, or demand may be lower at that price.
Define;
1A) Cash
1B) Liquidity
2A) How are Cash flow forecasts usefull to a business?
1A) Money the business has ( different from profit )
1B) The ability of a business to pay its short-term debts.
2A) Planning Tool
- ^ It’s a plan that helps a business know if it has liquidity.
- ^ A bank manager when presented with a detailed cash flow forecase is more likely to give a business a loan.
2B) Anticipating Periods of Cash Shortages
- ^ By showing when the business will have a cash shortage, it allowes them to plan around this.
2C) Dealing with a cash flow shortage when the business has a negative cash flow
- ^ A shortage can be dealt with by arranging for finance ( Usually Overdrafts ) so the business can still pay its billfs during the period if shortage to continue to produce.
- ^ Trying to reduce spending or increase revenue to avoid the shortage.
A) What is the formula for ARR?
B) What are some uses for it?
A1) Total Revenue - Cost of the investment = Total Profit
A2) Total Profit / Life of investment ( Years ) = Average Annual Profit
A3) ( Annual average proft / Cost of invement ) X 100 = **ARR **
B) Business use ARR to:
1. Compare different investments
2. Compare an investment with saving.
