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Options > Busniess Section 5 > Flashcards

Busniess Section 5 Flashcards

1
Q

3 roles of the finance department?

A

Identifying sources of finance e.g. bank loans and grants

Setting budgets for business

Providing financial help information

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2
Q

3 internal sources of finance?

A

Owners Capital
Retained profit
Sale of assets

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3
Q

Owner capital?

A

The owner of a business may put some of their own savings to help start and grow the business

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4
Q

Retained profit?

A

A business may use profits it has made in the past to pay for future expenses

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5
Q

2 advantages of owner capital?

A

Available immediately

No need to pay back or pay interest

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6
Q

2 disadvantages of owner capital?

A

Unlikely to be enough

Big risk may lose life savings

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7
Q

2 advantages of retained profit?

A

Available immediately

No need to pay back or pay interest

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8
Q

2 disadvantages of retained profit?

A

Not available to new businesses

Shareholders might want to take the short term reward of high dividends

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9
Q

Advantage of sale of assets?

A

If assert is no longer being used, It makes easy cash

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10
Q

2 disadvantages of sale of assets?

A

Depreciation - Second hand things will only be worth a fraction of the original cost

Time consuming to find a buyer

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11
Q

3 external sources of finance?

A

Bank loan
Overdraft
Take on new partner

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12
Q

2 advantages of a bank loan?

A

Large sum of money can be borrowed

Can be repayed over 3-5 years in affordable chunks

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13
Q

Disadvantage of bank loan?

A

Money has to be paid back with interest

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14
Q

2 Advantages of overdraft?

A

Used to cover short term problems e.g. day to day bills like wages and rent

Likely to pay back less interest as it’s only needed for a short amount of time

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15
Q

2 disadvantages of overdraft?

A

If used for a long time, the interest will become very high

Bank insists it is payed back straight away

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16
Q

2 advantages of taking on a new partner?

A

No interest to pay back like a bank loan or overdraft

They might have new skills and ideas for the business

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17
Q

2 disadvantages of taking on a new partner?

A

They’re entitled to a share of the profits

Disagreements

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18
Q

Share issue?

A

A business can sell to shareholders

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19
Q

2 Advantages of share issue?

A

Money does not have to be payed back

Large sum of money can be raised

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20
Q

2 Disadvantages of share issue?

A

in a PLC, business can be taken over if someone buys more than 50% of the shares

Some profit is given to shareholders in dividends

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21
Q

Crowd funding?

A

Money raised from sponsors
or donors through crowdfunding websites

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22
Q

2 advantages of crowdfunding?

A

An alternative for businesses who have been turned down for a bank loan

Can potentially raise a large sum of money

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23
Q

2 disadvantages of crowd funding?

A

Profits need to be shared with sponsors/donors

Can take a long time to raise the finance

24
Q

Trade credit?

A

When a supplier allows a business to receive goods first, then pay later

25
Q

advantage of trade credit?

A

gives the business time to sell goods/stock and then use the income to pay them back

26
Q

2 disadvantages of trade credit?

A

May not be available to new businesses who have no track record

Supplier must still be paid even if the goods aren’t sold

27
Q

Costs?

A

Payments that a business makes in order to make goods and provide a service

28
Q

Fixed costs?

A

Costs that do not change with output
e.g. rent, wages, insurance

29
Q

Variable costs?

A

Costs that change with output e.g. stock

30
Q

Total costs=?

A

fixed costs + variable costs

31
Q

Variable cost=?

A

variable cost per unit X output

32
Q

Revenue=?

A

Selling price per unit X output

33
Q

3 ways a business can increase revenue?

A

Open more shops
Advertising
Increase product range

34
Q

Profit/loss formula=?

A

Revenue - total costs

35
Q

difference between gross and net profit?

A

Net profit reflects the amount of money you are left with after having paid all your allowable business expenses, while gross profit is the amount of money you are left with after deducting the cost of goods sold from revenue

36
Q

Gross profit=?

A

Revenue - cost of sales

37
Q

Gross profit margin ratio=?

A

Gross profit/Revenue X 100

38
Q

Net profit=?

A

gross profit - operating expenses and taxes

39
Q

Net profit margin ratio=?

A

Net profit/revenue X 100

40
Q

2 ways a business can improve their net profit?

A

Reduce number of workers
Reduce amount spent on advertising

41
Q

Average rate of return?

A

Measure the profitability of an investment over the time of the investment

42
Q

Why would some investors want to know what the rate of return is for a business?

A

to know whether it is going to be worthwhile investment

43
Q

How to figure out the average rate of return=?

A

1) profit - cost of investment

2) Divide by the number of years

3)
Average profit/cost of investment X100

44
Q

What is gross profit?

A

the amount of profit made by a business as a result of buying and selling goods or services

45
Q

Why is it important for a business to make a profit?

A

To reward investors and owners

To use for future improvement and expansion

46
Q

What is the break even number of units?

A

number of units that a business needs to sell to make neither a profit or a loss
Total revenue = total costs

47
Q

Break-even formula?

A

Fixed costs
/selling price per unit - variable cost per unit

48
Q

3 reasons cash is essential?

A

To pay workers
To pay suppliers
To pay bills

49
Q

Cash?

A

the amount of money a business has available at a given point in time

50
Q

Profit =?

A

total revenue - total costs

51
Q

4 examples of cash inflows?

A

Sales
Bank loans
Share capital
Rent received

52
Q

4 examples of cash outflows?

A

Rent
Wages
Insurance
Stock

53
Q

Net cash flows=?

A

Total cash inflows - total cash outflows

54
Q

Share capital?

A

the amount of money the owners of a company have invested in the business

55
Q

disadvantage of a clash flow forecast?

A

it’s only a prediction

56
Q

3 reasons that break even analysis is good in business decision making?

A

Can be used to make judgements about prices and costs

More likely to be offered a bank loan as it is part of a plan

Helps them to plan how much to sell in order to make profit

57
Q

Martin of safety=?

A

current level of sales - break even point

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