Chapter 5.2 (Financial function) Flashcards
Define permanent capital
=Amount of assets, funds, or money required by the business at all times
Define variable capital
=The additional amount of assets/money required from time to time
What factors should you consider when choosing sources of capital (finance)
-Availability and accessibility
-Costs associated with a specific source
-Freedom of application
-Effects of financial leverage
-Taxation considerations
What problems would you usually face when obtaining finance ?
-Own capital contribution is too small
-Lack of experience in financial management
-Lack of financial expertise
-Too much emphasis on collateral by suppliers of finance
-Lack of planning
-Credit-worthiness
Define debtors
The sum total of all the monies owed to an enterprise by customers/clients at any given time
Define creditors
The sum total of all the monies owed by the enterprise to suppliers of the business
Define trade creditors
Monies owed to the suppliers of good and services intended for resale purposes
Define other creditors
Money owed to the suppliers of good and services meant for supportive operational purposes
Define credit transaction
Any business activity where goods and/or services are supplied but where the receiver doesn’t immediately pay them in full
List the various forms of credit
-Open account
-Revolving credit
-Instalment credit
Explain open account credit
-Credit is extended regularly to s customer/client but the customer/client has to pay the full amount of each of the specific purchases within the following agreed period
Explain revolving credit
The client/debtor is restricted to a maximum limit of the accumulated debt owed
Explain installment credit
-It applies mainly where high priced goods/services are supplied on credit and the client is obliged to make regular installment payments until the full debt is paid
What are the forms of instalment credit
-Hire-purchase
-Leasing
-Renting
Advantages of granting credit
-Increasing sales
-Increasing market share
-Increasing profit
-Facing competitionD
Disadvantages of granting credit
-Higher administrative and operational costs
-Possibility of late payments by debtors
-Increased need for capital
-Slowdown in cashflow
What is the importance of a sound and realistic credit policy
It gives guidance and information to the owner/manager and employees and customers
List the 7 C’s of assessing creditworthiness
-Credit history
-Capital
-Capacity
-Common sense
-Collateral
-Conditions
-Character
Define financial structure
The composition of the business’ assets in relation to its sources of capital
Define ROI
Indicates the rate of return on total capital
Define ROE
Indicates the rate of return on own capital
Define Liquidity
The ability of an enterprise to pay its short-term financial commitments continuously an on time
Define solvency
The degree to which the total assets of the business cover its total liabilities
Financial activities
-Obtain external information
-Preparing financial budgets
-Recording all financial transactions
-Analysing financial performance
-Financial Reporting
-Safe guarding cash
-Debt collection
-Formulating the credit policy
-Salary administration
-Negotiating with suppliers of capital
Typical problems when obtaining finance
-Own Capital Contribution is too Small
-Lack of Experience in Financial Management
-Lack of Financial Expertise
-Lack of Planning
-Too much emphasis on collateral
-Creditworthiness
Implementing Credit Decisions
-Confirming the outcome of an application
-Signing a formal agreement
-Ensuring efficient and effective administration
-Controlling debtors’ accounts
-Follow-up
