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Business Theme 2 > Finance > Flashcards

Finance Flashcards

1
Q

Benefit: OWNERS CAPITAL – PERSONAL SAVINGS

A

Immediate availability

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2
Q

Drawback- OWNERS CAPITAL – PERSONAL SAVINGS

A

Limited in amount

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3
Q

Benefits: RETAINED PROFIT

A

Cheap (no interest) and doesn’t need to be repaid

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4
Q

Drawbacks: retained profit

A

For profits to build up to use in this way can take too long and good business opportunities missed

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5
Q

Benefits: SALE OF ASSETS

A

Does not need to be repaid

If a particular asset isn’t helping your businesses overall sucess sale will not only ease cash flow problems but also enhance the overall profitability of the business

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6
Q

Drawback: Sale of assets

A

If want quick sale will have to sell cheap

Opportunity cost as assets might still be useful

a firm shouldn’t sell fixed assets to improve liquidity

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7
Q

Advantages: family and friends

A

Might not want a stake, meaning control is not relinquished

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8
Q

Drawbacks: Family and friends

A

Might lead to breakdowns in relationships if money not repaid

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9
Q

Benefits: Banks

A

you do not have to give the lender a percentage of your profits or a share in your company.

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10
Q

Drawbacks: bank loans

A

Money must be repaid or assets repossessed

Interest

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11
Q

What is peer-to-peer lending?

A

P2P

the practice of lending money to individuals or businesses through online services that match lenders with borrowers.

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12
Q

Benefits: P2P

A

P2P loans do not involve surrendering any control of the business but they usually involve directors signing a Personal Guarantee

Most P2P lending is unsecured, so the borrowers do not have to commit personal or business assets as security

As peer-to-peer lending platforms are typically entirely online, it means that the application process is quick and convenient. This can be very handy if you wish to secure your funds.

Provide an option where banks are unwilling to lend

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13
Q

With peer-to-peer lending, borrowers can often access loans with interest rates lower than they could obtain from traditional lenders like banks and building societies. Why might this be?

A

As investors are providing money directly to borrowers through a P2P platform, there aren’t the typical overheads associated with most financial service providers, which often allows both parties to benefit from more favourable rates. Also no middle man to pay

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14
Q

Drawbacks: P2P

A

Fairly high rate of interest

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15
Q

What are business angels?

A

Individuals who invest in the very early stages of a business, taking a significant equity stake

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16
Q

What is crowd funding?

A

Obtaining external finance from many small investments, usually through a web-based appeal for investors

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17
Q

Benefit: Business angels

A

Bring expertise to help with decision-making

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18
Q

Drawbacks: business angels

A

Control relinquished/potential conflict

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19
Q

Benefits: Crowdfunding

A

Good publicity for the business

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20
Q

Drawbacks: Crowdfunding

A

No control on who is buying a stake in the business

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21
Q

Benefits: share capital

A

SHARE CAPITAL

No repayment required

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22
Q

Drawback: share capital

A

Pressure from equity partner might focus on short-term returns

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23
Q

What is venture capital?

A

A method of providing finance in higher-risk investments generally through a combination of loans and shares

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24
Q

Benefit: venture capital

A

Can include expertise to help with decision making

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25
Q

Drawback: venture capital

A

Loss of control

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26
Q

What is an overdraft?

A

A facility offered by a bank to allow a customer to continue spending money even when their account becomes negative. There will be an agreed limit to the overdraft

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27
Q

Benefit: overdraft

A

Flexible, only use as and when you need it

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28
Q

Drawback: overdraft

A

Expensive as interest rates are high

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29
Q

What is leasing?

A

Leasing an asset is an alternative to buying the asset outright. Instead, the asset is rented for a monthly fee for a set period of time

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30
Q

Benefit: Leasing

A

Flexible, over fixed period allowing you to replace equipment
Avoids large chunks of cash outflows each time a major new asset is purchased

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31
Q

Drawbacks: Leasing

A

In the long term will be more expensive than purchasing an asset outright

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32
Q

What is trade credit?

A

The goods or services provided by a supplier are not paid for immediately

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33
Q

Who might be refused trade credit?

A

Start-ups or those with a poor record of payment in the past

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34
Q

Benefits: trade credit

A

Access to goods without immediate payment

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35
Q

Drawback: trade credit

A

failure to comply with the conditions could lead to the loss of a supplier.

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36
Q

Benefit: Grant

A

Does not need to be repaid

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37
Q

Drawback: grant

A

Can be difficult and time- consuming to access

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38
Q

3 Internal sources of finance

A

Owner’s capital: personal savings
Retained profit
Sale of assets

39
Q

6 external sources of finance

A 
Family and friends
Banks
Peer-to-peer
Business angels
Crowdfunding
Other businesses
40
Q

7 methods of finance

A 
Loans
Share capital
Venture capital
Overdrafts
Leasing
Trade credit
Grants
41
Q

Relevance of owner’s capital

A

Start-up or small business

42
Q

Relevance of retained profit

A

Not start-up

Must have profit

43
Q

Relevance of sale of assets

A

Established businesses with redundant assets

44
Q

What is borrowing from friends and family suitable for?

A

Small business contexts- most commonly start-ups

45
Q

Bank suitability

A

Widely applicable

46
Q

P2P suitability

A

Rare, usually risky start-up

47
Q

Business angels suitability

A

rare usually for start-ups

48
Q

Other businesses suitablility

A

Rare- only a few businesses are likely to offer this and always almost in hi-tech sectors to new start-ups

49
Q

Loans suitability

A

Some collateral will be needed and start-ups may find it hard to negotiate a loan at an affordable rate of interest

50
Q

Share capital suitability

A

Can only be used by a limited company

51
Q

Venture capital suitability

A

Higher-risk businesses, tend to be small

52
Q

Overdraft suitability

A

Short-term cash flow problem, not for purchasing new assets

53
Q

Trade credit suitability

A

Start-ups will struggle to convince suppliers to offer them credit

54
Q

Grants suitability

A

Only likely to be relevant to a business creating jobs in an area of economic deprivation or high-tech firms trying to compete internationally

55
Q

What sources of finance are sole traders and partnerships likely to rely on? (4)

A

Owners’ capital
Bank finance (loans and overdraft)
Leasing
Trade credit

56
Q

What time of sources of finance will limited companies use? (6)

A 
Share capital
Bank finance
Angel or venture capital
P2P or crowdfunding
Leasing
Trade credit
57
Q

Why would businesses with unlimited liability find it easier to raise finance?

A

lenders will be reimbursed if the business defaults; they are often seen as more credible as owners have more to lose and may therefore take less risks

58
Q

What is a business plan?

A

A business plan is a written document that describes in detail how a business, usually a new one, is going to achieve its goals.

59
Q

What is a CASH-FLOW FORECAST?

A

A cash flow forecast is a forecast of the cash inflows and cash outflows of a business over time

60
Q

The relevance of a business plan in obtaining finance:

A

By outlining a structured model of how a business is going to be run to achieve objective, lenders are more likely to borrow money to the business as the risk is likely to be lower.

61
Q

3 uses of cash-flow forecasts

A

Allows businesses to see where there may be cash-flow issues in the future;
Can ensure suppliers and employees can be paid on time to avoid disruptions;
Can provide reassurance to owners and investors;

62
Q

Limitations of cash-flow forecasts

A

Based on estimates and assumptions which can be inaccurate;
Doesn’t factor in unforeseen events;
Must be completed by trained individuals which is not always possible;

63
Q

Purpose of sales forecasts

A

Mainly to be able to set budgets that can be allocated in order to finance the business areas in order to achieve the forecast sales;
Helps to manage key aspects such as inventory levels and cash-flow;
Helps to prepare for growth

64
Q

Difficulties of sales forecasting

A

Based on estimates, even when based on historical data;
difficult to predicts as external factors are influential – e.g. consumer trends, changes in economic climate, competitor actions etc,

65
Q

3 Factors affecting sales forecasts:

A

Consumer trends
Economic variables
Competitor actions

66
Q

3 examples of fixed costs

A

Rent
Salaries
Insurance& banking fees

67
Q

3 VARIABLE COSTS

A

Raw materials
Hourly wages
Bought-in stocks

68
Q

What is SALES VOLUME

A

Number of units sold over a given time period

69
Q

Formula for SALES REVENUE

A

Volume sold x average selling price

70
Q

Formula for CONTRIBUTION PER UNIT

A

Selling price per unit – variable cost per unit

71
Q

Formula for BREAK-EVEN POINT

A

Fixed costs / Contribution per unit

72
Q

Formula for MARGIN OF SAFETY

A

Actual output – break-even point

73
Q

Two limitations of break-even analysis:

A

Assumes selling price remains constant

Variable costs such as raw materials are likely to change as output increases, such as benefits of bulk buying as volume increases

74
Q

Two types of budget

A

Historical

Zero-based

75
Q

The purpose of budgeting:

A

Allows performance to be measured by monitoring spending against a specific target

Provides guidance for managers/supervisors on how much to spend and determines how they should spend it

Should improve efficiency and avoid waste

76
Q

Two difficulties of budgeting:

A

Accuracy – they are only as good as the data used to create them

Can be time-consuming to prepare

77
Q

What are POSITIVE / FAVOURABLE VARIANCES?

A

When spending or costs has been better than expected -.e.g. when a business spends less or makes more revenue than was budgeted for

78
Q

Definition of NEGATIVE / ADVERSE VARIANCES

A

When spending or costs has been worse than expected -.e.g. when a business spends more or makes less revenue than was budgeted for

79
Q

GROSS PROFIT formula

A

Total Revenue – Cost of Sales

80
Q

GROSS PROFIT MARGIN formula

A

Gross profit/ revenue X 100

81
Q

OPERATING PROFIT formula

A

Gross Profit – operating expenses

82
Q

OPERATING PROFIT MARGIN formula

A

Operating profit/ revenue X 100

83
Q

PROFIT FOR THE YEAR (NET PROFIT) formula

A

Operating profit – interest and tax

84
Q

PROFIT FOR THE YEAR (NET PROFIT) MARGIN formula

A

Profit for the year/ revenue X 100

85
Q

CURRENT RATIO formula

A

Current assets/ current liabilities

86
Q

ACID TEST RATIO formula

A

Current assets- stock/ current liabilities

87
Q

Two ways to improve profitability:

A

Increase selling price whilst maintaining cost levels

Reduce average cost per unit

88
Q

The distinction between profit and cash:

A

Profit looks at the difference between revenues and costs over a period of time, whilst cash is the money in the business available as and when it is required to finance operations

89
Q

What is liquidity?

A

The ability of a business to find the cash it needs to pay its bills. The cash must be readily available either in the bank account or in the form of a payment from a customer that is due very soon

90
Q

Two ways a business can improve liquidity:

A

Hold less stock

Improve debtor payment

91
Q

Why cash is important to a business:

A

By having enough cash, a business can meet its everyday needs and avoid taking on debt. That way, the business has more control over its activities and can reduce the costs and influence of outside groups.
Without enough cash, businesses might not be able to pay suppliers, purchase additional raw materials for new orders or even its employees, all of which could have a significant negative impact on performance.

92
Q

Two causes of business failure:

A

Insufficient or no demand for the business idea as a result of poor market research

External shocks such as changing to economic conditions

93
Q

Break-even uses

A

it shows how many products they need to sell to ensure a profit,
it shows whether a product is worth selling or is too risky, it shows whether costs need to be reduced to lower the BEP, it can be used to persuade investors or banks to finance a business

Business Theme 2 (4 decks)

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