Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Business Theme 2 > Finance > Flashcards

Finance Flashcards

1
Q

Benefit: OWNERS CAPITAL – PERSONAL SAVINGS

A

Immediate availability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Drawback- OWNERS CAPITAL – PERSONAL SAVINGS

A

Limited in amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Benefits: RETAINED PROFIT

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Advantages: family and friends

A

Might not want a stake, meaning control is not relinquished

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Drawbacks: Family and friends

A

Might lead to breakdowns in relationships if money not repaid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Benefits: Banks

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Drawbacks: bank loans

A

Money must be repaid or assets repossessed

Interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Drawbacks: P2P

A

Fairly high rate of interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are business angels?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is crowd funding?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Benefit: Business angels

A

Bring expertise to help with decision-making

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Drawbacks: business angels

A

Control relinquished/potential conflict

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Benefits: Crowdfunding

A

Good publicity for the business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Drawbacks: Crowdfunding

A

No control on who is buying a stake in the business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Benefits: share capital

A

SHARE CAPITAL

No repayment required

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Drawback: share capital

A

Pressure from equity partner might focus on short-term returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is venture capital?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Benefit: venture capital

A

Can include expertise to help with decision making

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Drawback: venture capital
Loss of control
26
What is an overdraft?
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
27
Benefit: overdraft
Flexible, only use as and when you need it
28
Drawback: overdraft
Expensive as interest rates are high
29
What is leasing?
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
30
Benefit: Leasing
Flexible, over fixed period allowing you to replace equipment Avoids large chunks of cash outflows each time a major new asset is purchased
31
Drawbacks: Leasing
In the long term will be more expensive than purchasing an asset outright
32
What is trade credit?
The goods or services provided by a supplier are not paid for immediately
33
Who might be refused trade credit?
Start-ups or those with a poor record of payment in the past
34
Benefits: trade credit
Access to goods without immediate payment
35
Drawback: trade credit
failure to comply with the conditions could lead to the loss of a supplier.
36
Benefit: Grant
Does not need to be repaid
37
Drawback: grant
Can be difficult and time- consuming to access
38
3 Internal sources of finance
Owner’s capital: personal savings Retained profit Sale of assets
39
6 external sources of finance
``` Family and friends Banks Peer-to-peer Business angels Crowdfunding Other businesses ```
40
7 methods of finance
``` Loans Share capital Venture capital Overdrafts Leasing Trade credit Grants ```
41
Relevance of owner’s capital
Start-up or small business
42
Relevance of retained profit
Not start-up | Must have profit
43
Relevance of sale of assets
Established businesses with redundant assets
44
What is borrowing from friends and family suitable for?
Small business contexts- most commonly start-ups
45
Bank suitability
Widely applicable
46
P2P suitability
Rare, usually risky start-up
47
Business angels suitability
rare usually for start-ups
48
Other businesses suitablility
Rare- only a few businesses are likely to offer this and always almost in hi-tech sectors to new start-ups
49
Loans suitability
Some collateral will be needed and start-ups may find it hard to negotiate a loan at an affordable rate of interest
50
Share capital suitability
Can only be used by a limited company
51
Venture capital suitability
Higher-risk businesses, tend to be small
52
Overdraft suitability
Short-term cash flow problem, not for purchasing new assets
53
Trade credit suitability
Start-ups will struggle to convince suppliers to offer them credit
54
Grants suitability
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
What sources of finance are sole traders and partnerships likely to rely on? (4)
Owners’ capital Bank finance (loans and overdraft) Leasing Trade credit
56
What time of sources of finance will limited companies use? (6)
``` Share capital Bank finance Angel or venture capital P2P or crowdfunding Leasing Trade credit ```
57
Why would businesses with unlimited liability find it easier to raise finance?
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
What is a business plan?
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
What is a CASH-FLOW FORECAST?
A cash flow forecast is a forecast of the cash inflows and cash outflows of a business over time
60
The relevance of a business plan in obtaining finance:
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
3 uses of cash-flow forecasts
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
Limitations of cash-flow forecasts
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
Purpose of sales forecasts
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
Difficulties of sales forecasting
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
3 Factors affecting sales forecasts:
Consumer trends Economic variables Competitor actions
66
3 examples of fixed costs
Rent Salaries Insurance& banking fees
67
3 VARIABLE COSTS
Raw materials Hourly wages Bought-in stocks
68
What is SALES VOLUME
Number of units sold over a given time period
69
Formula for SALES REVENUE
Volume sold x average selling price
70
Formula for CONTRIBUTION PER UNIT
Selling price per unit – variable cost per unit
71
Formula for BREAK-EVEN POINT
Fixed costs / Contribution per unit
72
Formula for MARGIN OF SAFETY
Actual output – break-even point
73
Two limitations of break-even analysis:
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
Two types of budget
Historical | Zero-based
75
The purpose of budgeting:
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
Two difficulties of budgeting:
Accuracy – they are only as good as the data used to create them Can be time-consuming to prepare
77
What are POSITIVE / FAVOURABLE VARIANCES?
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
Definition of NEGATIVE / ADVERSE VARIANCES
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
GROSS PROFIT formula
Total Revenue – Cost of Sales
80
GROSS PROFIT MARGIN formula
Gross profit/ revenue X 100
81
OPERATING PROFIT formula
Gross Profit – operating expenses
82
OPERATING PROFIT MARGIN formula
Operating profit/ revenue X 100
83
PROFIT FOR THE YEAR (NET PROFIT) formula
Operating profit – interest and tax
84
PROFIT FOR THE YEAR (NET PROFIT) MARGIN formula
Profit for the year/ revenue X 100
85
CURRENT RATIO formula
Current assets/ current liabilities
86
ACID TEST RATIO formula
Current assets- stock/ current liabilities
87
Two ways to improve profitability:
Increase selling price whilst maintaining cost levels Reduce average cost per unit
88
The distinction between profit and cash:
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
What is liquidity?
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
Two ways a business can improve liquidity:
Hold less stock Improve debtor payment
91
Why cash is important to a business:
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
Two causes of business failure:
Insufficient or no demand for the business idea as a result of poor market research External shocks such as changing to economic conditions
93
Break-even uses
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)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions