Finance Flashcards
What is external finance?
External finance is capital that has come from outside of the business, for example; a bank loan.
What is internal finance?
Internal finance is capital that has come from inside of the business, for example; own savings.
Why might a business need finance?
- Start up a business, eg pay for premises, new equipment and advertising.
- Run the business, eg having enough cash to pay staff wages and suppliers on time.
- Expand the business, eg having funds to pay for a new branch in a different city or country.
Name external sources of finance:
- bank loan
- overdraft
- leasing/lease hire
- grant (usually Government grant)
- friends and family
- selling shares
- mortgages
- trade credit
- business angel/venture capital
- selling assets
Name internal sources of finance:
- own savings
- interest on investments
- retained profit
- selling assets (maybe)
What is trade credit?
Trade credit is where suppliers deliver the goods now but are willing to wait a number of days before payment.
What is factoring?
Factoring is where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount.
What is an overdraft?
An overdraft facility is where a bank allows a firm to take out more money than it has in its bank account.
What type of business would use a bank loan as a source of finance??
Any type of business would use a bank loan as a source of finance.
What type of business would use loans from friends and family as a source of finance??
Sole traders and partnerships would use loans from friends and family as a source of finance .
What type of business would sell shares as a source of finance?
PLC’s and LTD’s would selling shares as a source of finance.
What type of business would use retained profit as a source of finance?
Any business that makes a profit would use retained profit as a source of finance.
What type of business would use a credit card as a source of finance?
Small businesses such as sole traders would use credit cards as a source of finance, but also larger businesses would use it for sales people.
What type of business would use own savings as a source of finance?
Sole traders and partnerships would use own savings as a source of finance.
What type of business would sell assets as a source of finance?
Any type of business would sell assets as a source of finance.
What type of business would use trade credit as a source of finance?
Any business with a good credit history would use trade credit as a source of finance.
What type of business would use a business angel/venture capital as a source of finance?
Small businesses would use a business angel/venture capitalist as a source of finance.
What type of business would use government grants as a source of finance?
Small businesses or social enterprises would use this as a source of finance.
What type of business would use interest on investments as a source of finance?
Large businesses would use interest on investments as a source of finance.
What type of business would use mortgages as a source of finance?
Any businesses would use mortgages as a source of finance.
What is a cash flow?
Cash flow is money in and out of the business.
What are inflows?
Inflows are money received by customers and other sources. For example; a loan could be an inflow as well as selling things within the business.
What are outflows?
Outflows are money paid to suppliers wages. For example; wages are an outflow as well as advertising the business.
What is a cash flow forecast?
A cash flow forecast is a plan of expected money in and out of the business.
Name 3 examples of cash inflows;
- cash from company sales
- grants
- bank loans
Name 4 examples of cash outflows;
- wages
- company materials
- payments of bills
- rates and rents
Name 4 uses of cash flow;
- banks can see how much capital is flowing in the business
- the business can plan to see if they can out costs or increase revenue
- businesses can decide whether they want to expand or shrink the business
- businesses can decide if they need to invest anymore capital
What is fixed capital?
Fixed capital includes land, machinery and buildings.
What is working capital?
Working capital includes stocks of raw materials, semi-finished goods, components and money.
What is net cash flow?
Net cash flow is the difference between total cash in and total cash out each month.
What happens when a business becomes insolvent?
If a business runs out of cash and cannot pay its suppliers or workers it is insolvent.
How can a business improve its cash flow?
- Reducing cash outflows, eg by delaying the payment of bills, securing better trade credit terms or factoring.
- Increasing cash inflows, eg by chasing debtors, selling assets or securing an overdraft.
What is revenue?
Revenue is the value of total sales made by a business within a period of usually a year.
How do you work out net profit?
net profit = gross profit - expenses (fixed cost)
How do you work out gross profit?
gross profit = revenue - variable costs
How do you work out retained profit?
retained profit = net profit - corp tax
What is corptax?
Corptax is 24% of net profit.
What is a business plan?
A business plan is a document which contains the aims of a business and how it will achieve them.
List the 10 things that a business plan includes;
- the name of the company
- the type of ownership
- the size of the business
- the aims and objectives of the business - SMART
- the product or service
- market research or proposed marks and the 4 p’s
- personnel - experience of skills of those inside the business
- costs
- premise of equipment
- financial details - capital, cash flow, profit and loss etc
What does SMART stand for?
- specific
- measurable
- achieveable
- realistic
- time-related
What is remortgage?
This is when you get a new mortgage to pay off your existing mortgage whilst keeping your existing home.
What 7 factors do you have to consider before deciding a source of finance?
- type of business
- amount of finance required
- what it is being used for
- period of time
- cost of finance
- risks involved
- how quickly it is required
What is a profit and loss account?
A profit and loss account is an account which shows how net profit is calculated.
What is net profit?
Net profit is the profit made by the business after all its expenses.
What expenses might a business be faced with?
- wages
- rates
- gas
- electricity
- insurance cost
- cleaning costs
- rent
What is the trading account?
A trading account shows the difference between sales revenue and what goods cost to make. This is gross profit.
What is balance sheet?
A balance sheet is a sheet which shows the value of a business and what is is worth.
When is a balance sheet required?
A balance sheet is required if you’re a limited company.
What is a balance sheet made up of?
- assets - fixed and current
- liabilities - long-term and current
- captial
What are fixed assets?
Fixed assets are things such as land and buildings - not for re-sale.
What are current assets?
Current assets are things that are held in the business for a short time such as stock.
What are long-term liabilities?
Long-term liabilities are things such as loans.
What are current liabilities?
Current liabilities is the money the business owes such as tax.
What is the capital section?
The capital section is the capital the shareholders have put into the business.
What is break even?
total revenue = total costs
What 3 things do business use break even for?
- help them to decide, when setting up, what level of output and sales are needed
- support an application to a bank for a loan so that the bank can see the business has good planning
- see the results of ‘what if’ changes - what is the selling price is increased or cost increases
What is the formula for break even?
fixed costs / selling price - variable costs
