Finance Flashcards
income statement
is used to measures profitability and is used externally as it is published
sale revenue
the income gained from selling goods and services
costs of sales
the costs of goods bought in to sell
gross profit
profit made from trading (sales - cost of sales)
profit for the year
Final profit after all expenses deducted
what is the purpose of an income statement?
shows the profit/loss made by the company from the buying and selling of goods
can be used to compare gross profit and profit for the year over different years of trading to identify any trends and to aid decision making
comparisons can be made with similar companies in the same industry
can be used to compare expenses and sales over the years or between departments to see if there are any areas where they can be minimised or improved
what is a cash budget?
A cash budget is a document produced to help a business manage their cash flow.
A cash budget is prepared in advance and shows all the planned monthly cash incomings (receipts) and any planned cash outgoings (payments).
what is cash flow?
Cash flow is all the money that comes into and goes out of a business.
what are some cash flow problems?
low sales
too much money tied up in stock
customers taking too long to pay their bills
suppliers not allowing credit or a limited credit period
owner taking too much money out of the business, this is also known as drawings
over-investment in new assets such as machinery or equipment
an increase in expenses
what is the impact of cash flow problems?
unable to pay suppliers meaning stock is not delivered and production stops
may need to find a cheaper supplier which may reduce the quality of products
costs may increase due to interest on any extra funds borrowed
no money to invest in future growth
owner may need to reduce their drawings
may have to offer discounts to increase sales
unable to pay expenses
may need to sell unused assets or make staff redundant
what are some solutions to cash flow problems?
Find a cheaper supplier. This will reduce the cost of purchases meaning more cash available from each sale
Lease machinery or equipment. this allows a business to spread the cost of the purchase over many months
Sell any assets that are not being used effectively. This will release cash that can be used elsewhere in the business
Apply for a loan or overdraft from the bank. This will help to cover immediate cash flow problems but will need to be paid back over time with interest
Offer discounts to customers for paying upfront or paying for goods quickly. This will encourage customers to pay quickly and reduce the number of people who owe the business money
Arrange extra time to pay bills from supplier (increase credit terms). This will give the business time to raise the cash needed to pay bills
Increase advertising or sales promotion. This will increase sales meaning more cash coming into the business
what are the benefits of a cash budget?
It can identify any times where there may be a shortage of cash. This will allow the business to plan ahead and arrange extra funding such as a bank overdraft.
It can help to regulate expenses. Any months where expenses are high will be highlighted by a cash budget.
It will clearly show where a business has more cash than expected (surplus) or less cash than expected (deficit). This will allow a business to plan more effectively and make better decisions.
It can be used to show potential lenders or investors. This can help to secure investment in the business.
It can be used to set targets or budgets for individual departments. This may motivate employees as they have goals to achieve.
what is a ban overdraft and why is it useful as a source of finance?
A bank overdraft is a facility that will allow you to withdraw more money from your account than is available. A bank overdraft is a short term source of finance.
Advantages:
Can be arranged quickly
DIsadvantages:
Expensive as a high rate of daily interest is charged
Usually only available for small sums of money
what is a bank loan and why is it a good source of finance?
A bank loan is a long term source of finance. It is a fixed amount of money that is given to a business by the bank that has to be repaid over time with interest, usually in monthly instalments.
Advantages
it can be arranged quickly
The loan can be repaid over a long period of time
Disadvantages
Interest has to be paid in addition to the loan amount
what is a commercial mortgage and why is it useful?
A commercial mortgage is a long term source of finance. It is a sum of money borrowed from the bank that is secured against a business property and paid back in instalments, usually over a long period of time.
Advantages:
Mortgage is given for a long period of time
Large amounts of finance can be raised quickly
Disadvantages:
Interest is charged on the loan
Property can be lost to the mortgage lender if repayments are missed
