Finance Flashcards
What does the finance department have to do?
Ensure that adaquate funds are available to the organisation.
Ensure costs are monitored and controlled
Maximise and maintain profit levels.
The work of the finance department is?
Calculation and payment of wages and salaries.
Ensuring financial records are kept up to date.
Preperation of budgets.
Paying trade payables and credit control.
Advantages of internal sources of finance?
Using retained profits is cheaper than issuing new shares, also avoids administrive costs.
Retained profits also cost nothing.
Disadvantages of internal sources of finance?
Re-investing profits may mean less funds are available to pay dividends of shareholders.
Advantages of a Bank Overdraft?
Simple to arrange.
Interest is calculated on a daily rate on the amount overdrawn.
Disadvantages of a Bank Overdraft?
Can be expensive if used for a long time due to interest charges. If the overdraft limit is exceeded the facility may be withdrawn.
Advantages of Debt Factoring?
The factor chases up the unpaid debt, saving the company time and money.
Disadvantages of Debt Factoring?
Factors tend to be interested in only large outstanding debts as they can each earn more profit.
The business does not recieve the full amount of the outstanding debt.
Advantages of Trade Credit Terms?
When a business can negotiate longer payment terms with suppliers, this can improve their cash flow position.
Disadvantages of Trade Credit Terms?
Discounts for the promt payment are lost.
If payment is made outwith the cedit period, suppliers could be reluctant to sell the business more goods on credit.
Advantages of Bank Loans?
Repayment is usually made in fixed instalments over a set period, and this makes budgetary control easier.
Disadvantages of Bank Loans?
Newly formed or smalles businesses are usually charged higher rates of interest
Hire purchase advantages?
The cost of purchase is spread over a period of time, making it possible to purchase fairly expensive assets.
Hire purchase disadvantages?
High rates of interest can make this an expensive way of financing the purchase of assets.
Advantages of Leasing?
Leasing means that the equipment can be changed on a regular basis and will therefore be up to date.
Disadvantages of leasing?
Leasing over a long period of time can be expensive.
The equipment is not owned by the business and therefore is not an asset to them.
Advantages of a goverment grant?
Doesn’t need to be repaid.
Usually provided in one lump sum.
Disadvantages of a goverment grant?
Only given once.
May be tied to a specific project the business must undertake.
Advantages of mortgages?
Repayment is over a long period of time.
Fixed interest rates can be set.
Disadvantages of mortgages?
Mortgages are usually secured against a property and failing to meet the payments could mean losing the property,
Usually a 10% deposit is required upfront.
When interest rates are not fixed monthly repayments can vary.
Benefits of preparing a cash budget?
It can identify any times that there will be a shortage of money.
It can help regulate expenses
It will clearly show where a business has more cash than expected
It can be used to show potential investors
Can be used to set targets
The main items on a cash budget are?
Opening balance
Receipts
Payments
Closing balance
What is cash flow?
All the money that comes in and out of the business
Its important the business has money so they can?
Pay employees
Purchase supplies
Cover business expenses
What are some reasons cash flow problems may occur?
low sales
owner taking too much money out the business
an increase in expenses
customers taking too long to pay their bills
What’s the impact of cash flow problems?
unable to pay suppliers meaning stock is not delivered and production stops
no money to invest in future growth
unable to pay expenses
owner may need to reduce their drawings
Whats some solutions to cash flow problems?
Find a cheaper supplier - This will reduce the cost of purchase
Sell assets that arent being used effectively - This will make cash available to be used elsewhere in the business
Arrange for extra time to pay bills from supplier - this will allow for time to make the money needed.
Lease machinery or equipment - this will allow the business to spread the cost of equipment over many months.
What does an income statement show?
Sales revenue - the amount of money received for selling goods or services
Gross profit - the profit made from buying and selling goods. Gross profit is calculated by deducting cost of sales from sales revenue
Profit for the year - the profit made after all other operating expenses have been deducted from the gross profit
Whats 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 department to see if there are any areas where they can be minimised or improved
Who uses financial information?
Lenders will be looking at the solvency of a business
rivals are interested in monitoring the profits earned by competitors
banks can use them to make lending decisions
government (HMRC) use financial information to calculate tax payments
owners will look at financial statements to help them make decisions
Employees will use them to ensure their jobs are secure
