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National 5 Business Management > Finance > Flashcards

Finance Flashcards

1
Q

What should a business consider when choosing a source of finance?

A

What the business intends to use the finance for

The amount of finance needed

The length of time it is needed

The repayment terms

The type of business

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2
Q

Describe a loan from friends and family

A

This is borrowing money from family and friends

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3
Q

What are the advantages of a loan from friends and family

A

Likely to be more flexible with repayment terms

May not add interest to the amount borrowed

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4
Q

What are the disadvantages of a loan from friends and family

A

Disputes may occur between family members

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5
Q

Describe a bank overdraft

A

This is an agreement between the bank and the business to withdraw more funds from a bank account than are currently available i.e. the business will have a negative balance.

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6
Q

What are the advantages of a bank overdraft

A

A customer can spend more than they have in their bank account up to an agreed limit.

Interest is only charged on the amount overdrawn

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7
Q

What are the disadvantages of a bank overdraft

A

Interest is charged daily and tends to be a higher rate than a bank loan.

The facility may be withdrawn immediately if the limit is exceeded.

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8
Q

Describe trade credit

A

This is the length of time the business has to pay for goods they have purchased from suppliers, on credit e.g. 28 days

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9
Q

What are the advantages of trade credit

A

The products can be sold at a profit before the business has to pay their suppliers

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10
Q

What are the disadvantages of trade credit

A

Will not benefit from prompt payment discount.

Suppliers may be reluctant to sell more goods on credit if the business does not pay on time.

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11
Q

Describe a grant

A

This is a source of finance from central or local government, Business Gateway or the Prince’s Trust.

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12
Q

What are the advantages of a grant

A

In most cases the money does not have to be repaid.

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13
Q

What are the disadvantages of a grant

A

It is usually a one-off payment and certain conditions, or criteria must be met before it can be obtained.

Usually the business is told what the money must be used for.

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14
Q

Describe a bank loan

A

This is when the business borrows a fixed amount of money, which is paid back in fixed instalments over a fixed period of time e.g. 3–10 years.

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15
Q

What are the advantages of a bank loan

A

The business can purchase machinery now and use it in the business to start generating profit

Repayments are spread over a period of time which improves cash flow.

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16
Q

What are the disadvantages of a bank loan

A

The business must ensure it can pay all monthly instalments on time and in full

Interest is usually charged on top of the initial loan amount and so this can be a very expensive way of purchasing equipment and machinery.

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17
Q

Describe hire purchase

A

This is when a business buys an asset such as a delivery van and pays it back over period of time e.g. 36 months.

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18
Q

What are the advantages of hire purchase

A

Only a deposit is required when the asset is acquired

Therefore, the business can purchase items like machinery and equipment with only a small initial outlay of money.

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19
Q

What are the disadvantages of hire purchase

A

The business does not legally own the asset (machinery or equipment) until the last payment has been made.

Interest is usually charged and so it can be an overall more expensive way of purchasing large items.

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20
Q

Describe leasing

A

This is when a business rents an asset. The business never legally owns the asset.

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21
Q

What are the advantages of leasing

A

The leasing company will replace the asset if it breaks or becomes obsolete

The leaser is responsible for any repairs and maintenance.

22
Q

What are the disadvantages of leasing

A

The business will never own the asset.

Rental charges or leasing costs could be higher than purchasing the asset in the first place.

23
Q

Describe mortgage

A

This is when a large amount of money borrowed from the bank, over a long period of time, specifically to purchase land or premises e.g. shop, factory.

24
Q

What are the advantages of mortgage

A

The business is given a long period of time (25 years) to pay the mortgage back

25
Q

What are the disadvantages of mortgage

A

Interest is paid in addition to the initial amount borrowed

If the business cannot pay the mortgage back the bank can claim ownership of the property or land.

26
Q

Describe retained profits

A

This is when a business may set aside profits each financial year which can be used to reinvest in the business at a later date, e.g. to purchase equipment.

27
Q

What are the advantages of retained profits

A

There is no interest to be paid

The business is not incurring any debts

The business will own the assets straight away

28
Q

What are the disadvantages of retained profits

A

If a business spends all of its retained profits it can run into cash flow problems.

The business may not be able to pay for unexpected costs or expenses as all profit has been spent.

29
Q

Describe a share issue

A

This source of finance is only available to private (Ltd) or public (plc) limited companies. Ltd.’s will invite new shareholders to purchase shares

30
Q

What are the advantages of a share issue

A

Large amounts of finance can be raised – particularly plc’s

Finance raised does not have to be repaid

31
Q

What are the disadvantages of a share issue

A

Shareholders become part owners of the business

Shareholders need to be paid dividends each year

It is expensive to organise the sale of shares on the stock market (plc’s)

32
Q

Describe crowdfunding

A

This is when the business receives small amounts of finance from a large number of people. This is usually done through social media or crowdfunding websites.

33
Q

What are the advantages of crowdfunding

A

Access to a large amount of investors

Finance can be raised by a business which banks etc view as too risky

Usually the funds are donated so there is nothing to repay

34
Q

What are the disadvantages of crowdfunding

A

Privacy can be a problem as ideas become public and can be copied by competitors

If the target amount is not reached the money raised is returned to investors and business is left with nothing

35
Q

Describe cash budgeting

A

All businesses will have money coming in (cash inflows) and money going out (cash outflows)

A cash budget is used by a business to show when cash will come into and go out of the business – that is the timing of the cash flow

This is important as a business needs to make sure they have enough inflows to pay for their outflows when needed e.g. wages, rent

If a business does not have enough cash they could fail

A cash budget does not show profit

36
Q

What are inflows

A

Money received from customers and other sources

37
Q

Give examples of inflows

A

Revenue from sales

Capital invested by owners

Bank loan

Grant

38
Q

What are outflows

A

Money paid out by the business for expenses

39
Q

Give examples of outflows

A

Rent for premises

Utility bills e.g. gas, electricity

Suppliers

Wages and salaries to employees

40
Q

What are receipts

A

Money coming in

41
Q

What are payments

A

Money coming out

42
Q

Describe the purpose of a cash budget

A

Highlights periods when a negative bank/cash balance is expected

Highlights when surplus cash will be available for investment

Allow corrective action to be taken for expected overspend

Help to avoid liquidity problems e.g. secure overdraft, bank loan in advance of it being needed.

Reduced uncertainty and allows a business to anticipate future problems

43
Q

Describe the sources of cash flow problems

A

Suppliers only offer a short period of credit e.g. 14 days instead of 28 days

Purchasing assets e.g. a van, computer or machinery when the business cannot afford it

The owners withdraw too much money from the business

An unexpected increase in expenses

Borrowing more than the business can afford to repay

44
Q

Describe ways to resolve cash flow problems

A

Increase advertising to make customers aware of product/service

Offer discounts to customers who pay cash when they make the purchase

Reduce borrowing by investing personal savings into the business

Arrange an overdraft or loan from the bank in advance

Reduce costs by cutting waste and increasing efficiency

45
Q

Describe income statements

A

An income statement shows how much profit a business has made over a period of time (usually one year). The income statement has two sections:

Trading Account which shows the profit from buying and selling finished goods. This is known as the Gross Profit.

Profit and Loss Account which shows the profit after deducting all other expenses from Gross Profit. This is known as the Profit for the Year.

46
Q

What are the trading account key terms?

A

Sales - The income (revenue) received by the business from selling its goods/services

Opening Inventory - The inventory left over from last year which can be sold in the current year

Purchases - The amount of inventory purchased in the current year

Closing Inventory - The amount of inventory left at the end of the current year which has not been sold (this becomes the opening inventory for the following year).

Cost of Sales - The cost of buying/making the products sold. The calculation is Opening Inventory add Purchases less Closing Inventory

Gross Profit - This is the profit made from selling products/services before other expenses are deducted. The calculation is Sales less Cost of Sales

47
Q

What are the profit and loss account key terms?

A

Expenses - The expenses incurred in running the business e.g. telephone and utility bills (gas, electricity)

Profit of the Year - This is the actual profit made by the business after all expenses have been deducted. The calculation is Gross Profit (from the Trading Account) less expenses

48
Q

What are the reasons for an income statement?

A

To compare performance with previous years

To assist with decision making

Legally required to produce an income statement

To calculate the tax payable by the business (based on profit)

To calculate the cost of sales for the year

49
Q

What is the information in income statements used for?

A

It will help the business to identify reasons a profit or loss has been made. Managers can then take action to solve any problems, this usually means:

Increasing sales revenue

Reduce costs

50
Q

Describe increasing sales revenue

A

Increased advertising
Short term sales promotions e.g. BOGOF

Expanding channels of distribution

51
Q

Describe reducing costs

A

Find a cheaper supplier of inventory

Reduce number of employees

Reduce number of hours worked by employees (e.g. overtime)

Find a cheaper supplier of utilities e.g. gas

Buy stock in bulk to receive discounts

Use Just in Time inventory control

National 5 Business Management (6 decks)

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