Finance Flashcards
Sources of Short-term Finance (4)
Bank Overdraft.
Debt Factoring
Retained Profits
Trade Credit
Sources of Long-term Finance (6)
Bank Loans Hire Purchase Sell and leasing back Grant Share Issuing Crowdfunding.
Impacts of poor cashflow (7)
Inability to pay suppliers / expenses etc
May have to offer discounts to encourage customers on credit to pay early
Increased costs due to borrowing funds ie interest and bank charges
Reduced growth / expansion due to lack of disposable funds to invest eg to purchase new technology
Owner may need to reduce their drawings
May need to sell unused assets or reduce price of goods
Might lead to staff redundancies and closure of business
Benefits of Cash Budget (5)
It shows whether the business will have a surplus of cash this will allow them to plan future purchases
Make adjustments to spending or arrange an injection of cash to avoid the deficit
Make comparisons between predicted and actual figures this will help monitor the performance of the business
It aids decision making as it provides cash flow information for decisions to be based on
It can be used to set targets for individual departments to achieve which will allow the business to stay within budget as predicted
Too much money tied up in stock. (CASH FLOW PROBLEM)
Use just-in-time (JIT) stock control.
Sell off excess stock eg a sale
Too many credit sales (CASH FLOW PROBLEM)
Offer cash discounts to encourage customers to pay in cash.
Too long a payment period for credit sales (CASH FLOW PROBLEM)
Charge higher interest on credit sales to encourage customers to pay sooner.
Not enough credit purchases (CASH FLOW PROBLEM)
Switch suppliers to those with interest-free credit available on purchases.
High amounts of spending on non-current assets (CASH FLOW PROBLEM)
Pay for non-current assets in instalments, such as paying for a vehicle using hire purchase.
Increasing expense costs (CASH FLOW PROBLEM)
Look for ways to reduce expenses, eg spend less on rent by selling online through e-commerce.
Too many drawings by owners (CASH FLOW PROBLEM) (1)
Charge higher interest on drawings to discourage owners from withdrawing money from the business.
Not enough sales revenue (CASH FLOW PROBLEM)
Adapt the marketing mix to encourage more sales eg lower prices
Too many unpaid debts (CASH FLOW PROBLEM)
Sell debts to debt factoring companies.
Opening balance
Total receipts
Cash available
Total payments
Closing balance
Opening Balance - The amount of cash available at the start of the month.
Total Receipts - The total cash received during the month.
Cash Available - The amount of cash available to spend:
= opening balance + total receipts
Total Payment - The total amount of cash spent during the month.
Closing Balance - The total amount of cash available at the end of the month.
= cash available – total payments
Bank Overdraft (ST)
I - A facility which allows a business to spend more money than is in its bank account.
A- Can continue to pay expenses despite no money in the bank
D- High interest rates
Debt Factoring (ST)
I - A business sells its unpaid customer invoices to a factoring company. The factoring company then collects and keeps the customers’ debts.
A - Cash flow improved by receiving advanced payment of debts from the factor
D- Has to sell customer debt for reduced amount
Retained Profits (ST)
I - A business holding back profits from previous years to invest in the company.
A - Doesn’t need to be paid back
D - Will find difficult to expand in the long run if keeps using retained profits
Trade Credit (ST)
I - Allows a business to buy goods from suppliers and pay for them at a later date.
A - Helps a business to keep going when cash flow is poor
D - Lose discount for prompt payment
Bank Loan (LT)
I - Money borrowed from the bank that is repaid in regular instalments (over a fixed period of time) with interest.
A - Repaid in instalments which aids budgeting
D - Interest charges may affect cash flow in a negative way
Hire Purchase (LT)
I - A business can buy an asset by paying an initial deposit and then monthly payments for a fixed period of time.
A - Repaid in instalments which aids budgeting
D - Ownership remains with the finance company until the last instalment is made
Sell and lease back (LT) DESC 1A 1D
I - Sell an asset to gain funds and then lease it back. Lease - A contract that allows a business to rent an asset in return for regular, fixed payments usually on a monthly basis.
A - Gains funds for growth from sale of asset.
D - More expensive in the long term than buying the asset
Grant (LT)
I - Money from the government to invest in specific projects that does not need to be paid back
A - Does not have to be paid back
D - Must meet specific conditions to secure grant
Share Issue (LT)
I - Selling shares in the business. Plc sell on the stock market. Ltd sells shares privately.
A - Large sums of money can be raised by this method
D - Shareholders become owners of plc which may mean founders lose control
Crowdfunding (LT)
I - getting small amounts of finance from a large amount of people. This is usually done through social media or crowdfunding websites
A - Access to large amount of investors
D - A public request for investment risks your idea being copied by competitors
Financial Statement
Turnover or Sales Revenue
Amount of money received for selling goods or services during the year
Financial Statement
Cost of Sales
Amount of money spent on selling goods.
Financial Statement.
Gross Profit
Profit made from buying and selling>
GP = sales revenue – cost of sales
Financial Statement Expenses
Running costs incurred throughout the year
Financial Statement
Profit made after expenses are deducted from gross profit
Profit for the Year = gross profit - expenses
