Finance Flashcards
Name 3 factors to be considered when choosing a source of finance.
Short, medium or long-term required
What the funding will be used for – this can often tell you whether the finance is short, medium or long-term if it hasn’t been specifically stated in the question. Long term sources for funding of growth
Type of organisation wishing to access finance – not all finance is available to all organisations. Eg Ltd can’t sell shares on the stock market
Name 8 long term sources of finance
Bank Loan Hire Purchase Sell and lease back Grant Debentures Share Issue Venture Capitalists Crowdfunding
Describe a bank loan and Discuss for 2 marks
Money borrowed from the bank that is repaid in regular instalments (over a fixed period of time) with interest.
Repaid in instalments which aids budgeting
Interest charges may affect cash flow in a negative way
Describe a hire purchase and Discuss for 4 marks
A business can buy an asset by paying an initial deposit and then monthly payments for a fixed period of time.
Spread cost of purchasing an asset over a period of time
Repaid in instalments which aids budgeting
Ownership remains with the finance company until the last instalment is made
Interest
Describe Sell and lease back and Discuss for 3 marks
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.
Gains funds for growth from sale of asset.
Through leasing, asset is replaced when obsolete
More expensive in the long term than buying the asset
Describe a grant and Discuss for 2 marks
Money from the government to invest in specific projects that does not need to be paid back
Does not have to be paid back
Must meet specific conditions to secure grant
Describe debentures and Discuss for 2 marks
Loans borrowed from individuals through the stock market.
Control of the business retained
Have to pay interest on the amount borrowed
Describe share issue and Discuss for 2 marks
Selling shares in the business. Plc sell on the stock market. Ltd sells shares privately.
Large sums of money can be raised by this method
Large sums of money can be raised by this method
Shareholders become owners of plc which may mean founders lose control
Describe venture capitalists and Discuss for 2 marks
Organisations that invest in established businesses in return for equity (ownership percentage)
Business angels are individuals that invest rather than organisations.
Large amounts lent but interest is high
Part ownership often needed in exchange for finance
Describe crowdfunding and Discuss for 2 marks
getting small amounts of finance from a large amount of people. This is usually done through social media or crowdfunding websites
Access to large amount of investors
A public request for investment risks your idea being copied by competitors
Describe the following terms of a cash budget.
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 payments
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
Offer solutions to the following cash flow issues.
Too much money tied up in Stock Too many credit sales Too long a payment period for credit sales Not enough credit purchases High amounts of spending on non-current assets Increasing expense costs Too many drawings by owners Not enough sales revenue Too many unpaid debts
Too much money tied up in Stock
Use just-in-time (JIT) stock control.
Sell off excess stock eg a sale
Too many credit sales
Offer cash discounts to encourage customers to pay in cash.
Too long a payment period
for credit sales
Charge higher interest on credit sales to encourage customers to pay sooner.
Not enough credit purchases
Switch suppliers to those with interest-free credit available on purchases.
High amounts of spending on non-current assets
Pay for non-current assets in instalments, such as paying for a vehicle using hire purchase.
Increasing expense costs
Look for ways to reduce expenses, eg spend less on rent by selling online through e-commerce.
Too many drawings by owners
Charge higher interest on drawings to discourage owners from withdrawing money from the business.
Not enough sales revenue
Adapt the marketing mix to encourage more sales eg lower prices
Too many unpaid debts
Sell debts to debt factoring companies.
Justify a cash budget 5 marks.
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
Explain 7 impacts of poor cashflow.
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
Describe the following terms of an income statement
Turnover or Sales Revenue Cost of Sales Gross Profit Expenses Profit for the year
Turnover or Sales Revenue
Amount of money received for selling goods or services during the year
Cost of Sales
Amount of money spent on selling goods.
Gross Profit
Profit made from buying and selling>
GP = sales revenue – cost of sales
Expenses
Running costs incurred throughout the year
Profit for the year
Profit made after expenses are deducted from gross profit
Profit for the Year = gross profit - expenses
