Finance Flashcards
what is the definition of finance?
money raised and used by a bsuiness
what is the definition of finance function?
refers to the finance department, which is usually found in larger businesses
what is the definition of financial information?
includes details of profit, loss, cashflow, break-even, profit margins and average rate of return
what is the role of the finance function?
calculating sales revenue and production costs as well as forecasting cash flow
what are the five needs for finance?
establishing a new business, funding expansion, recruitment, marketing, running the business
why do establishing businesses need finance?
it needs to buy items before it produces or sells something
why do businesses need finance for expansion?
may need to pay for a larger factory, shop or office
why do businesses need finance for recruiting?
it costs money to advertise jobs and select workers
what is the definition of an overdraft?
an arrangement with the bank that a business can spend more money than it has in its account
what is the definition of the owners’ capital?
money from savings put into the business by the owners
what is the definition of retained profit?
profit that is not distributed to shareholders as dividends
what is the definition of sale of assets?
items sold by the business
what is the definition of taking on a partner?
adding a new partner who contributed some new capital
what is the definition of trade credit?
when the business buys goods to sell and does not need to pay the supplier for a period of time - often 30 days
what are the advantages and disadvantages of owners’ capital?
no need to repay and no interest
owners risks savings or may not have savings
what are the advantages and disadvantages of retained profit?
no need to repay and no interest
businesses may not have made profits
what are the advantages and disadvantages of sale of assets?
good if selling of old equipment or stock, no need to repay, no interest
may be difficult and take time
what are advantages and disadvantages of an overdraft?
meets short term cash flow problem
interest is charges for each day the money is owed, which can be expensive
what are the advantages and disadvantages of trade credit?
the business may have goods to sell before paying them
goods must be paid for even if they do not sell, interest is charged if payment is late
what are the advantages and disadvantages of taking on a new partner?
may bring new skills
share on the profits
what is the definition of crowdfunding?
money raised through an appeal to the public who are supporters of the business
what is the definition of a loan?
a sum of money borrowed for stated period at an agreed rate of interest
what is the definition of a share issue?
money raised from investors by selling new shares
what are the advantages and disadvantages of a loan?
repayment is in fixed sums
interest must be paid
what are the advantages and disadvantages of share issue?
new investors can contribute a lot of money to a business
shares can only be sold by limited companies
what is the definition of external finance?
finance raised from sources outside the business
what is the definition of internal finance?
finance raised from within the business
what is the definition of revenue?
the money received from sales
what ways are there to increase revenue?
increase unit selling price, reduce price to increase sales, advertising
what is the definition of fixed costs?
costs that stay the same regardless of a change in output for example: rent, utilities, insurance
what is the definition of total costs?
the addition of total fixed and total variable costs
what is the definition of variable costs?
costs that change as output changes for example: wages
what is the definition of costs of sales?
the cost to the business of producing goods to sell
what is the definition of expenses?
the costs of operating the business
what is the definition of gross profit?
sales minus the variable costs
what is the definition of loss?
when the costs of a business are greater than the revenue it makes
what is the definition of net profit?
gross profit minus fixed costs
what is the equation to work out the gross profit margin?
gross profit divided by sales multiplied by 100
what is the equation to work out the net profit margin?
net profit divided by sales multiplied by 100
what are the three steps to find out the annual rate or return?
work out the profit
divide profit by life of the investment
annual profit/ cost of investment x 100
what is the definition of break even quantity?
the amount a business must sell to earn enough revenue to just cover its costs so it does not make a profit or a loss
what is the equation for break even output?
total fixed costs/ contribution per unit
or
total fixed costs / price - variable costs per unit
what are the two uses of break even forecasts?
planning how much to produce, planning the price to charge
what is the definition of a cash flow forecast?
a statement showing the expected flow of money into and out of a business over a period of time
what is the definition of liquidity?
the ability of a business to pay its short-term debts
what is the definition of negative cash flow?
a forecast that there will be more cash going out of the business than coming in
how are cashflow forecasts useful?
planning tool, anticipating periods of cash shortages, providing targets
what is the definition for cash?
notes and coins in the business plus money it has in its bank account
what is the definition of closing balance?
the amount of cash left at the end of the month
what is the definition of net cash flow?
total inflow of cash minus total outflow
what is the definition of opening balance?
the amount of cash available at the beginning of the month
what is the definition of profit?
the total revenue a business receives minus the total costs of production
how is a cash flow statement drawn up?
cash that flows in is added up and the total for each month is put in the ‘total inflow’ row, same for cash that flows out ‘total outflow’, total outflow is deducted from the total inflow each month and this is the ‘net cash flow’, net cash flow is added to the opening balance if it is a positive or deducted from the opening balance if it is negative. this gives the closing balance
