Finance Flashcards
Sources of finance
Bank loan
Bank mortgage
Bank overdraft
Share issue
Venture capitalist
Angel investor
Hire purchase
Leasing
Trade credit
Debentures
Debt factoring
Own equity
Retained profit
Sale of assets
Sell and lease back
Internal sources of finances
Own equity
Retained profit
Sale of assets
Sell and lease back
External sources of finance
Bank loan
Bank mortgage
Bank overdraft
Share issue
Venture capitalist
Angel investor
Hire purchase
Leasing
Trade credit
Debentures
Debt factoring
Short term sources of finance
Bank overdraft
Trade credit
Gov grant
Retained profit
Own equity
Debt factoring
Long term finance sources
Bank loan
Bank mortgage
Debentures
Venture capitalist
Share issue
Bank loan
Where a business borrows finance from a bank, and pays it back over a long period of time in monthly instalments, with interest.
Bank mortgage
Where a business borrows finance from a bank specifically to purchase property, which the business pays back in monthly instalments with interest over a 25 year period.
Bank overdraft
Where a bank allows a business to use slightly more finance than there is in their account.
Share issue
Where a business sells new shares to the public, either on the stock market (PLC) or to approved members (LTD) for finance.
Venture capitalist
Organisations which invest in other businesses for a share of ownership, they typically only invest in established businesses.
Angel investors
Where an individual invests in a business for a share of the business ownership.
Hire purchase
Where a business purchases an asset, by paying for it in instalments for a higher overall price.
Leasing
Where a business pays to use an asset for a certain period of time.
Trade credit
Where a business or customer gets to purchase a product or asset now and pay for the product or asset later.
Debentures
A form of loan given out by a business, or individual over the stock market, which has to be paid back with interest.
Debt factoring
Where another different business purchases another businesses customer debt, for a lower price, to increase the business cash flow.
Own equity
Where a business uses the owners personal capital (finance) as a source of finance.
Retained profit
Where a business uses the profit made from last year to grow and cover business payments.
Sale of assets
Where a business sells off a piece of equipment or valuable item the business owns, to increase finance.
Sell off and lease back
Where a business sells of an asset which they still need, and then lease the asset from the individual/ business they just sold to to still use the asset.
Cash budget
A document which forecasts the cash flowing into and out of the business.
Liquidity
The amount of finance a business can access quickly or has on had.
Liquid asset
An asset which can easily be converted back into cash.
Asset
An item or property owned by a business.
Reasons for cash budget
Predicts a surplus
Predicts a deficit
Compare actual figures to cash budget
Helps financial investors
Set targets + budgets
Predict cash flow.
Features of cash budget
Opening balance
Receipts
Total receipts
Total cash available
Payments
Total payments
Closing balance
Cash budget columns
Right hand side -totals
Left hand side - receipts + payments,
Cash flow issues
Too much money tied up in capital
Too much credit time
Purchase assets outright instead of hire purchase
Decrease in sales
Increase in payments
Inflation
Cash flow solutions
Selling unnecessary assets
Financial incentives to fast payments
Increase product price
Advertise to increase sales
Owners draw less finance.
Types of ratios
Profitability
Liquidity
Efficiency
Purpose of ratios
Compare performance of business to competitors
Calculate profitability liquidity and efficiency
Compare against previous years
Highlights areas of business needing attention
Can be used to support decision making.
Limitations of ratios
Information is historical
Don’t take external factors into account
Doesn’t take internal factors such as employees into account
Must compare same size and type of company to be effective.
Types of profitability ratios
Gross profit percentage
Profit for year percentage (net profit)
Return on equity
Gross profit percentage
Gross profit /sales x100
Percentage of profit made by buying stock and selling product.
What influences gross profit percentage
Increase/ decrease of selling price
Sales quantity
Profit for the year percentage
Profit for year/ sales x 100
The percentage of overall profit after all expenses have been payed.
Factors affecting profit for year percentage
Profit margins
Expenses
Sales
Return on equity employed
Profit for year/ opening equity x100 calculates finance an investor will get back after a period of time.
Factors affecting return on equity employed ratio
Sales
Expenses
Liquidity ratios
Current
Acid test
Current ratio
Current assets /current liabilities
The ability of a business to pay back short term debt
Acid test ratio
Current assets - closing stock /current liabilities
The ability of a business to pay back short term debt in a crisis situation
Efficiency ratio
Rate of stock turnover
Rate of stock turnover
Cost of sales/average inventory
The number of times a business restocks their inventory during the year
Average inventory
(Opening inventory + closing inventory)/ 2
Ways to improve efficiency ratio
Use JUST IN TIME
Ways to improve liquidity ratio
Use just in time
Increase spending
Income statements
A financial document which shows the gross profit and profit for the year.
Key features of an income statement
Sales revenue
Cost of sales
Gross profit
Expenses
Profit for the year.
Purpose of creating an income statement
To show the profit or loss made by the business each year.
To compare gross profit and profit for the year, from different years.
To compare different businesses in the same industry
To compare expenses and sales and find ways to improve of minimise spending
Sales revenue definition
The finance generated by selling the business products.
Cost of sales definition
The opening stock add the purchases minus the closing stock.
Gross profit def
The profit for the year before the expenses are taken off.
Expenses
The overhead charges the business pays to keep the business running.
Profit for the year def
The gross profit minus the expenses to run the business.
Statement of financial position def
The document which shows the assets and liabilities of a business
Statement of financial position features
Fixed assets
Current assets
Current liabilities
Working equity
Net assets employed
Fixed liabilities
Net assets
Equity and reserves
Current assets
Short term Items that a business owns that can be quickly converted into cash.
Current liabilities
Short term Debts that can be quickly be payed off.
Fixed assets
Long terms Items which can’t be easily converted into cash.
Fixed liabilities
Long term debts that can’t be payed off quickly.
Working equity
Current assets - current liabilities
Net assets employed
Current assets - current liabilities + fixed assets .
Net assets
Current assets - current liabilities + fixed assets - fixed liabilities
Equity and reserves
Finance generated by the business
Purpose of a financial statement
Legal requirements
To show the overall value of the business, to compare against competitors in the same market.
To use to convince investors to invest in a business
Can be used to aid decision making by showing current and fixed assets and liabilities.
Uses of financial information
HMRC - tax
Investors - trying to find solvency if a business and see if a business is risky
Banks used to make lending decisions
Owners- aid decision making
Employees - check if their job is secure
Competitors - use to see how competition is doing.
Technology in finance
Spreadsheets
Online banking
Sage software
BACs
EFTPOS
Spreadsheets
Used to produce financial documents such as cash budget, income statement and statement of financial position
