Finance Flashcards
A bank loan is…
Money is borrowed from the bank and repaid with interest in regular installments
Bank loan advantage is…
Loan can be repaid over a period of time
Bank loan disadvantages are…
Interest has to be paid back in addition to the loan amount
Bank overdraft allows…
A business to withdraw money money than is in their bank account
Bank overdraft advantage is…
Can be arranged quickly
Bank overdraft disadvantage is…
Usually only available for small sums of money
Hire purchase is…
A small deposit paid for an asset and the cost is paid in fixed instalments over a period of time
Hire purchase advantage is…
No large initial outlay of finance to purchase
Hire purchase disadvantage is…
Do not own item until final payment is made
Debt factoring involves…
A business selling its debts to a factor company who will immediately give the business a percentage of the money owed to customer
Debt factoring advantage is…
Time and effort is saved as company in no longer required to recover unpaid debts
Debt factoring disadvantage is…
Money is lost from the business as unpaid debts are sold at reduced value
Retained profit is…
A portion of the businesses profits are reinvested back into the company
Retained profit advantage is…
Does not need to be repaid
Retained profit disadvantage is…
May take too long for profits to build up and food business opportunities may be missed
Purchases are increasing so a business should…x3
Use JIT or investigate lower prices for materials
Cheaper raw materials/supplier
Use hire purchase
If the business is in deficit it should…
Arrange short term solutions like loans or overdraft
Cash sales are falling which means a business should…
Use advertising to promote sales
Expenses are increasing which means a business should…x3
Lay off temporary workers
Cut overtime hours
Switch to cheaper premises or energy suppliers
Purpose of the income statement is…x4
Lists the costs and expenses of the year
Helps with decision making
Used to measure performance
Shows the levels of profit or loss made
Sales revenue is…
The amount of money received from selling goods and services
Cost of sales is…
The amount spend on making, selling goods
Gross profit is…
Profit made buying materials and selling goods
Expenses are…
Running costs e..g wages, advertising, gas, rent, energy
Profit for the year…
The final profit figure which will be split for shareholders and investors
Formula for profit for the year is…
Gross profit -expenses
Formula for gross profit is…
Sales revenue - cost of sales
Advantages of using spreadsheets are…x4
can be turned into graphs and charts which can be used to convey financial information
formulas can be used to reduce the chance of human error
formulas will automatically update spreadsheets if work is amended or variables have been changed
formulas make spreadsheets easier to fil out e.g. IF statements, autosum
Commercial mortgage is when…
Money is borrowed from the bank to purchase premises or property and paid with interest
Commercial mortgage advantages are…x2
Mortgage given for long period of time so doesn’t have to be paid back immediately
Large amounts of finance can be raised quickly
Commercial mortgage disadvantages are…x2
Interest charged on top of loan
Property can be lost to the mortgage lender if repayments are missed
Share issue involves…
Selling more shares to a new or existing shareholder. PLCs can sell theirs on the stock market
Share issue advantages are…x2
Finance raised doesn’t need to be paid back
Large amounts of finance can be raised
Share issue disadvantages are…x2
Shareholders need to be pay paid a dividend each year
Shareholders become part owners of the business
Grant is…
Money given to a business form the government. They must meet certain criteria e.g. business start up, offer employment in high deprivation area, etc.
Grant advantage is…
Doesn’t need to be paid back
Grant disadvantages are…x2
Business needs to meet certain criteria
It is time consuming to apply for grants and to complete the paperwork
Crowd funding is when…
A small amount is donated by a large amount of people- usually set up using the internet
Crowd funding advantages are..x2
Access to large amount of investors
Fast way to raise finance
Crowd funding disadvantages are…x2
A public request for investments rises your project being copied by competitors
If the targeted amount isn’t reached the money is returned to investors and the business gets nothing
Sale of assets is when a business is…
Seeking something that it no longer requires e.g. machinery that is idle
Sale of assets advantage is…
Doesn’t need to be repaid
Sale of assets disadvantage is…
May be difficult or may take time to sell assets
Venture capitalists provide…
Finance when banks decide that loans are too risky
Venture capitalists advantage is…
Available for more risky investments
Venture capitalists disadvantages are…x2
Venture capitalist may want a share of business meaning some control is lost
A larger return may be required due to the high risk nature of the product
Debentures are…
Sold by companies to investors and they pay the holder a fixed anyone of money every year until it’s maturity date
Debentures advantage is…
Control of the business isn’t lost
Debentures disadvantage is…
Interest must be paid even if company makes a loss
Purposes of a cash budget are…x6
Can be used to set targets for individual departments to achieve which allows the business to stay in the budget as predicted. Target also motivate employees.
To make comparisons between predicted and actual figures that helps monitor the performance of org
Highlights periods where expenses are high which allows action to be taken to control spending
Aids decision making as it shows cash flow and information that decisions can be based on
Shows where he the business will have a surplus which allows them to plan future purchases
Shows whether the business will have a deficit which allows them to make adjustments to spending
Opening balance is the…
Amount of cash available at the start of the month
Total receipts is the…
Total cash received during the month
Total payments is the…
Total amount of cash spent during the month
Closing balance is the…
Total amount of cash available at the end of the month
Formula for cash budgets is…
Opening balance + total receipts - total payments = closing balance
Deficit is when…
Expenditure is greater than income
Surplus is when…
Income is greater than expenditure
Roles of the manager in budgeting are…x7
Planning
Organising
Commanding
Coordinating
Controlling
Delegating
Motivating
Planning allows…
Management to plan ahead- identify when cash is spent, allows future ideas for short term finance
Organising allows…
Managers to arrange resources to in the right place at the right time in the right quantities
Commanding gives…
Each department limits for spending and gives them a clear budget to work to
Coordinating will…
Coordinate financial aims. The senior management analyses an overview of finances
Controlling checks…
What has been planned against what has actually happened in the budget and investigates the differences
Delegating is…
Giving responsibility for holding, recording and spending departmental budgets
Motivating is…
Encouraging others to take responsibility for financial control via empowering departments to be financially responsible
Purposes of SOFP are…x6
To know the value of the business at a specific time
Shows the equity of the org e.g. share value, reserves (how it is financed)
Shows the liability of the org e.g. capital, creditors and bank loans
The value of the org’s assets e.g. premises, machinery, bank account balances
Investors and potential investors can use SOFP to determine whether they’ll get a good return on investment
Suppliers and creditors can use it to determine the risk factor involved in lending or supplying to the business
Trade payables are…
Suppliers the business owes finance to
Trade receivables are…
Customers that owe finance to the business
Non-current assets show…
The current value of major purchases to help with running the business e.g. PCs, premises, vans
Items owned for more than one year
Current assets show…
Cash available to the business e.g. stock ready to sell, cash in the bank and money owed to them by debtors. Items owned for less than one year
Non current liabilities include…
Long-term loans such as long-term bank loans or debentures that do not need to be paid back within a year
Current liabilities are…
Any debts of business owes that will need to be paid back within a year
Working equity is…
The finance that a business can access immediately. A business needs adequate working equity to ensure it meets its short term debts on time
Current assets - current liabilities
Net assets show…
The value of the company once all liabilities are taken away from assets. Shows the overall worth of the business.
Equity and reserves show…
The finance invested by the owners and any profits kept by the business. This is retained profit
Who uses financial information? x7
Lenders
Employees
Government
Owners
Shareholders
Trade unions
Competitors
Lenders use financial information as it…
Helps determine if a loan should be given. Checks liquidity and its ability to pay short term loans
Employees use financial information to…
Check to see whether they are being laid fairly- look at gross profit and PFTY to compare success
Government uses financial information to…
Check the correct amount of tax is being paid for inland revenue- HMRC (His Majesty’s Revenues and Customs)
Owner or manager uses financial information to…
Help to plan how to improve profitability by identifying where costs can be reduced
Shareholders use financial information to…
Help make decisions at AGM. allows them to decide whether they want to buy more shares or not
Trade unions use financial information to…
Assess whether members should be getting a pay rise
Competitors may use financial information to…
Compare their financial data to compare successes
Key terms in cash budget are…
Opening balance
Total receipts
Total payments
Closing balance
Key terms in income statement are…
Sales revenue
Cost of sales
Gross profit
Expenses
Profit for the year
Key terms in SOFP are…
Non current assets
Current assets
Current liabilities
Non current liabilities
Equity and reserves
Net assets
Working equity
