Finance Flashcards
Retained Profits
Business holding back profits from previous years
A - Can be used for larger purchases
- Business doesn’t go into debt
D - More difficult for a business to grow
Sale of Assets
Selling something business no longer needs
A - Money raised boosts cash flow
- Money doesn’t need repaid
D - If finance urgent, may have to sell for less than worth
Share Issue
Selling shares of the business
A - Large sum of money raised
- Money doesn’t need repaid
D - Dividends paid to shareholders
- Expensive to advertise sale of shares
Bank Loan
Bank lends business money for specific purpose
A - Business can budget for repayments
- Essential equipment can be bought & paid back over years
D - Interest
Mortgage
Large sum of money borrowed from bank for property
A - Can be paid back over long period
- Interest rate lower than loan
D - Interest
Debt Factoring
Business sells unpaid customer invoices to factoring company
A - Responsibility passed onto factory saving time & effort
- Improves cash flow
D - Has to sell debts for reduced amount
- Only interested in large debts
Debentures
Loans borrowed through stock market
A - Business keeps control
- Paid back over a long time
D - Annual interest
Grants
Money given to business from government
A - Doesn’t need repaid
D - Business needs to meet certain requirements
- Can’t be repeated
Venture Capital
Organisations that invest in businesses in return for equity
A - Large investments can be gained
- Willing to take on more risky investments than banks
D - Equity stake, share of profits given up
Crowd Funding
People donating money to a cause online
A - Finance raised from individuals
- Nothing to repay
D - Low success rate
- Ideas can be copied
Purpose of Budgeting
To predict a surplus
To predict a deficit
To allow action to be taken to avoid a deficit
To allow investment to be planned during a surplus
Solutions to Cash Flow Problems
Too much money tied up in inventory
- Use JIT
Too many credit sales
- Offer cash discounts
Not enough credit purchases
- Switch to interest-free suppliers
Too many unpaid debts
- Sell to debt factoring companies
Not enough sales revenue
- Adapt marketing mix to encourage more sales
Analysis of Cash Budgets
Opening budget
- Cash available at start of month
Total receipts
- Total cash received during month
Cash available
- Amount of cash available to spend
- Opening balance + Total receipts
Total payments
- Amount of cash spent during month
Closing balance
- Amount of cash available at end of month
- Cash available - Total payments
Income Statement
Shows profit made from buying & selling (gross profit) & profit after expenses deducted from gross profit (profit for the year)
Sales revenue
- Amount made from selling goods or services
Cost of sales
- Amount spent on selling goods
- (opening inventory + purchases) - closing inventory
Gross profit
- Profit from buying & selling
- Sales revenue - Cost of sales
Expenses
- Running costs throughout the year
Profit for the year
- Profit made after expenses deducted from gross profit
- Gross profit - Expenses
Statement of Financial Position
Shows items a business owns (assets), owes (liabilities) & overall value of business
Non-current assets
- Items owned for more than a year
Currents assets
- Items owned for less than a year
Non-current liabilities
- Long-term debts
Current liabilities
- Items owed for less than a year
Working equity
- Ability to pay short-term debts
- Current assets - Current liabilities
Net assets
- Overall value of business
- Net assets employed - Non-current liabilities
Equity & reserves
- Shows how business has been financed
