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
Users of Financial Statements
Owners
- To assess profits & inform decision-making
Employees
- To ensure jobs are secure
Trade unions
- To assess if members are due a pay rise
Competitors
- To measure success against each other
Lenders
- To decide to give a loan or not
Purpose of Ratios
Compare performance of business with previous years
Compare performance of business against competitors
Compare against industry averages
Highlight areas of business that need attention
Ratio Limitations
Info is historical so irrelevant to current or future position
Ratios don’t take external factors into account
Don’t take internal factors into account
Don’t take product developments into account
Profitability Ratios
Gross profit
- Gross profit / sales revenue x 100
- Measures % of profit made from buying & selling
- Switch to cheaper supplier
Profit for year
- Profit for year / sales revenue x 100
- Measures % of profit made once expenses deducted from gross profit
- Reduce expenses
Return on equity
- Profit for year / equity x 100
- Measures % of investment returned to investors
- Increase profit for year
Liquidity Ratios
Current ratios
- Current assets / current liabilities
- Measures businesses ability to pay back short-term debts
- If less than 2:1 must try secure more current assets
Acid test
- (current assets - closing inventory) / current liabilities
- Measures ability to pay back short-term debts in a crisis
- If less than 1:1 must try secure more current assets
Efficiency Ratios
Rate of inventory turnover
- Cost of sales / average inventory
- Measures amount of times a business re-stocks during the year
- High figure indicates products are selling well & no money is tied up in inventory
Spreadsheets
Used to prepare financial statements
- Accurate
- Formula replicated, saving time
- Charts made easily, allows info to be presented
Internet Banking
Check balances quickly
Sage Software
Keep track of payments & send invoices to customers
EFTPOS
Receive money from customers instantly
