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Higher Business Management > Finance > Flashcards

Finance Flashcards

1
Q

Sources of Finance

A
  • retained profits: holding profts from previous year
  • sale of assets: selling something that the business no longer needs
  • share issue: selling shares of the business
  • bank loan: a bank agrees to lend a business money, must be paid back in installments and with interest
  • mortgage: large some of money borrowed from a bank secured on a property, that is paid back over a long period of time with interest
  • debt factoring: a business sells its unpaid customer invoices to a factoring company then collects and keeps the customers dept
  • debentures: loans borrowed from individuals through the stock market
  • grants: money given to a business from government or a trust and doesnt need to be paid back
  • venture capital:organisations that invest in established businesses in return for equity
  • crown funding: small amounts of money from a large number of people are raised to fund a new business of project.
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2
Q

Retained profits

A

Advantages:
- used to make large purchases, such as assets or for bulk buying
- the business wont go into depts
Disadvantages:
- can make it more difficult for the business to grow if it regularly uses retained profits

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3
Q

Sale of Assets

A

Advantages:
- money can be raised from the sale of an asset to boost cash flow
- the money does not have to be repaid
Disadvantages:
- if the finance of required urgently the business may have to sell the asset for less than its worth

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4
Q

Share Issue

A

Advantages:
- very large sums of the money can be raised through the sale of shares
- the money does not need to be repaid
Disadvantages:
- dividends have to be paid to shareholders
- it can be expensive to advertise and organise the sale of shares

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5
Q

Bank Loan

A

Advantages:
- the business can budget for repayments
- purchases of essential equipment can be made in advance and paid back over a number of years
Disadvantages:
- interest has to be repaid along with the loan
- small businesses may find it hard to be approved for a loan and may have higher interest rates

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6
Q

Mortgage

A

Advantages:
- it can be paid back over a long period of time
- the interest rate is often lower than a bank loan
Disadvantages:
- interest has to be repaid along with the loan
- the mortgage provider owns the property till the last payment is made, so the business could lose the property if they dont keep up with payment

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7
Q

Dept Factoring

A

Advantages:
- responsibility for collecting the dept is passed on to the factor, saving the company time and effort
- cash flow is improved by receiving an advanced payment on depts
Disadvantages:
- the business has to sell the customers dept for a reduced amount, they receive less then owed
- factoring companies are often only interested in large amounts of dept

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8
Q

Debentures

A

Advantages:
- control of the business is retained
- these can be paid back over a long period of time
Disadvantages:
- interest must be paid annually even if a loss is made, unlike with shares where dividends are only paid if they make profits

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9
Q

Grants

A

Advantages:
- an incentive to help a business get started or expand
- the money does not have to be repaid
Disadvantages:
- can be complicated to apply for and the business needs to meet certain requirements
- one off payments that are not required

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10
Q

Venture Capital

A

Advantages:
- large amounts of investment can be gained
- venture capitalists are willing to take on more risky investment than banks
Disadvantages:
- venture capitalists have an equity stake, which means control and a share of profits are given up

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11
Q

Crowd Funding

A

Advantages:
- finances can be raised from individuals when banks see a venture as too risky
- some funds are donated so there is nothing to repay
Disadvantages:
- low success rate
privacy can be a problem as ideas become public and can therefore be copied

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12
Q

Factors affecting sources of finance

A
  • Use of funding: long term finance needed e.g property growth, or short term finance required e.g stock or bills
  • Interest Rates: an organisation will choose finance with the lowest interest rates possible
  • Payback Term: the quicker the payback term the lower the interest rate
  • Size and Type of organisation: organisations are restricted to certain types of finance e.g a public sector organisation cannot sell shares and has to rely on government funding
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13
Q

Cash flow problems and solutions

A
  • spending too much cash on stock: consider JIT production or offer discounts for cash sales
  • allowing customers too much credit:offer customers discounts for early or prompt payments
  • customers not paying within agreed credit terms:offer customers discounts for early or prompt payments
  • borrowing too much finance at high interest: seek another source of finance
  • owners drawing too many drawings:owners draw less from the business
  • purchase of capital items (equipment):purchase capital items on hire purchase
  • low sales:advertise products
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14
Q

Purpose of a cash budget

A

A business will use a cash budget to make projections into the future. They will use this to:
- manage their cash flow as a basis for decision making
- monitor and control: use as a tool for a comparison of budgeted with actual results obtained from other financial decisions
- measure performance of the organisation, or individual departments
- set targets for managers and employees to work towards
- highlight anticipated periods of poor cash flow (deficit) and provide time for
corrective action
- highlight anticipated periods of surplus to enable the organisation to invest for the future
- Used to set targets for workers and managers
- Can be motivational for employees
- Can be used to convince a lender that you have sufficient cashflow to repay debt

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15
Q

Cash budget terms

A
  • surplus: positive closing balance
  • deficit: negative closing balance
  • total receipts: total amount received by the business
  • opening balance: amount at the start of each month
  • total payments: total paid by the business
  • closing balance: amount at the end of each month
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16
Q

Interpretation of cash budget

A
  • Cash sales falling, due to external factors (recession): engage in marketing activities
  • purchases increasing, too much money tied up in stock, stock isn’t selling despite having ordered so much: use JIT stock control
  • expenses are increasing, rising cost of rent in June: switch to cheaper premises
  • one-off-payments on equipment, spending too much money in one month: spread the cost e.g hire purchase or leasing
  • negative closing balance, has a deficit in June and will be unable to pay off expenses or depts: arrange more finance in the short term e.g loan or overdraft
17
Q

Purpose of an Income Statement

A

An income statement calculates:
- the profit made from buying and selling goods and services this is known as gross profit
- gross profit = sales revenue - cost of sales
- the profits made after expenses are deducted from gross profit, this is know as profit of the year
- profit of the year = gross profit - expenses

18
Q

Income statement terms

A
  • Revenue: the amount made from selling goods and/or services
  • Cost of sales: cost associated directly with the productivity/purchase of goods or services
  • Gross profit: this is the difference between sales revenue and cost of goods sold
  • Expenses: all additional expenses incurred by the organisation e.g administration
  • Profit of the year: this is the amount of money the organisation has left once all expenses have been deducted from gross profit
19
Q

Statement of Financial Position

A

Shows the assets of an organisation and the liability (what it owes to others) at this point in time

20
Q

Features of Financial Position

A
  • shows the value of the organisation’s assets (non-current and current)
  • shows the value of the organisation’s liabilities (current and long-term)
  • shows the equity/capital of the company
21
Q

Statement of Financial Position Terms

A
  • non current assets: items owned which will be kept for more than a year
  • current assets: items owned that will be kept for less than a year
  • current liabilities: what the business owes and will pay back in the short term usually within a year
  • long term liabilities: what the business owes and will pay back in the long term
  • financed by: shows how the company has been financed
  • trade receivables: customers who have received goods from the business but have not yet paid for them
  • trade payables: business owes money to creditors (supplier)
  • drawings: funds taken out by the owner from the business for personal use
22
Q

Users of financial information and what they use it for

A
  • owners/shareholders: to measure profits made and to inform decision making
  • employees: to ensure job security and to asses the profitability of an organisation to check they are being paid fairly
  • competitors: to measure their success against competition
  • inland revenue: to ensure the business is paying the correct amount of tax
  • banks/lenders: they are interested in the liquidity of an organisation to decide whether to supply finance
  • suppliers: to decide whether to allow more credit
  • investors: to asses whether or not to invest in the business
23
Q

Purpose of Ratio analysis

A
  • to compare the current years performance with that of the previous year
  • to compare performance with that of a similar organisations
  • to highlight areas of the business that require attention
  • to highlight trends to aid future decision making
24
Q

Ratio analysis

A

information obtained from the final accounts of an organisation can be analysed through the use of ratios with the following themes:
- profitability: shows how much profit is made from trading
- efficiency: shows if the organisation is making the best use of resources
- liquidity: shows whether the organisation has enough money to pay its depts

25
Q

limitations of ratio analysis

A
  • ratio information is historical so it is not relevant to the current or future position
  • ratios do not take into account external factors e.g recessions
  • ratios do not take into account internal factors e.g low staff morale
  • ratios do not take into account product developments
  • it is difficult to find competitors of the exact type and size to make valid comparisons
26
Q

Types of Ratios

A
  • profitability ratios are calculated using figures from the income statements
  • liquidity rations are calculated from statement of financial position
  • efficiency ratios are calculated using figures from both final accounts
27
Q

Spreadsheets

A
  • Allows a variety of formulae and functions to prepare financial records, this may reduce errors made during calculations
  • What IF statements can be used to see the outcome of alternatives - this can help managers make decisions eg showing the effect of borrowing different levels of finance in a cash budget
  • Graphs and charts can be created from spreadsheets which are easy to understand eg comparison of projected/actual figures, trends over a period of time, comparison with competitors
  • Can be stored centrally in the organisations intranet allowing multi-user access and can be backed up in case original file is damaged/lost
  • Templates can be created and used throughout the organisation to ensure consistency of financial record keeping, makes internal analysis easier and helps employees understand/use spreadsheets effectively
28
Q

Technology in finance advantages and disadvantages (in general)

A

Advantages:
- Increased speed of info handling
- Integration of systems and access to data
- Increase efficiency and production
- Enhanced reputation
- Competitive edge
- Reduction in staffing costs
- Facilitates flexible working
Disadvantages:
- Hardware, software and installation
- Staff training
- Loss of working time/efficiency whilst training
- Possible hacking
- Health and safety implications
- Errors whilst familiarising
- Technical glitches

Higher Business Management (5 decks)

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