Finance Flashcards
Advantages of internal finance
No interest paid
Affairs of business private
Does not have to be repaid
Internal sources of finance
Debt collection
Sale of fixed assets
Sale of inventory
Retained profits
Owners investment
Advantages of external sources of finance
Larger sums available
Quicker
Borrower has use of asset whike paying for it
Disadvantages of external sources
Interest to be paid
Lender requires security
External sources
Grants
Trade credit
Mortgage
Hure purchase
Leasing
Share issue
Additional partners
Bank loan/overdraft
Advantage of extra partners
New partner contribute capital
Disadvantage of extra partners
Partner entitled to share of profits
Disadvantage of leasing
Payments math be very high
Asset remains property of lender
Advantage of leasing
Business can use asset( up to date equipment)
Advantages of hure purchase
Can pay in instalments
Hired till paid off
Disadvantage of hire purchase
Total cost of asset is much higher than if bought for cash
Advantage of mortgage
Business can use premises from beginning
Will eventually become property of business when payments been made
Disadvantage of mortgage
More expensive than if bought for cash
Advantage of trade credit
Immediate use of goods(30 days to pay)
Advantage of owner’s investment
Private
Doesn’t have to be repaid
Disadvantage of owners investment
Not all owners have additional capital
Advantage of retained profits
Private
Does not have to be repaid
Disadvantage of retained profits
Not all businesses make enough to reinvest profit
Advantage of sale of inventory
Raise finance quickly
Disadvantage of sale of fixed assets
Small businesses not likely be o have surplus assets
Purpose of cash flow forecasts
Forward planning- predicts the level of spending and level of income will have in a period of time
Review performance- it enables a business to compare the forecasted income and spending against actual amounts
Shows when finance will be required- any business wishing to borrow money etc will need to see when this money will be re available
Importance of a forecast to a business
Ensures business will not suffer from a shortage of ready money
Business must ensure there is a steady supply of money coming in so that in can pay essential debts
Without adequate cash flow the business could be forced to close because suppliers
Consequences of incorrect forecasting
Would cause a shortage of working capital- could not pay essential expenses such as wages
Some of the businesses assets may be sold- could affect production eg machinery sold
Inventory levels may be inaccurate- if sales revenues underestimated sufficient inventory not purchased
Importance of income statement and statement of financial position to business
Show accurate value of business
Cost of sales
Opening inventory+ purchases - closing inventory
Gross profit
Sales revenue - cost of sales
Net profit
Gross profit - expenses
Non current assets
Assets which are more permanent
Current asset
Assets can be exchanged for cash
Non current liability
Borrows for a longer time eg bank loan
Current liability
Liabilities which must be paid immediately
Statement of financial position records
Businesses assets
Businesses liabilities
Owners capital
Wonders drawings
Net profit
Gross profit %
Gross profit/ sales revenue x 100
Net profit %
Net profit / sales revenue x100
Inventory turnover rate
Cost of sales / average inventory
Return on capital employed
Net profit / capital employed x100
Working capital ratios
Current assets / current liabilities
Significance of a break even point
Amount of goods which must be sold to make a profit
Level of costs business can bear
Price which needs to be charged for goods
How to work out break even point
Total fixed costs / selling price per unit - variable cost per unit
Variable costs
Costs which vary eg electricity
Fixed costs
Costs not affected by quantity of goods eg rent
What is margin of safety
The amount in which the business sells in excess of its break even point
