finance Flashcards
sources of finance (9)
- owners personal finance
- profits
- selling assets
- grants
- loans
- shares
- selling then leasing assets
- bank overdraft
- trade credit
owners personal finance advantages (2)
- owner keeps control over business
- reduce the amount that has to be borrowed ensuing there is no debt
owners personal finance disadvantages (2)
- can be difficult to withdraw savings if they are invested in the business
- risk owner may loose their savings if the business fails
retained profits advantages (2)
- used to make larger purchases such as assets or bulk buy
- business doesn’t go into debt
Retained profits disadvantages (2)
- business may strugle to grow if profits are consumed.
- cant solve short term cash flow issues
sale of assets advantages (2)
- money can be raised from asset sales
- money doesn’t need to be repaid
Sale of assets disadvantages (1)
- if finance is required urgently asset may be sold at a low price
selling and leasing back advantage (2)
- the asset is kept which may be essential for the business.
- business passes responsibility of maintaining and renewing equipment to leasing company
selling and leasing back disadvantages (1)
- if leased long term it can be expensive
selling shares advantages (2)
- large sums of money can be raised
- money doesn’t need to be repaid
selling shares disadvantages (2)
- dividends have to be paid back
- expensive to advertise the sale of shares
bank overdraft advantages (2)
- easy to arrange
- business can pay expenses with no money in the bank
bank overdraft disadvantages (2)
- high interest rates are applied by banks
- bank overdraft can be withdrawn by a bank at any time and must be repaid
trade credit advantages (2)
- allows a business to sell goods at higher prices and earn profit
- helps businesses cash flow
trade credit disadvantages (2)
- discount for prompt payment is lost
- suppliers will be reluctant to continue trade credit if a business fails to pay
grants advantages (2)
- offered to help a businesses expand or start up
- money doesn’t need to be repaid
grants disadvantages (2)
- complicated to apply for and business has to meet certain requirements
- usually a one off payment and are not repeated
bank loan advantages (2)
- business can budget or repayments
- purchases for essential materials can be made and paid back over years
bank loans disadvantages (2)
- interest has to be repaid along with the loaned amount
- smaller businesses often need to pay a larger interest.
factors affecting sources of income (5)
- short term finance required
- long term finance required
- interest rates
- payback term
- size and type of organisation
how does short term finance required affect sources of finance
Organisation may only need finance for a short term so an overdraft could be used
how does long term finance required affect sources of finance
an organisation may need long term finance required to fund a property
how does interest rates affect sources of finance
- Organisation will choose agreements with lowest interest rates to keep costs down
how does payback term affect sources of finance
the quicker the pay back the lower the interest
how does the size and type of the organisation affect sources of income
Organisation can be restricted to certain sources of finance
purpose of budgeting (5)
- to predict a surplus and
- focus on investment during period of surplus
- to predict a deficit
- allow action to be taken to avoid a deficit
- to compare with figures from different departments
cash flow problems (5)
- too much tied up in inventory
- too many credit sales
- high spending amount on non current assets
- not enough sales revenue
- too many unpaid debts
solution too much tied up in inventory
use just in time inventory and sell of excess inventory
solution to too much credit sales
offer cash discounts to encourage customers to pay in cash
Solution to not enough sales revenue
adapt the marketing mix
solution too many unpaid debts
sell debts to debt factoring companies
what is an opening balance
amount of cash available at the start of the month
what are total receipts
total cash received during the month
what does the cash available mean
cash available to spend
opening balance + total receipt
what are total payments
total amount of cash spent during the month
what are closing balances
amount of cash available at end of the month
cash available - total payments
users of financial statements
owners - asses profits and make decisions
employees - ensure job security
competitions - measure success as comparison
investors - asses potential investment
lenders - decide weather or not to loan
what does an income statement show
the profit made from buying and selling known as gross profit
sales revenue definition
profit made from selling goods and services
cost of sales meaning
amount spent on selling goods
sales revenue - cost of sales
gross profit definition
profit made from buying and selling
sales revenue - cost of sales
expenses definition
costs throughout the year
profit for the year definition
profit made after expenses are deducted from gross profit
gross profit - expense
what does a statement of financial position show
it shows the items a business owns
- non current assets
- current assets
- liabilities
- working equity
- net assets employed
- non current liabilities
- net assets
- equity and reserves
definition of non current assets
items owned for a period of more than a year. leasing
definition of current assets
items owned for less than a year
Definition working equity. Calculation?
Ability to pay short term debts
current assets - current liabilities
definition of current liabilities
items owed for a period of less than a year
Definition of net assets employed
value of non current assets added to working equity
definition of non current liabilities
long term debts of business
definition of net assets. calculation?
value of business
net assets employed - non current liabilities
definition of equity and reserves
shows how business has been financed
purpose of ratio analysis (4)
- to compare the performance of the business with previous years
- compare performance of the business with competitors
- highlight areas that need attention
- highlight trends to aid decision making
limitations of ratios (2)
- do not take into account external factors
- difficult to find exact competitors so valid comparisons are difficult
profitability ratios examples and meaning
how profitable a business is
gross profit percentage
profits for the year
Return on equity employed
gross profit calculation
gross profit/sales revenue x 100
description of gross profit percentage
measures percentage of profit made from buying and selling. the higher the better
how to improve gross profit percentage
increase sales revenue by increasing price. find a cheaper supplier
profit for the year percentage calculation
profit for the year/sales revenue x 100
description of profit for the year percentage
measures profit ones expenses have been deducted from gross profit. higher the better
how to improve profit for the year percentage
reduce expenses
Increase sales revenue
Improve gross profit
Return on equity employed formula
profit for the year/equity x 100
description on equity employed formula
measures percentage of investment that is returned to investors. the higher the better
how to improve on equity employed formula
increase profits
reduce expences
what are liquidity ratios
measures cash situations on a business and ability to pay debts
- current ratio
- acid test ratio
current ratio formula
current assets / current liabilities
description of current ratio
measures ability of business to pay short term debts
ideal is 2:1
how to improve current ratio
if business has less than 2:1 then it has to secure more current assets
if higher than 2:1 then should invest in current assets
acid ratio formula
(Current assets - closing inventory) / current liabilities
description of acid ratio ratio
Measures ability for a business to pay back debts in crisis situations. 1:1 ratio is good
how to improve acid ratio
less than 1:1 must secure more current assets
Current ratio ok but acid test is low then too much money in inventory
what are efficiency ratios
how well a business uses its resources
rate of inventory turnover formula
cost of sales /average inventory
Description of rate of inventory turnover
Measures times a business has to restock inventory during the year
how to improve rate of inventory turnover
most want a high rate as it shows products are selling and not tied up. JIT or sales of return.
