Finance Flashcards
What should a business consider when getting a source of finance?
How much? Used for? Repayments? IS the entrepreneur willing to give up ownership?
What is finance needed for?
start up costs, expenditure (machinery, vehicles), working capital (day to day), investment.
Short term sources?
Selling assets, retained profits, overdrafts, venture capital, leasing, grants, trade credit.
Medium term sources?
retained profits, bank loans, crowdfunding, venture capital, leasing, grants.
Long term sources?
owner’s capital, loans debentures, peer-to-peer, crowdfunding, share capital.
Owner’s capital?
money invested in the business from the owner’s personal savings
-Internal.
-No repayment/interest.
-May be limited.
Retained profits?
Profits made in earlier years and kept by the business and used for a variety of reasons including paying for growth.
-no interest/repayment.
-Flexibility.
-Might be limited.
-Internal.
Sales of assets?
when a business sells off its unwanted or unused assets to raise funds
-Internal.
-Frees up space.
-Immediate.
-May take time to sell, may not sell at all.
Overdrafts?
When a lending institution allows a firm to withdraw more money than it currently has in its account
-Good solution to short term cash flow problem.
-External.
-For emergencies.
-High interest.
Trade credit?
the practice of buying goods and services now and paying for them later
-Can make revenue before paying.
-High interest if missed payment.
-External
Debt factoring?
A bank sells their invoices to a bank to gain immediate access to cash.
-Improves cash flow.
-External.
-Do nor receive the full value of the invoice.
Hire purhcase?
an asset is sold to a company that agrees to pay fixed repayments over an agreed time period - the asset belongs to the company
-no large upfront cost.
-interest.
-External.
Leasing?
Renting a product while ownership title remains with the lease grantor.
-Cheaper in short term.
-Can easily switch to new technology.
-Easy regular payments.
-Interest and is more expensive in the long term.
-External.
Share capital?
Selling shares to raise finances.
-External.
-Dividends and slower decisions making.
Venture capital?
Money that is invested in new or emerging companies that are perceived as having great profit potential.
-External.
-Will want input and profits.
Business angels?
individuals who invest their personal capital directly in start-ups
-Offer knowledge and skills.
-Loss on control and profits.
-External
Friends and family?
Quicker and cheaper than a loan.
Can add stress and may not be enough
-External.
Taking on a new partner?
Partnerships can obtain additional finance by selling off part of the business to a new finance.
-More skills
-Loss of control and profits.
-External
Loans?
money borrowed that must be repaid with interest
-External.
-Regular repayments and instant money.
-Interest.
-Not provided to start ups because of lack of security.
What is the role of finance?
-Prepare financial records such as cash flow, income statements.
-Assess the financial performance of the business.
-Raising finance.
-Pay creditors and employees.
What is a budget?
Is a written plan of what you expect your income and expenses to be over a certain period of time
What is a sales revenue budget?
the planned revenue from sales.
What is an expenditure budget?
the planned spending on labour ad raw materials.
What is a purpose of a budget?
- A careful record of income and expenses over a set period of time
- Keep track of monthly spending
- A tool to help prevent a person from going into debt
- A tool to help save money
Benefits of budgeting?
-Can control and review spending.
-Can set targets.
-Motivates staff.
-Improves communication and efficiency.
-Highlights waste and inefficiency.
Drawbacks of budgeting?
Inflexible budgets may not be able to adapt to changes in market conditions
-Overstating budgets can lead to poor decision-making.
-Time consuming for small businesses.
-Some staff may not like working towards a budget they don’t believe in.
What is cash flow?
The movement of money in and out of the business over a period of time
Cash flow inflows?
Money from owners, bank loans, cash from sales
Cash flow outflows?
Wages, raw materials, interest on loans, advertising, bills
What is net cash flow?
total inflow - total outflow
What is a cash flow forecast?
It is an estimate of future inflows & outflows of the business usually on a monthly basis.
It shows the expected cash balance (NOT profit!) at the end of each monthW
What is a purpose of a cash flow?
-Identify potential shortfalls.
-Spots problems with sales and if you can pay suppliers.
-Allows external stakeholders to see if it is worth investing.
Consequences of a negative cash flow?
-Can’t pay suppliers so no materials.
-Can’t pay rent leads to eviction.
-If not paying wages, staff won’t work and operations are disrupted.
-Persecution for not paying taxes increases costs more.
-No money for advertising.
-Banks will be unwillingly to invest.
Benefits of cash flow forecasting?
- useful planning tool for someone wishing to start a business
- helpful for businesses applying for loans from major lending institutions
- predicting cash flow helps managers identify in advance periods where a business may need cash, and plan accordingly
- helps monitoring and managing cash flow. can compare estimates and actual figures, and assess problems arising
Drawbacks of cash flow forecasting?
-Only a prediction and actual values may be lower/higher.
-Unexpected events will drastically change forecast.
-Is time consuming so if not reliable then is a waste of time and resources.
Causes of cash flow problems?
- Lack of planning
- Poor credit control
- Allowing too much credit for customers.
- Expanding too rapidly
- Unexpected events
- Seasonal demand (businesses can predict this).
Impact of increasing selling price on cash flow?
-Increases revenue per item, so if that remains unchanged then revenue increases.
-However, if product is elastic, customers will not buy the product.
Impact of decreasing selling price on cash flow?
-Attracts customers.
-However, less revenue per item, so if product is inelastic may not improve cash flow.
Impact of advertising on cash flow?
-Gains customers and increases sales.
-However adds a large cost to spending.
How does finding an alternative supplier impact cash flow?
-May have cheaper goods which decreases outflows.
-However may be poorer quality so customers could switch.
Impact of an overdraft on cash flow?
Allows the business to access cash once its bank balance has reached zero.
However has high interest.
Impact of trade credit on cash flow?
-Results in total lower payments.
-however, high interests when missing deadlines and can be seen as delaying the cash flow problem not solving it as the stock will have to be paid for at some point.
What is an income statement?
a report of net income and expenses to be over a certain period of time
Why are income statements important?
It helps to see how the business is performing in what areas and which areas need improvement.
What are the main components of an income statement?
Trading account- sales revenue and direct cost of sales.
Profit and loss account- considering expenses.
Net and gross profit.
What is gross profit?
Revenue - cost of sales
What is net profit?
Net Profit = Gross Profit - Expenses. This is the profit that owners can reinvest or retain.
How can profit be improved?
-Increases sales; increase advertising, increase selling price.
-Reduce cost of sales; using cheaper suppliers, flow production, quality control, motivation.
-Reduce expenses; lower wages.
What is the gross profit margin?
The percentage of sales that becomes gross profit.
Gross profit/sales revenue x100
What is the net profit margin?
The percentage of sales revenue that becomes net profit.
Net profit/sales revenue x100.
What can profit margins tell us?
GPM increase- sales improving more than cost of sales increase.
NPM increase- better control over expenses.
Should also be compared with industry averages.
