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Finance Flashcards

1
Q

What is a business?

A

Providing goods and services for people while generating a profit

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2
Q

Why do businesses need finance?

A

E.g. -buying stock
-paying employees
-paying rent
-paying expenses

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3
Q

What is a recession?

A

When a business has two quarters of negative growth

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4
Q

What is internal finance?

A

Finance from within a business
E.g. -owners capital
-retained profit
-sale of assets

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5
Q

What is owners capital?

A

When the owners of a business use their own personal servings to invest into the business

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6
Q

Benefits of using owners capital

A

-If owners have a lot of savings it can be quick
-Don’t have to pay it back
-Can invest it whenever

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7
Q

Drawbacks of using owners capital

A

-Possible low amount of finance raised
-Owner may not have the money
-Risk of personal debt

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8
Q

What is retained profit?

A

When a business reinvests its profits to help it grow
(well known businesses reinvest yearly for stock, staff, vehicles, premises and equipment)

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9
Q

Benefits of using retained profit

A

-Easy if the business has high profits
-It is free to reinvest

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10
Q

Drawbacks of using retained profit

A

-May not have enough profits to reinvest
-Owners are missing their share of the profits

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11
Q

What is sale of assets?

A

Raising finance by selling items the business already owns
E.g. -machinery
-land
-premises
-vehicles

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12
Q

Benefits of using sale of assets

A

-Making room
-If unused, making money from it rather than having it sitting around
-Cheaper final product because you sold the old one

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13
Q

Drawbacks of using sale of assets

A

-No longer have the asset
-May take a long time to sell

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14
Q

What aspects of finance should be considered in a business plan?

A

3 major components:
-cash flow projection
-income statement
-balance sheet
Must also outline past, present, future financial state (includes:)
-expenses
-cash flow statement
-break even point
-sales forecast

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15
Q

What is a business plan and why are they important?

A

A look into the future of a business
-prevent risk and failure
-set goals and targets
-used to apply for finance
-monitor success
-attract possible investors

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16
Q

What will a cash flow forecast show?

A

The expected income and expenditure of a business over the coming year

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17
Q

What will a start up cash flow management show?

A

The start up money (this is why many businesses fail)

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18
Q

What will the affordability of interest show?

A

It will include cash flow forecasts which show banks the interest rates that can be afforded on the finance they borrow

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19
Q

Interest rates

A

the base rate is set by the Bank of England which is independent from the government

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20
Q

What is a cash flow forecast?

A

A prediction of the amount of money that will flow into and out of the business
Includes:
-cash inflows
-cash outflows

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21
Q

What are cash inflows?

A

Money coming into a business (receipts)
E.g. -sales revenue
-loans
-grants
-selling shares

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22
Q

What are cash outflows?

A

Money leaving a business (payments)
E.g. -buying stock
-paying expenses
-repaying loans
-buying equipment

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23
Q

How do you calculate the monthly balance in a cash flow forecast?

A

Total inflows - Total outflows

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24
Q

How do you calculate the closing balance in a cash flow forecast?

A

Monthly balance - Opening balance

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25
Q

Why do businesses make cash flow forecasts?

A

-Make comparisons between predictions and actual
-Help control and monitor cash in and out of a business
-Important for financial planning (can support an application for funding)
-Show owners where cash flow shortages are likely so they can arrange suitable finance

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26
Q

Factors affecting cash flow

A

-Consumer trends (can increase or decrease sales)
-Economic variables (if the economy is in a growth or decline sales and costs will be impacted)
-Competitors actions (new products, innovation, reputation gain)

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27
Q

Problems with cash flow forecasts

A

-Bias (may have overinflated inflows to improve business reputation and impress suppliers)
-Prediction (cannot see all future events)
-Static document (needs updating regularly or it becomes old and outdated)
-Short term (only a 12 month snapshot)
-Shows no profit only cash

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28
Q

What is limited liability?

A

Not liable for the debts of the business, can only lose the money invested
-Includes public or private limited companies

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29
Q

What is unlimited liability?

A

Responsible for debts of the business, may have to sell personal assets to pay the debts
-Includes sole traders and partnerships

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30
Q

What is gross profit and how is it calculated?

A

The selling price of a businesses profit without the cost of producing it
-The higher the better, can be compared yearly and measures the performance of a business
-Calculation: sales revenue - cost of sales

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31
Q

What is operating profit and how is it calculated?

A

The sales revenue without the operating expenses of a business
-Calculation: gross profit - expenses

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32
Q

What is net profit and how is it calculated?

A

It is what the business has left of its sales revenue after paying all of its debts
-The higher the better and demonstrates how well a business is controlling their expenses
-Also known as profit before taxation
-Calculation: operating profit - expenses

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33
Q

What is gross profit margin and how do you calculate it?

A

Allows a business to see their gross profit as a % of their sales
-Calculation:
(gross profit / sales revenue) x 100

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34
Q

What is operating profit margin and how do you calculate it?

A

It is a true measure of profit
Calculation:
(operating profit / sales revenue) x 100

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35
Q

What is net profit margin and how is it calculated?

A

The proportion of sales revenue that is left once all the costs have been paid
-Calculation:
(net profit / sales revenue) x 100

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36
Q

Why are profit margins a better indicator of performance than the raw figures?

A

-Allows comparison because it is a % not a rough figure
-Calculated after expenses

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37
Q

What is the break even point and how is it calculated?

A

Where the total costs are the same as total revenue, the business is making neither a profit nor a loss
-Calculation:
total fixed costs / contributions per unit

38
Q

How are total costs calculated?

A

Fixed costs + Variable costs

39
Q

What is revenue and how is it calculated?

A

The money coming in from sales
Known as sales or turnover
-Calculation: selling price x units sold

40
Q

What are fixed costs?

A

Don’t vary with output or sales e.g rent

41
Q

What are variable costs?

A

Change depending on output e.g stock

42
Q

How do you calculate contribution?

A

Selling price - Variable costs per unit

43
Q

What is the margin of safety?

A

The difference between the actual level of output and the break even output

44
Q

Limitations of break even

A

-It assumes that every item produced is sold
-In a service business the prices may differ
-Costs may increase and you would need to recalculate the break even
-It is only a best guess of what might happen

45
Q

What is a budget?

A

A financial plan and an agreed spending limit within a business
-based on objectives
-managers must think ahead
-usually 12 months

46
Q

Why do businesses create budgets?

A

-Planning (allows them to anticipate problems and develop solutions)
-Motivation (managers feel responsible by being in control)
-Control (budgets are set against aims and can be used as a comparison goal for success)

47
Q

What is a historical budget?

A

A budget set using current figures (how much you will spend, sell, costs)
-Pro: it is realistic as it is based on last years sales
-Con: these things are dynamic and may be wrong

48
Q

What is a zero based budget?

A

A budget set using figures based on potential performance, it takes away historical assumptions and starts on a clean slate
-you must be able to justify the levels of expenditure
-Pro: clean slate
-Con: must be loud and convincing to receive a higher budget

49
Q

Benefits of a budget

A

-Provides a method to allocate resources
-Monitor and control operations
-Promotes forward thinking and planning for the future
-Motivate the workforce and show employees the overall picture of organisation

50
Q

Limitations of a budget

A

-Can sometimes be too low and some departments end up lacking in resources
-Time consuming to create
-Possible errors
-Budgets involve and affect people which can cause conflict

51
Q

What is variance?

A

When you compare the budget figures against what actually happens, it happens in 2 ways:
-favourable variance
-adverse variance

52
Q

What is favourable variance?

A

The manager has under-spent in the department, this means success for the budget as the costs have been cut which will impact profits

53
Q

What is adverse finance?

A

The manager has overspent, profits will be lowered as costs are now higher

54
Q

Difficulties of budgeting

A

-Often fixed for a year, this is difficult when a business is dynamic
-Time consuming to monitor, prepare and control
-Can be demotivating if the budget is unrealistic
-Can cause inter-department rivalry

55
Q

What is a profit and loss account?

A

A financial document showing the company revenue income over the year as well as their costs and expenditure
-created at the end of the trading year
-provides a summary of profit or loss during the year

56
Q

Why are profit and loss accounts useful?

A

-Shows money going in and money going out
-Allows a company to quickly identify if they are making a profit or a loss

57
Q

Methods to improve a business’s profitability

A

-Increase revenue e.g raise the price
(can be risky as sales may be impacted and demand may fall)
-Reduced costs e.g move countries, find cheaper raw materials, make redundancies

58
Q

What is profit and how is it calculated?

A

-Shows how much money is left after expenses
-It is recorded immediately after a sale
-Calculation: total revenue - costs

59
Q

What is cash?

A

The most liquid of assets
-needed to survive

60
Q

What is liquidity?

A

The ease at which an asset can be converted into cash
-this is measured to understand how secure a business is

61
Q

What is a balance sheet?

A

A document showing what a business owns (assets) and what it owes (liabilities), it essentially shows how much a business is worth
-it is a snapshot of what a business is worth over a period of time
-shows sources of funds and how a business uses them
-is also sometimes known as a statement of financial position
-public and private limited companies must publish these by law

62
Q

What are non-current assets?

A

These are fixed assets that will be kept for more than one year, they are long term assets of a business which are not expected to be sold within the next year of trading

63
Q

What are current assets?

A

Assets a business will be getting rid of throughout the year, they are short term assets which are likely to be turned into cash within the next year of trading

64
Q

What are non-current liabilities?

A

Debts which are not expected to be paid off within the next year of trading

65
Q

What are current liabilities?

A

Debts which are expected to be paid within the next year of trading

66
Q

Uses of a balance sheet

A

-Evaluate the performance of a business
-Evaluate the potential of a business to an investor
-A summary evaluation of a business

67
Q

Limitations of a balance sheet

A

-Value of the assets stated may not be the same as the amount they actually sell for
-A statistic snapshot of one day in a business, this picture could change the next year

68
Q

What is current ratio and how is it calculated?

A

A measure that estimates whether the business can pay its debts due within one year out of its current assets
-Also known as working capital
-Calculation:
current assets / current liabilities

69
Q

What is the acid test ratio and how is it calculated?

A

Known as the ‘quick’ ratio and is a much harsher test of liquidity because stocks aren’t guaranteed to sell
-Calculation:
(current assets - stock) / current liabilities

70
Q

What is working capital and how can it be calculated?

A

The funds that a business has to meet it day-to-day expenses
-Calculation:
current assets - current liabilities

71
Q

How can a business improve liability?

A

-Reduce the amount of stock that the business holds
-Reduce the credit period offered to customers
-Pay suppliers later on agreed credit terms
-Increase borrowing long term and clear the short term debts

72
Q

Examples of sources of finance

A

-Family and friends (selling them shares)
-Banks
-Peer to peer funding
-Business angels
-Crowdfunding
-Other businesses

73
Q

Examples of methods of finance

A

-Loans
-Share capital
-Venture capital
-Overdrafts
-Leasing
-Trade credit
-Grants

74
Q

What is external finance?

A

Funds obtained from outside the business

75
Q

What are the benefits of using external finance?

A

-Speed up growth
-Provide emergency relief
-Support uneven cash flow
-New equipment
-Replenish supplies

76
Q

What are the limitations of using external capital?

A

-Can sometimes have high interest costs
-Possible loss of ownership
-Debt obligations
-Can cause cash flow issues

77
Q

What is family and friends finance and what are the pros and cons?

A

Includes:
-Selling shares in an LTD
-Contributing money
Pros:
-Owner keeps control of the business
-Owners have better trust with their business investors
Cons:
-Can cause tensions/problems if money isn’t repaid

78
Q

What is bank finance and what are the pros and cons?

A

Includes:
-A loan (typically to start up businesses)
-An overdraft when a business has cash flow issues
-A mortgage loan
Pros:
-Quick and easy for short term finance
-Can receive a large sum of money
Cons:
-Overdrafts can be expensive as they have a high interest rate
-All methods must be paid back with interest

79
Q

What is peer to peer funding and what are the pros and cons?

A

It is an unsecured loan without going through a bank
-e.g student loans, payday loans, debt factoring (selling a loan on) and lease agreements
Pros:
-Lower interest rates
-Borrowers can earn a credit rating
Cons:
-High credit risk

80
Q

What is angel investment and what are the pros and cons?

A

This is where an angel investor uses their personal disposable income and gives it to a business for them to use
-(Sometimes also known as equity finance)
-Many usually want shares in return
-The investors provide knowledge and experience as well as finance
-Usually want a return on their investment within 3-8 years
Pros:
-Provide money, knowledge and experience
-Often do not need to be repaid with interest
-Everyone is eligible
Cons:
-Possible loss of control and ownership

81
Q

What is crowdfunding and what are the pros and cons?

A

It is where a large number of people fund a project over the internet making small investments each
Pros:
-Usually have many investors so lots of finance is raised
-Can help build a customer base
-Business can avoid the debt and interest of a bank loan
Cons:
-May have expensive returns
-May not reach the target amount of finance
-Can be time consuming to promote your campaign

82
Q

Ways to crowdfund

A

-Donate: investors get no money back, may receive tickets or newsletters in return
-Lend: money is paid back to investors with interest
-Invest: in exchange for equity or shares

83
Q

What is a bank loan and what are the pros and cons?

A

A transfer of money from one party to another with an agreement to pay it back
Pros:
-Allow growth
-Keep full control
-Quick
Cons:
-Expensive to pay it back with interest
-Possible high interest rate

84
Q

What is share capital and what are the pros and cons?

A

When a business raises finance through selling shares
Pros:
-No interest payments
-Low risk
Cons:
-Share dilution impacts existing share holders
-Possible loss of control and ownership

85
Q

What is venture capital and what are the pros and cons?

A

When money is invested into a project where there is risk
Pros:
-Can achieve a large amount of capital
-No obligation to repay
-Offers an opportunity for expansion
Cons:
-Possible loss of control and ownership
-Difficult to come across
-Can be expensive if it needs to be repaid

86
Q

What is an overdraft and what are the pros and cons?

A

An agreement with the bank to spend more money then is in your bank account
Pros:
-Can take more money if needed
-Flexible
-Cheaper than a loan as you only take out what you need
Cons:
-Must be repaid with interest
-Possible high interest rates
-Bank can reduce or cancel the overdraft at any time

87
Q

What is a lease and what are the pros and cons?

A

An agreement for a user to pay the owner for the use of an asset e.g property
Pros:
-Lower monthly payments
-No down payments
-Low initial investment
Cons:
-No ownership
-Possible termination liability
-End of lease costs (wear and tear)

88
Q

What is trade credit and what are the pros and cons?

A

Buying goods on credit (paying the supplier late for the stock)
Pros:
-Delay payments until you have more money
-Allows growth
Cons:
-Greater risk for debts
-Possible tension if unable to pay

89
Q

What are government grants and what are the pros and cons?

A

A sum of money awarded from the government that you don’t have to pay back
Pros:
-Don’t have to repay
-No debt
Cons:
-Restricted income
-Highly competitive to get
-Unsustainable as they are short term

90
Q

What is sales volume and how do you calculate it?

A

The total amount of goods/services sold over a certain period of time
Calculation: number of units sold x time period

Business (11 decks)

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