Finance Flashcards
What are internal sources of finance?
a source of money that comes from within the business
What is owner’s capital?
the money invested by the owner into their business
What is retained profit?
when a business makes profit, it can either leave some or all of its profit and use it to reinvest into the business to expand
What is selling assets?
involves selling products the business have, for example unused machinary
What are external sources of finance?
a source of money that comes from outside of the business
What is family and friends?
money obtained to a business from family or friends
What is a bank loan?
money that is given from a bank which then needs to be paid off often with interest over a certain period of time
What are overdrafts?
when a business decides to use more money than they currently have in their bank account
What is a venture capitalist and business angels?
refers to an individual or group of people who are willing to invets money into a new or growing business in return foran agreement to share the profits
What are new partners?
when a new person is added to a businessas a partner
What is share issue?
a business may sell more of their shares to raise money
What is a trade credit?
allows a business to obtain raw materials and stock but pay for them at a later date
What is leasing?
a way for a business to rent out machinary that they require by paying monthly upkeeping costs
What is hire purchase?
it is used to purchase an asset and are not owned until the business pays back all of the money they owe
What are government grants?
a fixed amount of money that is given by the governement to a business
advantages of owners capital
-quick and convinent
-no interest required
-doesn’t require a loan
disadvantages of owners capital
-the owners may not have enough money
-once the money is used, it is gone
advantages of retained profits
-quick and convinent
-easy to gain
-no interest
disadvantages of retained profits
-once the profits are used then they are gone and therefore there is no backup for future unexpected problems
advantages of selling assets
-can create space
-quick
-easy way to make money
disadvantages of selling assets
-might have to sell below the original purchase price
-may need in the future
advantages of family and friends
-low interest
-may not to be paid back
disadvantages of family and friends
-money may be lost
-can cause arguments
advantages of bank loans
-easy to get
-can obtain large amounts of money
disadvantages of bank loans
-pay interest
-hard to obtain for new businesses
advantages of overdrafts
-quick to access
-allows emergency purchases
disadvantages of overdrafts
-high interest rates
-only short term
advantages of venture capitalists and business angels
gain money quickly
potential to raise lots of money
-may offer advice and help
disadvantages of venture capitalists and business angels
-owner must give away part of their business
- may have contrasting views which could lead to conflicts
advantages of share issue
-can gain money quickly
-no interest
disadvantages of share issue
-give away part of business
-leaves the business to be open for takeover
- shareholders receive dividends
advantages of new partners
-easy way to gain money
-potential to raise huge amounts of finance
-offer advice and help
disadvantages of new partners
-owner must give away part of the business
-may have different visions for the business
advantages of trade credit
-access to supplies without immediate payment
- no interest
disadvantages of trade credit
-short term
-small amounts
advantages of leasing
-no large upfront payments
-leasing company pay for repairs and maintenance
disadvantages of leasing
-can be expensive
-assets aren’t owned by the business
advantages of hire purchase
-expensive assets can be purchased then paid back over time
disadvantages of hire purchase
-interest
-equipment is not owned until all the money is paid off
advantages of government grants
-does not need to be paid back
-available to small businesses
disadvantages of government grants
-needs to meet certain criteria
-time consuming to complete paperwork
What is revenue?
revenue is any money that a business makes from selling goods and services
What are costs?
anything that a business pays for
calculation for revenue
revenue = selling price x quantity sold
what are fixed costs?
costs that do not change, no matter what the output for the business is
what are variable costs?
costs that change depending on the output of a business
equation for total costs
total costs = fixed costs + variable costs
What is profit?
any revenue that is left after a business has paid all of its costs
equation for profit
profit = revenue - total costs
What is break even?
the point at which revenue and total costs are the same meaning that the business is making neither a profit or loss
equation for contribution per unit
selling price per unit - variable costs per unit
equation for break even point
break even point = fixed costs / contribution
how to draw a break even chart?
step 1: fixed cost line
step 2: variable cost line
step 3: total cost line
step 4: total revenue line
why is an increase in revenue positive?
if revenue increases, it is likely that profit will also increase
why is a decrease in revenue bad for a business?
if revenue is decreasing then a business is at risk of not breaking even or having very low profit margins
why are increasing costs bad for a business?
likely to reduce the business’ profit margins
why are decreasing costs good for a business?
allows the business to access more profit as long as their quality remains the same
ARR step 1 equation
average annual profit = total profit / number of years
ARR step 2 equation
ARR = (average annual profit / cost of investment) x 100
What does a profit and loss account show?
the revenue and costs of a business to work out if the business has made a profit
Gross profit equation
gross profit = revenue - cost of sales
Net profit equation
net profit = gross profit - expenses
Gross profit margin equation
gross profit/sales revenue x 100
Net profit margin equation
net profit/sales revenue x 100
how can changing prices improve a business?
-by increasing their prices they can maintain the same level of demand after this they will make more profit
-by reducing prices more people could potentially buy their product or service
how can reducing costs improve a business?
-reducing costs of raw materials would reduce cost of sales but could affect quality
-reducing labour costs by introducing technology
- reducing labour costs without rducing quality of product or service
What is meant by cash?
cash refers to the physical money a business has in note and coins along with any money it has in the bank
What is cash flow?
cash flow is the movement of money in and out of a business over a period of time
What is cash flow forecasting?
it involves predicting the future flow of cash in and out of a business’s bank account
Equation for closing balance
Closing balance = net cash flow + opening balance
Equation for net cash flow
net cash flow = cash inflows - cash outflows
why are cash flow forecasts good for shareholders/owners?
- they will be able to see whether the business is likely to succeed
- can be used to make key business decisions
how do cash flow forecasts help managers?
- can impact the decisions they make
- managers may have to work with owner to manage money
how do cash flow forecasts help employees?
- maya want to know the cash flow position of a business to see if their job is secure
why are cash flow forecasts important for bank?
- used to decide whether they should give out a loan or not
how do cash flow forecasts help suppliers?
- may want to know if a business is in a financially secure position before offering trade credit
when could a business suffer with cash flow issues?
- at start up when large amounts are invested
- during rapid growth when the business is growing quickly but can’t keep up with the cash being paid out
- a sudden drop in the level of demand
how can a business improve their cash flow?
- increase revenue
- reduce costs
- delay payments
- extra funding
