Finance Flashcards
The role of the finance department
its role is to have enough cash to keep going and to produce financial statements that will help the business plan and record its financial performance
Benefits
-improves business performance
-prevents bankruptcy and sales
financial management
Importance
financial management determines the success or failure of an organisation.
there has to be
-an amount of funds available to fund projects,and hit objectives
-ensure costs are controlled
-ensure adequate cash flow
tasks done by the financial department
-the maintenance of financial records-keeping annual accounts up to date
-payment of salaries and wages.
-payment of expenses
-reporting to management-use this financial information to make an informed decision
What do financial problems implicate
-court action by those owed money
-attempts to sell organisation as a going concern
-liquidation of the business(everything is sold to see what money can be paid back)
Owners personal finance
Advantages and disadvantages
includes personal savings and money borrowed from, family and friends
A
- owner to keep control of the business
-amount to be borrowed from other sources lower
D
- difficult to withdraw savings once they are invested in the business
- owner could lose their savings if their business fails
Bank loan
Advantages and disadvantages
This is money the bank agrees to lend a business for a specific purpose, for a fixed period of time, regular repayments instalments are put in place
Advantages
The business can budget for the repayments
purchases of essential equipment can be made in advance and paid back over a number of years
Disadvantages
Interest had to be repaid along with loan
small businesses may find it harder to secure a loan,often if they do its with extreme interest rates,hence they pay back more and are at greater risk
Grants
Advantages and disadvantages
money is given to a business from central or local governments,the EU or the princes trust.A grant doesnt need to be paid back
Advantages
These are often offers as an incentive and a way of helping a business get started or expand
The money does not need to be repaid
Disadvantages
They can be complicated to apply for and can require the business to meet certain requirements
Grants are usually one off payments that are not repeated
Bank overdrafts
Advantages and disadvantages
allows a bank to spend more money than in the bank account
Advantages and disadvantages
-This is usually easy for a business to arrange with its bank
-It allows a business to continue to pay business expenses,despite their being no money in the account
-high interest rates are usually applied when borrowing money from the bank this way
-The overdraft can be withdrawn by the bank at any TIME and then has to be repaid
Mortgage
Advantages and disadvantages
Large sum of money borrowed from the bank,to fund a property for a medium to long term basis
Advantages and disadvantages
It can be paid back over time
the interest rate charged is often lower than the bank loan
-Interest is repaid along with the loan amount
-can be repossed
Trade credit
Advantages and disadvantages
Allows a business to buy goods from suppliers,and pay for them at a later date
Advantages and disadvantages
This allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid
It helps a business to keep going when the cash flow is poor
Discount for prompt payment is lost
Suppliers will be reluctant to continue to offer credit if a business foes not pay within the agreed credit period
hire purchase
Advantages and disadvantages
an asset by paying deposit then monthly payments for
A
-expensive equipment can be bought with only an initial deposit
-The asset,is owned by the business at the end of the repayment period
-The business doesnt own the item last repayment is made
-expensive if interest rates are high
Share issue
Advantages and disadvantages
Selling stocks in the business.PLCS sell on the stock market and LTDS sell shares privately
A
- large sums of money can be raised through sale of shares
- money does not need to be repaid
D
-Dividiends paid to shareholders
-expensive to advertise and organise the sale of shares
sale of assets
Advantages and disadvantages
Selling of assets that the business no longer needs
A
money can be raised,boosting cash flow
the money does not need to be repaid
D
if the finance is required urgently,the business may have to sell the asset for less than its market worth
Could get bad prices for second hand goods if the money is needed quick
Sell and lease back
Advantages and disadvantages
selling an asset and leasing(renting) it back
A
asset is retained,could be an essential and leasing back the main shop/factory/office
-responsibility for maintaining and renewing equipment to the leasing company
D
-Leasing long time can be expensive,may pay back more than it received from the sale
-The business doesnt own equipment.Rental charges add up,paying more for lease
Debentures
Advantages and disadvantages
Loans borrowed from individual by PLCS through the stock market
(PLCS ONLY)
A
Control of business is retained
these can be paid back over a long period of time
D
interest must be paid annually,even if a loss is made,unlike with shares where dividends are only paid out if profits are made
The amount borrowed must be paid back
retained profit
Advantages and disadvantages
Profit reinvested into the business rather than being distributed as dividends
A
-Doesnt need to be repaid
D
-For profit to build up,could take long potentially missing business opportunities
debt factoring
Advantages and disadvantages
A business sells its unpaid customers invoices to a factoring company,The factoring company then collects and keeps customers debts
A
-Responsibility for collecting the debt is passed on to the factor,saving the company time and effort
-Cash flow is improved by receiving an advanced payment of the debts from the factor
D
-The business had to sell the customers debt for a reduced amount,recieves less than is actually owed
-Factoring companies are usually only interested in large amounts of debts
venture capitalists
Advantages and disadvantages
Organisations that invest in established businesses in return for equity(owning a percentage of the company)
A
-Large amounts of investment can be gained
-Venture capitalists are willing to take on more risky investments than banks
D
-venture capitalists have an equity stake, which means control and a share of profits are given up
crowd funding
Advantages and disadvantages
Small amounts of money from a large number of people are raised to fund a new business or a project
A
-Fianance can be raised from individuals,banks see business as to risky
- funds are donated,no repayment
D
-Privacy isnt respected,as ideas become public and can therefore be copied
-there is a low success rate.unlikelyto hit target
Cash flow
Cash is generated by a business through the sale of goods
must be able to
-Pay employees
-buy supplies
-cover expenses
Business has to avoid liquidation
Cash flow problems
Low sales
too much money in stocks
customers taking too long to pay their bills
an increase in expenses
Solutions too cash flow problems
-Low sales
-too much money in stocks
-Customers taking too long to pay their bills
-An increase in expenses,low cash flow
Increase expenses
look for ways to reduce expenses
too much money in stocks/inventory
Use JIT inventory system
Customers taking too long to pay their bills
charge higher interest rates
arrange overdraft where cash flow is low, this means an organisation would be covered
Impact of Cash flow problems
-Unable to pay supplier-stock isnt delivered stopping production>-sales lowered
-Costs a lot to borrow money
-sell unused assets,make staff redundant
-have to find lower quality supplier,reducing quality
What is as cash budget
A cash budget is a document produced to help a business manage their cash flow
it shows receipts and any payments leaving the business
Purpose of a cash budget
-shortage of cash,can get cash inject such as bank loan
-it aids decision making - as it provides cash flow information for
decisions to be based on
-shows the business if they will have a surplus of cash,therefore can plan ahead on purchases to help the business
Postives of a cash budget
-business has more cash than expected(surplus) or a decficit in cash>-business plans more effectively
- used to show lenders or investors,secure investments into the business
- set targets or budgets for individual departments,motivate employees as they have goals to achieve
