Finance Flashcards
What is revenue
Income that a business receives from selling it’s goods and services
Explain fixed costs
These are costs, such as rent and insurance, which do not change when the level of output or production alters. They remain the same, regardless of the level of production.
Explain variable costs
Examples of these costs include wages and expenditure on fuel and raw materials. They rise directly with the level of output, so if output or production increases, variable costs increase to.
What is sources of finance
A means of raising funds that are needed by a business for purposes such as expansion.
What is raising finance
The process of getting the money needed, for examples to start or expand a business.
What is an asset and examples of
Something that is an owned by a business, such as land, buildings, vehicles and machinery.
Why would new businesses need to raise finance
To buy assets needed to operate the business, such as property, machinery and vehicles
To pay for promotion(for example, advertising) that will be essential to let consumers know about the business and its products.
To buy raw materials, fuel and components that will be needed for the business to start trading .
Why would an existing business need to raise finance
To buy assets such as raw materials, components and machinery to allow the business to increase sales and to grow.
To invest in developing new products and promoting these products to customers.
To make the business more efficient, possibly by buying production line technology or training employees.
What is internal source of finance and examples
Money that is available within the business, for example retained profits from previous years.
What are three internal sources of finance
Retained profits
Trade credit
Selling assets
Advantages and disadvantages of retained profit
Advantage - avoids paying interest on loans
Disadvantage-only available to profitable businesses, owners receive less of the profits
Advantages and disadvantages of trade credit
Advantage - a free source of finance
Disadvantage - this finance is usually only available for 90 days
Advantages and disadvantages of selling assets
Advantages - money may be available quickly, avoids interest charge
Disadvantage - assets not available to business in the future, sale and lease back requires future payments to use the asset
What are retained profits
The part of the business’s annual profits which is kept within the business to finance future investments
What is trade credit
A period of time which suppliers allow customers before payment for suppliers must be made.
What is an external source of finance and example
Refers to money outside the business, for example, a loan from a bank
What is a share issue
When a company sells additional shares in the business to raise finance
What are six external sources of finance
Family and friends
A new share issue
Loans and mortgages
Overdrafts
Hire purchase
Government grants
What is a loan
An amount of Money provided to a business for a stated purpose in return for regular payments, including interest charges. Usually lent over a short period of time, for example 5 years
What is a mortgage
A loan from a bank or building society that is used to buy land and buildings such as an office or shop. Usually lent over a long period for time, for example 25 years.
What is overdraft
A flexible loan which businesses can use, whenever necessary, up to an agreed limit
What is hire purchase
A source of finance under which business pay for assets by making an initial payment and then paying instalments over time.
What is a government grant
A sum of money given to an entrepreneur or business by the government for a specific purpose
What are the advantages and disadvantages of family and friends as a external source of finance
Advantage - can be qucik and easy to arrange, there may be no interest payments
Disadvantages - family and friends may have limited finical resources, the money may need to be repaid at short notice, the business plan is less likely to be scrutinised for errors and issues
Advantages and disadvantages of a new share issue
Advantages - Can raise large sums of finance, No interest payments
Disadvantages - only available to companies, shareholders will expect to receive part of profits as dividends, owners may lose control of the business if they sell more than 50% of all shares
Advantages and disadvantage of loans and mortgages
Advantages - assets can be paid for over a long period of time, may be arranged quite quickly
Disadvantages - can be costly in terms of interest payments, collateral may have to be provided for large loans
Advantages and disadvantages of overdraft
Advantages - flexible as only paid for when needed, can help businesses over come cash shortages
Disadvantages - can be costly in terms of interest charges, bank may ask for repayment as short notice
Advantages and disadvantages of hire purchase
Advantage - Spreads the cost of assets such as vehicles over time
Disadvantage - assets are not owned until the final payment is made, can have high interest payments
Advantages and disadvantages of government grants
Advantages - May not need to be repaid, can provide finance for new businesses
Disadvantage - can require complex forms to be completed, will only provide part of the finance needed
What influences a business choice of sources of finance
Type of business - only companies can sell shares, so sole trader are more likely ton use friends and family
Assets owned by a business - suitable assets may be sold or used for sale and leaseback deals.
Risk associated with the business - a high risk business may find it difficult to negotiate a bank loan or mortgage
What is cash
Notes and coins that a business holds or money in it’s bank account
What is cash flow
Money that flows into and out of a business on a day-to-day basis
Benefits of positive cash flow
Can take advantage of opportunities to develop new products and new markets(if sufficient cash if available)
Will not need an expensive overdraft to pay it’s bills
Is better able to arrange a long term loan with lower interest rates
What are the consequences of managing cash badly
Business runs out of cash
Unable to pay bills on time
May even stop trading
What is a cash flow forecast
A plan of the expected inflows to and outflows from a business over a period of time
What is cash inflow
Money received by a business from it’s activities
What is cash outflow
Money paid by a business to finance it’s activities
What is net cash flow
A business’s cash inflows minus it’s cash outflows over a period of time
What is the opening balance
The amount of money available to a business at the start of an accounting period
What is the closing balance
The amount of money available to a business at the end of an accounting period
What does a cash flow forecast tell you
Helps identify periods when a business may be short of cash.
What are solutions to cash flow problems
Increases cash inflow
Decrease cash outflow
Use an overdraft
Rescheduling payments
What is the difference between cash flow and profit
Profit shows the extent to which a business’s revenue exceeds its total costs over a trading period.
Cash flow is the money that flows in out of the business each day. It is related to the timings and payments and receipts.
A business can still be profitable but short of cash if it’s customers are slow to pay
What is average rate of return
Compare the average yearly profit from an investment with the cost of the investment is stated as a percentage
What is break even output
The level of production at which a business’s total costs and revenue from sales are equal
What is a break even chart
Shows a business’s costs and revenues and the level of production needed to break even
What does the break even chart tell us
Break even output-this occurs when revenue equals total costs.
Loss making range of output-this shows how many units need to be sold for revenue to be more than total costs
Profit making range - levels of output where there is units be sold which are exceeding costs to make a profit
Margin off safety - shows how much higher the current level of output is than break-even output.
What is margin of safety
Measures the amount by which a business’s current level of production exceeds it’s break-even level of output
What are the advantages of break even analysis to a business
Break even charts show the facts of changes in price. If the business increases its price it will need to sell fewer units of output to reach break even output.
If a business faces changing costs these will be shown on a break-even chart. A rise in costs will mean that a business needs to sell a higher level of output to break even.
If a business is applying for a bank loan, it will be more likely to get it if it has carried out break-even analysis
What are disadvantages of break even analysis
A break even annals assumes that the business sells all the output that it produced. If it does not sell its output, it will not receive the revenue.
If costs and prices change regularly, the level of a business break even output will change to regularly . This makes it much more difficult to use break even analysis effectively
What are four main reasons a business may prepare a finical statements
Assess business performance
To help the business’s mangers to make decisions, such as wether or not to expand
To help the investors and other stakeholders making decisions about their dealings with the business
To abide by UK law - many business in the UK are obliges by law to prepare financial statements
What are the two major finical statements business prepare
Income statements
The statements of financial position(also known as a balance sheet)
What is an income statement
A financial statements showing a business revenues and costs and therefore it’s profit or loss over a period of time
What does an income statement show
The revenue that a business earns over a trading period
It’s costs of production over the same period of time
The profit or losses that result during that trading period
What 7 calculations are in an income statement
Revenue
Cost of sales
Gross profit
Overheads
Operating profit
Tax and interest
Net profit
What is a statement of financial position
This sets out the assets and liabilities that a business has on a particular day
What is liability
A sum of money that is owed by a business to another business or individual
What does a statement of financial positions show
The sources of finance used by the business
Assets that the business has purchased
The date on which it was drawn up
What 6 calculations are included in a statement of financial position
Non current assets
Current assets
Non current liabilities
Current liabilities
Net assets
Total equity
