Finance Flashcards
Why does a business need finance?
fund expansion, replace worn out assets
What is external source of finance?
raising funds from outside the business allowing them to raise larger amounts
What is an internal source of finance?
Raising funds within the business meaning they don’t need to pay high interest
What is an example of Internal sources for finance?
Owners capital
Retained profit
Selling unwanted assets
What is an example of external sources of finance?
Bank overdraft
Trade credit
Crowdfunding
What is retained profit?
When the business has worked out their profit they can decide wether to keep it or reinvest in the business
What are the advantages of retained profit?
A cheap form of finance
No interest
doesn’t reduce the ownership
What are drawbacks of retained profit?
Growth may be slow if it relies on retained profit
What is owners capital?
money that a entrepreneur has saved up
What are disadvantages of owners capital?
only available to businesses with profit
What are advantages of Owners Capital?
Cost effective
No need to repay money
not going to lose control
What is selling unwanted assets?
Selling spare land, buildings, machinery that are no longer needed by business
What is a Loan?
an amount of money borrowed for a set period with an agreed repayment schedule
What is an advantage to loans?
No loss in control
Repayments are spread out
What are disadvantages of loans?
May need to risk an asset as security
Interest must be paid on top of the loan
What is a bank overdraft?
A short term source of finance that is available to help fund the day to day payments required
What are the disadvantages of Over draft?
Interest is charged daily
What is a benefit of Overdraft?
can meet short term cash flow issues
business can continue trading
Interest is paid only on the amount borrowed
What does taking on a new partner mean?
contributes to finance to the business
What are benefits of taking on a new partner?
new fresh ideas and skills
What is a drawback of taking on a new partner?
they are entitled to a share of the company
What is a debtor?
They owe you
What is a creditor?
You owe them
What is a share issue?
small businesses can set up as limited companies and raise finance by selling shares
What are advantages of Share Issue?
There is no interest to be paid
Cost does not need to be repayed
What are Drawbacks of share issue?
loss of control
Need to satisfy shareholders expectations
What is trade credit?
a firms supplier allowing them to have the goods and pay them back later
What are disadvantages of Trade Credit?
Difficult for new businesses
The goods must be paid for even if they don’t sell
Dangers of losing future arrangements if not paid in time
What are the benefits of trade credit?
allows business to use the goods before they pay the suppliers
Helps when there is a shortage of funds
usually interest free
How do you calculate revenue?
Selling price per unit x quantity sold
What is revenue?
income gained by a business from selling goods and services
What are costs?
the spending that occurs to set up and run a business
What are fixed costs?
the costs that do not change with output
What are variable costs?
costs which change as a result of change in output
What is an example of variable costs?
Raw Materials
Wages
Electric/gas/water
What is an example of Fixed Costs?
Rent
Business Rates
Salaries
Insurance
What are peace rates?
changes on how much are produced
How do you calculate the Total Costs?
Fixed Costs + Variable Costs
What is profit?
The amount of money they made from a product
How do you calculate profit?
Total Sales - Total Cost
What is Gross profit?
the profit made before any operation expenses or interest has been deducted
What is Net Profit?
Shows how much the business has left to reinvest
How do you calculate Gross Profit?
total revenue - cost of sales
How do you calculate Net Profit?
total revenue - cost of sales - other expenses
How is a negative number written in finance?
in brackets
How do you calculate the gross profit margin?
Gross profit
—————————— x100
Sales revenue
How can you increase a businesses sales revenue?
Lowering the selling price may increase demand
Increasing prices if customers are prepared to pay it
Increasing assets of a product
What are ways to improve a gross profit margin?
Increase sales revenue
lower cost of sales
How to calculate the Net Profit Margin?
Net Profit
————————- x 100
Sales Revenue
What is the Average Rate of Return?
a quantitative method of deciding wether an investment is worthwhile
How do you calculate the ARR (Average Rate of Return)
Average Profit from investment
—————————————————– x100
Cost of the investment
How do you calculate the Average Profit from Investment?
Add all numbers
Take away from initial investment
divide by the number of years
What does it mean to break even?
the sales revenue is the same as the total costs
How do you find the break even point on a graph?
Where the Sales revenue and Total Costs meet up
How do you calculate the Break Even Point?
(Sales price - Variable costs)
What is Cash flow?
the movement of money into and out of a business bank account
What is Inflow?
The money that flows into a bank account e.g loans
What are OutFlows?
the money that goes out of a bank account e.g wages
What is Net Cash Flow?
The difference between the inflows and the outflows
What is a cash flow forecast?
a financial document that shows the expected flow of money
How do you calculate Total inflows?
investment + sales
How do you calculate total outflows?
raw materials + wages + marketing + set up costs
How do you calculate Net Cash Flow?
total inflows - total outflows
How do you calculate Opening balance?
previous months closing balance carried over
How do you calculate Closing Balance?
Opening balance + Cash Flow
