Finance Flashcards
whats start up capital?
capital needed by an entrepreneur when starting a business
working capital
capital needed to finance day to dy expenses and pay short term debt
Non current/ fixed assets
resources owned by a business which will be used for a period longer than a year, like building and machinery
capital expenditure
spending by a business on non current assets
long term finance
debt used to finance the purchase of non current assets or expansion, borrowing not expected to be returned less than 5 years
short term finance
loands or debt business expects to pay back within a year
retained profit
profit remaining after all expenses have been paid, and is reinvested back into business
overdraft
agreement with bank which allows a business to spend more money than it has in account, loan has to be repaid within a year
trade receivables
amount owed to a business by customers who bought goods on credit
debt factoring
selling trade receivables to improve business liquidity
bank loan
provision if finance by a bank which business. will repay with interest over a period of time
leasing
obtaining the use of non current asset by paying a fixed amount for a period pf time
mortgage
long term loan used to purchase land or buildings
debenture
a bond issued by a company to raise long term finance usually at a fixed rate pf interest
equity finance
permanent finance provided by owners in a limited company
micro finance
small amounts of capital loaned to entrepreneur in countries where business finance is difficult to obtain
crowd funding
financing a business idea by obtaining small amounts of capital from a large amount of people
why business needs finance
- start up capital
2/ invest in latest technology and machinery - finance espansion
- pay day to day expenses
- Markey research
what are the internal sources of finance
- retained profit
- sales of non current assets
3 reduce inventory - cash balance
- reduce trade recievables
what are other sources of finance
- micro finance
- crowd funding
why’s cash important to business
without cash, business will not be able to pay day to day expenses and business will be forced into liquidation
whats cash flow forecast
estimate of future cash inflows and outflows in business, if inflows more than outflow=positive chasflow, otherwise negative cashflow
sources of inflow
- sales. of products
- payment by debtors
- borrowing money
- sales of assets
- investors like shareholders putting in money
sources of Chas outflows
1.purchscing materials
2. paying wages
3. repaying loans
4. purchasing fixed assets
importance of chaflow forecast
- tells manager how much cash available. to pay debt
- how much business needs to borrow to prevent insolvency
- tells whether business is holding too much cash which can be reinvested
uses of cashflow forecast
- starting up business
- keep bank informed
3.manage nbu8siness
whats liquidity
ability of business. to pay. short term debt
what does length of working capital cycle depend on
- level of invenotries
- how quick. business. finds buyers
- how long it takes to sell products
howtoimproveworkingcapital
1.reduceˆnvintorylevel
2.negotiatelongercredittermswithsupplier
3.reducetradereceivables
whats credit sales
goods sold to customers who will pay for these at an agreed date
whats profit
difference between revenue and total cost
what are the types of profit
- gross profit
- profit
- retained profit
revenue
price times quantity sold
total costs
cost of sales plus expenses
gross profit
difference between revenue and cost of sales
importance of profit to business
- reward for business owners for their risk
- measure success of business
- decide whether or not continue make product
- purchase fixed assets and expand
- helps attract investors
difference between cash and profit
- many business that makes profit but don’t last since they can’t manage cash
2.money invested in business or borrowed will increase cash but not profit - capital expenditure decreases cash but not profit
- selling goods on cash will increase profit but not cash
whats an income statement
financial record of revenue, costs and profit of a business
importance of profit TO STAAKEHOLDERS
- shareholders need it to distribute it as dividends
- employees job security
- lenders make sure profit is enough to repay debt
- government give high taxes
- suppliers
- managers compare to competitors
statement of financial position
accounting statement that records assets, liabilities and owners equity, shows FINANCIAL HEALTH OF BUSINESS
assets
resources owned b y business
liabilities
debt of business that will be payed in future
non current assets
resources that business owns and expects to use for a long period of time like machinery
current assets
resources business owns that expects to convert into cash
trade receivables
amount of money owed to business when customers pay on credit
current liabilities
debt business expects to repay
trade payables
debt business has to pay to supplier for goods bought on credit
owners equity
amount owed by business to its owners
why’s it important to check business performance
1.identify strength and weakness
2. show wether business is. meaning objectives
3. improve future performance
gross profit margin(ratio between profit and revenue)
gross profit/revenue X100
net profin margin
pofit/revenue X100
Profit
revenue- expenses+sales
return on capital employed
profit/ capital employees X100
