Finance Flashcards
+ retained profit
Can invest more risk free
Doesn’t have to borrow money, less debt
Doesn’t have to try to raise the profit by selling any shares
Share (equity) capital
Money invested in business by shareholders or owners
Long term funding
Capital employed
Where business has got their money from
Capital employed includes
Share capital (equity)
Debt capital
Retained profits
Debt capital
Banks-loans and mortgages that need to be repaid
The proportion of long term funding that is debt equation - GEARING
Debt capital (NCL) / total CE (NCL+ EQUITY) x100
Gearing
Measure of risk >50%, STRUGGLE OT TAKE OUT MORE LOANS
Higher= more debt used to fund the business
Higher= business is more vulnerable to changes in interest rate
<20%, investors may ask why, why haven’t they borrowed money to expand, do they not have any plans to grow -not ambitious enough
Equity vs Debt capital
Equity
Shareholders investments
Expect dividends
More control, entitled to say how company is run , may have different objectives
Debt
Money borrowed by bak to invest
Money reaped over time depending on loan
Interest rate
Income budget
Monetary target for revenues
Used to set sales targets for departments
Informed by past data , seasonality and market research
Used to generate cash flow forecast
Why set budget s
Clear targets for team
Motivation
Allows purchasing decisions to be made by experts in that area
Enhances credibility of business plan( help gain investors)
Allows performance t be reviewed by variance analysis
Difficulties in setting budgets
Reliant on accuracy of data
Reliant of skills of entrepreneur
Unforeseen changes in external environment
Changes in costs
Competitor actions
Time consuming and expensive
Variance analysis
Comparing budget to actual performance
Budget - Actual
Net cash flow
Cash inflows- Cash outflows
Opening balance
Money left, last months closing balance
Closing balance
Opening balance + net cash flow (Inflows-outflows)
Why create cash flow forecast
Identify cash flow problems
Ensure b. Has sufficient working capital to operate (pay wages/suppliers)
Take actions to prevent problems
Show good financial performance, gain investors
Improving cash flow
Increase/reduce selling price- depends on accurate PED, how consumers react
Increase marketing- high costs
Sell equity in business, ask partner, invest- but loose control
Break even
Fc/cpu
CPU= sp-vcpu
What does break even point mean
Total revenue is equal to total costs
B. Is not making profit or loss
If below BE= loss
If above BE=profit
Contribution
Pays FC
When they are paid
Goes towards profit
Calculate Total contribution
Either
CPU x output
or
TR-Tvc
Strength of Break Even
Helps business see how many units need to be sold of any new product
Predicts profit with diff levels of output
Assess impacts fo changes of price and cost
Hello set target
Weakness of break even
Depends on reliability of forecasts
Assumes constant returns
Doesn’t include unforeseen changes
Gross profit
REV-COS
OP
Gross profit-operating expenses
Profit of the year
OP+proft from other-net costs+tax
Internal sources of finance
Selling assets
Owners investing
Debt factoring - internal source of finance -short term
Only used if business needs help, not first place go to raise finance
Buys debt from b, they collect the money from customer - increase receivable days, get cash immediately , reduce risk fo bad debt
However. Harm rep, if debt factoring is agg when chasing customer
May only receive 80% of sales value
Overdraft- short term
Arrangement with bank to overspend on account
Cover seasonal changes in demand and short term falls of cash ie awaiting customer payment
However, high rate of interest
May need to support evidence that can pay back to bank, time consuming
Short term sources of finance
Debt factoring
Overdraft
Long term sources of finance
Retained profit
Share capital
Loans
Venture capital
Retained profit - internal
Money saved by you, ie pocket money
Can be used for any purposes
Invest in new capital, machinery, generate revenue for b. In long run
Quick, easy accessible
Not restrictions, in dividends or interest, no loss of control
Reduces availability of dividends to shareholders
Opportunity cost
Share capital
Equity invested by shareholders in return for a share of profits an ownership of b- part ownership
Limited liability, encourage investors
Don’t have to pay dividends
Additional expertise
Investment is permanent
Improves brand image- easier to raise loan capital
But
Pressure to pay dividends
Loss of control
Loans
Funds needed to be repaid with interest over fixed period
Relatively quick and easy to secure , specific to business, fixed repayment scedule , no loss for ownership
But
Inflexible
Interest payments
Venture capital
Money invested into business by another businesss
Used to finance expansion of small to medium size
Useful if can’t find investment from other sources
Source of advice snd support
But
Partial loss of ownership
Conflict
