Finance Flashcards
What is the role of the finance department?
• Ensuring bills are paid on time e.g. electricity
• Paying wages and salaries
• Managing the budgets for the other departments e.g. marketing
• Chasing up customers who have not yet paid
• Creating final accounts e.g. income statements
What factors may influence a business of the types of finance they use?
• The purpose of the finance
• Objectives of an organisation
• Amount of finance required
• The type of business (not all sources are available to all businesses)
• Length of time the finance is required for
What are sources of finance a business may use?
• Bank overdraft
• Bank loan
• Grant
• Mortgage
• Share issue
• Owner investment
• Loan from family or friends
• Hire purchase
• Crowd funding
• Leasing
• Retained profit
• Venture capital
What is owner investment?
Money that is invested by the owner from their own personal funds
Advantages of owner investment?
-Does not need to be paid back
-Full control of the business is maintained
Disadvantages of owner investment?
-Personal savings may be lost if the business is unsuccessful
What is retained profit?
Profit that has been made by the business in previous years that is then reinvested back into the company
Advantages of retained profit?
Does not need to be repaid
Disadvantages of retained profit?
For profits to build up to use in this way can take too long and good business opportunities may be missed
What is a bank overdraft?
A facility that will allow you to withdraw more money from your account than is available. A bank over draft is a SHORT TERM SOURCE OF FINANCE
Advantages of bank overdraft?
-Can be arranged quickly
Disadvantages of bank overdraft?
-Expensive as high rate of daily interest is charged
-Usually only available for small sums of money
What is a bank loan?
A bank loan is a LONG TERM SOURCE OF FINANCE. It is a fixed amount of money that is given to a business by a bank that must be repaid over time with interest, usually in monthly instalments
Advantages of a bank loan?
-Can be arranged quickly
-Loan can be repaid over a long period of time
Disadvantages of a bank loan?
-Interest has to be paid in addition to the loan amount
What is a mortgage?
A mortgage is a LONG TERM SOURCE OF FINANCE. It is a sum of money borrowed from the bank that is secured against a property and paid back in instalments, usually over a long period of time
Advantages of a mortgage?
-Mortgages are given for a long period of time
-Large amounts of finance can be raised quickly
Disadvantages of a mortgage?
-Interest is charged on loan
-Property can be lost to the mortgage lender if payments are missed
What is a hire purchase?
Used to purchase an asset, such as a delivery van or piece of equipment
A deposit is paid and the remaining amount for the asset is paid in monthly instalments over a set period of time
The business does not own the item until all payments are made
Advantages of hire purchase?
-Expensive assets can be purchased and paid back over time
What is leasing?
Leasing is a way of renting an asset the business requires such as a coffee machine
Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item
Advantages of leasing?
-Large amounts of money are not required up front to lease machinery
-The leasing company are responsible for repairs and maintenance
Disadvantages of leasing?
-Over time it can be a more expensive way to obtain assets
-Assets are never owned by the business
What are loans from family and friends?
Businesses can obtain a loan from family or friends that may not need to be paid back or are paid back with little or no interest
Advantages of loans from family and friends?
-May not need to be paid back
Disadvantages of loans from family and friends?
-Money may be lost if the business is not successful
-Arguments may occur between family members
What is a grant?
A fixed amount of money usually awarded by the government, EU or charitable organisations
Grants are usually given to a business on the condition that they meet a certain criteria such as providing jobs in an area of high employment
Advantages of a grant?
-Does not need to be paid back
Disadvantages of a grant?
-Businesses need to meet certain criteria
-Time consuming to apply for grants and complete paperwork
What is share issue?
A source of finance that is only available to private or public limited companies
Such businesses can decide to issue more shares in the company and obtain finance from their sale
Advantages of share issue?
-Finance raised does not need to be paid back
-Large amounts of finance can be raised
Disadvantages of share issue?
-Shareholders need to be paid a dividend each year
-Shareholders become part owners of the business
What is crowd funding?
Involves getting small amounts of finance from a large amount of people this is usually done through social media or crowd funding websites
Crowd funding investors may donate money, get rewards for their investments or receive a share of the profits
Advantages of crowd funding?
-Access to large amounts of investors
-Fast way to raise finance
Disadvantages of crowd funding?
-A public request for investment risks your project being copied by competitors
-If the targeted amount isn’t reached the money is returned to the investors and the business gets nothing
What is venture capital?
Money that investors provide to a company that is starting up or expanding
Venture capital is usually used when there is an element of risk with the business
Advantages of venture capital?
-Available for more risky investment
Disadvantages of venture capital?
-Venture capitalists may want a share of the business meaning some control may be lost
-A larger return may be required due to the high risk nature of the investment
What are fixed costs?
Costs that stay the same no matter how many units are produced e.g. rent will have to be paid whether a business has produced 0 or 10000 units
What are variable costs?
Costs that change depending on the level of output e.g. the more a business is producing the more electricity used therefore a higher electricity bill
What are total costs?
Costs that are the fixed and variable costs added together
How do you calculate Total Profit?
Total profit = sales revenue - total costs
How do you calculate Selling Price?
Selling price = sales revenue / output
(Take from break even point!)
What is break even?
When a business is making neither a profit nor a loss
The point at which a company has sold enough products or services to have covered all their costs
What would a business need to identify to calculate their break even point?
• Cost of raw materials
• Cost of salaries
• Cost of energy/electricity bills
• Cost of advertising
A break even chart will be produced by a business to identify the break even point
How do you calculate break even point?
Break even = fixed costs / sales - variable costs
What is a cash budget?
A plan of how a business expects to spend money (payments) and receive money (receipts)
What is opening balance?
The money a business has at the start of the week/month
What is closing balance?
The money that you have at the end of the week/month
(this then becomes next week/months opening balance)
What are receipts?
The money you get at the start of each week/month
What are payments?
The money you spend during the weekend/month
What is surplus?
A positive balance, when receipts are greater than payments
What is deficit?
A negative balance, when payments are greater than receipts
Why would a business draw up a cash budget?
-To see if it’s facing a surplus or deficit : if a business is facing a deficit then it will have to think about how this can be avoided
-To see whether another source of finance is needed e.g. a bank overdraft to overcome a month where there may have been a deficit
-To highlight where expenses are particularly high
-To help with decision making e.g. when to make purchases
-Avoid having cash flow problems e.g. more money going out than coming in (liquidity problems)
-Get a loan or mortgage from the bank e.g. can be used as evidence to prove repayments are affordable
-Compare projected and actual figures e.g. sales may have been lower than expected and investigate possible reasons
What are problems associated with cash flow?
- Low sales : e.g. Jan/Feb as people are watching outgoings after Christmas
-An increase in expenses e.g. wages and electricity
-One off payment of new assets e.g. machinery
-Deficit closing balance i.e. more money going out than coming in
-Money tied up in inventory e.g. can’t be sold as it has going out of date/fashion
-Customers are not paying on time which can lead to bad debts
-Suppliers are not giving the business credit which is buying goods but paying for them at a later date
How may a business resolve cash flow problems?
-Introduce new campaigns to increase sales e.g. new promotions to entice customers
-Cutting down on staff overtime to reduce wage costs
-Finding a cheaper supplier of raw materials or negotiating prices to cut down production costs
-Finding cheaper energy suppliers
-Using bank loan/hire purchase/leasing to fund new assets
-Encouraging customers to pay early by offering discounts
-Selling old machinery that is no longer used
Why would a finance department use spreadsheet software?
-Calculate profit using formulae
-Create accounts such as income statements - templates may be used which is less time consuming for the user
-Create charts/graphs which allow the business to show profit levels over time
-Copy and paste data into other software such as Word
-Change figures easily when compared to paper-based documents e.g. formulae will automatically update values
-Perform ‘what if’ scenarios by temporarily changing data to see the effects.
Why would a finance department use word processing software?
-Create financial reports for shareholders
-Create letters to send to customers reminding them to pay their bills on time
Why would a finance department use presentation software?
-Create presentations to show financial performance to shareholders
Why would a finance department use databases?
-Store contact details of customers to remind them of their payment dates
Why would a finance department use email?
-Remind customers of their outstanding payments
Why would a finance department use online banking?
-Pay bills online e.g. electricity
-Transfer money to a customer or receive payment from them
Why would a finance department use accounting software e.g. Sage?
-Create final accounts such as income statments
Why would a finance department use electronic payment systems e.g. Apple Pay?
-Receive payment from customers
Disadvantages of hire purchase?
-Interest is charged on hire purchase items
-Equipment is not owned until final payment is made
Sales revenue
sales that a business has received throughout the year by selling to customers
Cost of sales
the cost of producing a product or buying a product in to sell onto customers
Gross profit
the profit made from buying and selling goods
Expenses
items that a business must pay for to keep running e.g. electricity, wages, loan repayments
Profit/loss for the year
the profit made once expenses have been subtracted
Why would a business produce an income statement?
• To calculate total costs of expenses
• To calculate the profit/loss made for the year
• Legal reasons (all limited companies are required to produce and income statement)
• Tax reasons (profit needs to be calculated so businesses can accurately calculate their tax payments)
• To calculate cost of sales
• To compare with previous years or other companies
Gross profit calculation
Sales revenue - cost of sales
Profit/loss for the calculations
Gross profit - expenses
