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Nat5 Business Managment > Finance > Flashcards

Finance Flashcards

1
Q

What is the role of the finance department?

A

• 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

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2
Q

What factors may influence a business of the types of finance they use?

A

• 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

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3
Q

What are sources of finance a business may use?

A

• Bank overdraft
• Bank loan
• Grant
• Mortgage
• Share issue
• Owner investment
• Loan from family or friends
• Hire purchase
• Crowd funding
• Leasing
• Retained profit
• Venture capital

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4
Q

What is owner investment?

A

Money that is invested by the owner from their own personal funds

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5
Q

Advantages of owner investment?

A

-Does not need to be paid back

-Full control of the business is maintained

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6
Q

Disadvantages of owner investment?

A

-Personal savings may be lost if the business is unsuccessful

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7
Q

What is retained profit?

A

Profit that has been made by the business in previous years that is then reinvested back into the company

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8
Q

Advantages of retained profit?

A

Does not need to be repaid

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9
Q

Disadvantages of retained profit?

A

For profits to build up to use in this way can take too long and good business opportunities may be missed

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10
Q

What is a bank overdraft?

A

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

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11
Q

Advantages of bank overdraft?

A

-Can be arranged quickly

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12
Q

Disadvantages of bank overdraft?

A

-Expensive as high rate of daily interest is charged

-Usually only available for small sums of money

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13
Q

What is a bank loan?

A

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

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14
Q

Advantages of a bank loan?

A

-Can be arranged quickly

-Loan can be repaid over a long period of time

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15
Q

Disadvantages of a bank loan?

A

-Interest has to be paid in addition to the loan amount

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16
Q

What is a mortgage?

A

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

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17
Q

Advantages of a mortgage?

A

-Mortgages are given for a long period of time

-Large amounts of finance can be raised quickly

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18
Q

Disadvantages of a mortgage?

A

-Interest is charged on loan

-Property can be lost to the mortgage lender if payments are missed

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19
Q

What is a hire purchase?

A

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

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20
Q

Advantages of hire purchase?

A

-Expensive assets can be purchased and paid back over time

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21
Q

What is leasing?

A

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

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22
Q

Advantages of leasing?

A

-Large amounts of money are not required up front to lease machinery

-The leasing company are responsible for repairs and maintenance

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23
Q

Disadvantages of leasing?

A

-Over time it can be a more expensive way to obtain assets

-Assets are never owned by the business

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24
Q

What are loans from family and friends?

A

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

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25
Q

Advantages of loans from family and friends?

A

-May not need to be paid back

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26
Q

Disadvantages of loans from family and friends?

A

-Money may be lost if the business is not successful

-Arguments may occur between family members

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27
Q

What is a grant?

A

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

28
Q

Advantages of a grant?

A

-Does not need to be paid back

29
Q

Disadvantages of a grant?

A

-Businesses need to meet certain criteria

-Time consuming to apply for grants and complete paperwork

30
Q

What is share issue?

A

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

31
Q

Advantages of share issue?

A

-Finance raised does not need to be paid back

-Large amounts of finance can be raised

32
Q

Disadvantages of share issue?

A

-Shareholders need to be paid a dividend each year

-Shareholders become part owners of the business

33
Q

What is crowd funding?

A

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

34
Q

Advantages of crowd funding?

A

-Access to large amounts of investors

-Fast way to raise finance

35
Q

Disadvantages of crowd funding?

A

-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

36
Q

What is venture capital?

A

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

37
Q

Advantages of venture capital?

A

-Available for more risky investment

38
Q

Disadvantages of venture capital?

A

-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

39
Q

What are fixed costs?

A

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

40
Q

What are variable costs?

A

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

41
Q

What are total costs?

A

Costs that are the fixed and variable costs added together

42
Q

How do you calculate Total Profit?

A

Total profit = sales revenue - total costs

43
Q

How do you calculate Selling Price?

A

Selling price = sales revenue / output

(Take from break even point!)

44
Q

What is break even?

A

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

45
Q

What would a business need to identify to calculate their break even point?

A

• 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

46
Q

How do you calculate break even point?

A

Break even = fixed costs / sales - variable costs

47
Q

What is a cash budget?

A

A plan of how a business expects to spend money (payments) and receive money (receipts)

48
Q

What is opening balance?

A

The money a business has at the start of the week/month

49
Q

What is closing balance?

A

The money that you have at the end of the week/month

(this then becomes next week/months opening balance)

50
Q

What are receipts?

A

The money you get at the start of each week/month

51
Q

What are payments?

A

The money you spend during the weekend/month

52
Q

What is surplus?

A

A positive balance, when receipts are greater than payments

53
Q

What is deficit?

A

A negative balance, when payments are greater than receipts

54
Q

Why would a business draw up a cash budget?

A

-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

55
Q

What are problems associated with cash flow?

A
  • 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

56
Q

How may a business resolve cash flow problems?

A

-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

57
Q

Why would a finance department use spreadsheet software?

A

-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.

58
Q

Why would a finance department use word processing software?

A

-Create financial reports for shareholders

-Create letters to send to customers reminding them to pay their bills on time

59
Q

Why would a finance department use presentation software?

A

-Create presentations to show financial performance to shareholders

60
Q

Why would a finance department use databases?

A

-Store contact details of customers to remind them of their payment dates

61
Q

Why would a finance department use email?

A

-Remind customers of their outstanding payments

62
Q

Why would a finance department use online banking?

A

-Pay bills online e.g. electricity

-Transfer money to a customer or receive payment from them

63
Q

Why would a finance department use accounting software e.g. Sage?

A

-Create final accounts such as income statments

64
Q

Why would a finance department use electronic payment systems e.g. Apple Pay?

A

-Receive payment from customers

65
Q

Disadvantages of hire purchase?

A

-Interest is charged on hire purchase items

-Equipment is not owned until final payment is made

Nat5 Business Managment (5 decks)

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