Finance Flashcards
What are the 12 sources of finance
Bank loan
Mortgage
Bank overdraft
Share issue
Grant
Hire purchase
Debt factoring
Crowd funding
Sale of assets
Retained profit
Venture capital
Debentures
bank loan
2 adv 1 disadv
finance borrowed from the bankand repaid with interest
+can be repaid in instalments
+can be received quickly with minimum paperwork
-repaid with interest
commercial mortgage
2 adv 2 disadv
finance borrowed from the bank to purchase property
+large amounts can be raised
+long repayment time so more affordable
-property is secured against the loan
-interest applied
bank overdraft
1 adv 2 disadv
an agreement to use more money than you have in your account
+easy to organise in app or over the phone
-only available for small sums of money
-interest is chaarged daily- expensive borrowing
share issue
2 adv 2 disadv
selling part ownership by inviting shareholders or advertising on stock market
+no interest or repayments
+large amounts raised
-dilutes ownership- votes at AGM
-profits have to be shared/ dividends paid
grant
1 adv 2 disadv
finance from the government that does not need to be repaid
+does not need repaid
-time consuming due to amount of paperwork required
-criteria needs to be met
leasing
2 adv 3 disadv
when a company rents an asset e.g equipment or property
+no cash outlay- just monthly rental fee
+landlord wll be responsible for maintenance
-asset is never ownede
-may cost more in the long term
-high termination fees to edn contract early
hire purchase
1 adv 2 disadv
buyinh an asset and paying in monthly instalments
+spreads cost over time- helps cash flow
-asset not towned until final payment
-high interest added to payments
debt factoring
2 adv 1 disadv
selling the value of your invoices/ debts to a debt factoring company
+reduces the chance of ‘bad debts’
+time and effort saved from unpaid bills
-loss of finance as debt is sold for less than original value
crowd funding
2 adv 2 disadv
involves getting small amounts if finance from a large group of people usually on the internet or social media
+access to large amout of investors worldwide
+can be fast to raise finance due to social media/ instant donations
-a public request for investments means competitors could copy ideas
-if target not reached, money will need to be returned
sale of assets
1 adv 2 disadv
selling of any assets e.g equipment that is no longer required (internal source)
+no debt or interest payments incurred
-could take tine to sell so not useful for cash flow
-asset will ne sold at less than price when purchased
retained proft
3 adv 1 disadv
reinvestment of profits made in previous year (internal source)
+does not need repaid
+no debt incurred
+no interest payments
-limited amount may be available
venture capital
2 adv 1 disadv
when an investor provides money to a startup or expanding business that others see as risky
+capital can be gained
+specialist knowledge/ contacts can be given by the investor
- equity stake gained by investor meaning share of profits and say in the business
debentures
2 adv 1 disadv
long term loans paid on specific date that are sold on the stock market
+large amounts can be raised
+holders are creditors and not owners so control of business not lost
-a fixed rate of interest is paid annually- regardless of profits
7 purposes of an income statement
TO COMPARE TO PREVIOUS YEAR- to help make decisions on how to improve
FOR TAX PURPOSES- to calculate corporation tax due to the government
CALCULATE PROFIT FOR THE YEAR- to make decisions on how it will be appropriated
CALCULATE GROSS PROFIT- to show how effective sales and manufacturing costs are
CALCULATE COST OF SALES- to make decisions on mark up
CALCULATE TOTAL EXPENSES- to see how much the firm is spending on overheads
CALCULATE SALES- to show the income being made selling goods
what is sales revenue
the value of money received from selling goods and services
what is cost of sales
amount spent on purchases and selling goods
(opening inventory + purchases- closing inventory)
what is gross profit
profit made from buyiing materials and selling goods
(sales revenue - cost of sales)
what are expenses
running costs and overheads e.g wages, advertising, rent, electricity, gas etc.
what is profit for the year
final profit which can be appropriated as dividends or reinvested
(gross profit- expenses)
How do you calculate gross profit
Sales revenue less (-) cost of sales
How do you calculate profit for the year
Gross profit less (-) less expenses
Profitability ratios
These show how profitable a firm is. Nearly all of the figures come from the income statement
Gross profit percentage
For every £1 of sales revenue many pence of gross profit is made, calculated by dividing gross profit by sales revenue and multiplying by 100
profit for the year percentage
for every £1 of sales revenue, how many pence proft for the year. profit for the year/ sales revenue x100
Return on equity employed (ROEE)
Shows shareholders return on investment, for every £1 invested how many pence returned. Calculated by dividing PFTY by opening equity and multiplying by 100
5 ways to improve gross profit percentage
- increase selling price
- find a cheaper supplier
- negotiate cheaper price with current supplier
- buy raw materials in bulk to receive bulk buying discount
- start promotion to encourage more sales
2 ways to improve profit for the year percentage
- improved expense control e.g finding cheaper utility suppliers, reducing overtime
- any action that improves gross profit
2 ways to improve return on equity employed
- increase gross profit
- reduce expenses to increase PFTY
8 users of financial info and how they use it
Lenders (bank)- to determine whether to lend finance by checking the liquidity of the statement of financial position
Employees- to check profitability to see if they are being paid fairly. Is their job secure?
Government- to calculate tax by using the income statement (HMRC) (has correct tax been paid)
Owner (shareholders)- will use the ROEE ratio to see the level of returns expected, and compare it to other investments
Suppliers- to check liquidity to ensure that payment can be made for inventory supplied.
Competitors- to make comparisons to assess their position against competitors
Financial journalists- to write articles about company performance in national newspapers
Trade unions- to assess if members are paid fairly
6 purposes of cash budgets
To identify periods of deficit to allow corrective action to be taken e.g reduce spending, find suitable sources of finance
Used to set targets- help motivate employees
Highlight periods of surplus- plan investments/ capital expenditure
Compare actual performance to estimated- help managers make decisions
Control overspending- estimates future cash position
Can be shown to bank managers- help acquire additional funding e.g bank overdraft, bank loan
Opening balance- cash budget
Cash at the start of the financial period
Receipts (income)- cash budget
Any money received by the business
Payments (expenditure)- cash budget
Any money spent by the business
Closing balance- cash budget
Cash available at the end of the financial period
How to calculate closing balance
Opening balance + receipts - payments = closing balance
Deficit
Expenditure exceeds income
Surplus
Income exceeds expenditure
6 problems and solutions in cash budgets
Falling sales revenue- start a sales promotions e.g promotional price to encourage sales
Increased capital expenditure spending on in current assets- arrange to buy in hire purchase or spread payments
Increased raw material costs- find a cheaper supplier or negotiate a new price with current supplier
Increasing wage costs- lay off temporary workers or reduce overtime hours
Increasing expenses e,g electricity- find a cheaper utilities supplier
Deficit closing balance- arrange an overdraft to cover the shortage temporarily
4 other solutions for cash flow problems
- Ask supplier for extended credit terms
- Arrange suitable short term finance e.g bank loan
- Offer cash discounts to customers for prompt payments
- Hold less inventory to reduce cash tied up.
6 purposes of preparing a statement of financial position
- It is a legal requirement for limited companies
- It calculates the net equity (value o the firm)
- It summarises assets and liabilities
- It is used to calculate liquidity ratios
- It shows the working equity
- Used by creditors to determine the risk of lending
Non current assets
Items owned by the business for more than a year e,g motor vehicles, premises
Current assets
The value of cash or near cash items available to the business leg cash, cash in bank, debtors (trade receivables)
Current liabilities
Money owned by a business for a period of less than a year elf suppliers, bank overdraft
Non current liabilities
Money owned by a business for more than a year e.g loans, mortgages
Working equity
The ability to pay short term debts calculated by current assets- current liabilities
Net assets
Show the value of the company once all liabilities have been deducted from assets
Equity and reserves
Show the money invested and any retained profit
What do efficiency ratios do
Show how well an organisation uses its resources. Calculated from income statement
What is the rate of turnover inventory ratio
Cost of sales/ average inventory (average inventory is opening - closing inventory/ 2)
Shows the number of times inventory is replaced
Esther causes the turnover to be low
Low advertising, poor quality goods, recession etc.
How to improve rate of inventory turnover ratio
Have a sale
Use marketing techniques to shift inventory
Negotiate sale or return with supplier
What do liquidity ratios show
Ratios calculated for SoFP showing ability to repay short term debts (<1 year)
What is a current ratio
( working equity ratio)
Current assets/current liabilities = x:1
Shows the ability to pay short term debts, idea, ratio is 2:1. £2 owned for every £1 owed.
Acid test ratio
Current assets - closing inventory / current liabilities
Shows ability to pay short term debts in a CRISIS SITUATION, idea, ratio is 1:1.
£1 owned for every £1 owed so all debts can be paid.
How to improve liquidity ratios
Increase current assets
Sell any unnecessary non current assets
Decrease current liabilities.
4 benefits/ purposes of ratios
- Ratios are easier to understand and analyse than the raw figures
- They allow comparisons to be made from:
Year to year
Against competitors
Against industry averages - They will facilitate decision making by identifying trends
- Highlight poor performance so corrective action can be taken.
4 limitations of ratios
- Info is historic so it is not relevant to current/ future position
- Different accounting procedures/ valuations may lead to comparisons being invalid
- Comparisons are into valid if you do like with like e.g similar size or similar industry.
- It does not show external factors e.g recession or internal factors e.g highly motivated staff.
