Finance Flashcards
What does short term sources of finance mean?
Sources of finance that firm will get access to instantly
What are the sources of short term finance
Sale of asset - firm will sell off piece of equipment that it is not using
Government grant - lump sum of money that firm supplies from government
Trade credit - supplier will deliver supplies to firm and allow them to pay at later date for the goods
Factoring - firm will collect all outstanding debts and sell them on to another firm, a debt collection agency
Bank overdraft - bank allows firm to exceed funds they have in bank
What does medium term sources of finance mean?
Sources of finance that firm will use and aim to pay off over a year often less than 10 years
What are the medium term sources of finance
Hire purchase - firm will hire equipment and pay for it in instalments. After last payment firm takes ownership of good
Leasing- firm rents building of piece of equipment for an agreed period of time
Bank loan - lump sum of money borrowed from bank to be repaid in instalments with interest
What are the long term source of finance
Mortgage - loam given to firms who wish to purchase premises and is repaid in instalments with interest
Owners savings - funds saved by owner and invested in business
Venture capitalist - private investors who provide finance where banks decide it is too risky eg a Dragon from Dragons Den
Debenture - group of companies will give Plc a long term loan to be repaid with fixed interest over a long period of time . Full amount repaid
What is cash budgeting
A forecast of all the money coming into and going out of the business over a period of time
What is the structure of a cash budget
Cash budget can cover 6 month period
“00” at top of column means that the sales for the month is £1,500, not £15
“Other income” money business will make OTHER THAN from the products
“Payments” costs business has to cover and so money is leaving the business
What are the potential cash flow problems
Low sales which has lowered the amount of money coming into the business
Owner is taking out too many personal drawings
Too much money tied up in stock
Firm is not chasing in unpaid bills and so there is money outstanding from customers
Firm has allowed customers too lengthy period of trade credit
Firm has borrowed at high interest rate and so its monthly costs are very high
Firm has purchased products instead of leasing it
What are the solutions for a poor cash budget
Organise an overdraft or bank loan
Negotiate better discounts with suppliers which will keep raw material costs down
Lease/HP equipment instead of buying which will spread the repayments
Extend credit period with suppliers which means firm has longer to pay back debts
Chase in outstanding bills with customers
Offer discounts to customers to increase sales and so revenue for each moth is good and firm avoids having left over stock
What are the reasons for a cash budget
Allows firm to spot when they have surplus cash and are able to purchase items
Controlling the business better
Useful document to take to bank to appeal for loan
Allows firms to set targets for the managers and departments
What is the equation for profit
Profit = revenue - costs
- revenue - money made from sales
- cost of raw materials
What is another word for sales
Revenue
What are the different types of costs
Fixed costs - these costs DONT vary with output. Firm would have to pay rental costs even if NO output is being made . Level of output for that day or month will not influence rental fee of factory
Variable costs - costs DO vary with output. An example is raw materials, cotton, buttons. If firm made lots of shirts that month then costs of cotton will rise. If output rises then variable costs rise
How would you calculate total costs
Total costs = fixed cost + variable costs
What are the sources of finance seen as?
Short-term
Medium-term
Long-term
What is break even
When total cost and total revenue are EQUAL
What are debtors
Someone who owes the business money
What are creditors
Business owes someone money
What are the benefits of using a break even chart
It can determine a minimum target for sales
Once sales target has been set, the firm can a target level of output
These targets can be communicated to rest of firm such as sales staff
Break even chart acts like a planning document for firm
Managers can pass judgement as to whether members of staff are performing well
What are profit statements
Accounting documents that help them organise their figures
What is a trading account
This is where all the sales and costs linked directly wit the making and buying of the product are logged to produce a general profit figure called GROSS PROFIT
What is a Profit and Loss account
This is where the overheads of the business are logged. These are subtracted from the profit in the trading account and the final profit is arrived at ie the NET PROFIT.
What is the calculation for gross profit
Gross profit = sales - cost of goods sold
What is the formula for net profit
Net profit = gross profit - expenses
