Finance Flashcards
What is internal finance?
Where the money is already in the business (therefore no cost) but has an opportunity cost
What is external finance?
Where finance is sourced outside of the business, it usually costs in interest and security is required so that it can be repossessed if the loan isn’t paid back
What is an opportunity cost?
Where the business has to choose in between 2 options of what to spend there money on as they can’t spen it on both
What is short term finance?
Up to 12 months
What is medium term finance?
1-3 years
What is long term finance?
3+ years
What is a share issue?
Where companies raise finance by trading finance for a share
What is retained profit?
Where profit is made and held back to pay for things like equipment
What is hire purchase?
Where a business will pay monthly for something they need (interest will be added) it won’t be theirs until final payment is made
What is cash flow?
The amount of money being transferred in and out of a company
What is cash flow forecast?
Where business try to predict its income and expenditure
What is the balance being carried forward to the next month?
The difference between the total income and total expenditure
The closing balance for one month becomes the opening balance for the next
What is negative cash flow?
Where the total expenditure > total income
What happens if the balance being bought forward is negative?
It will be subtracted from the next months total income
How many months is a forecast of negative cash flow bad?
A few consecutive months
Can businesses fail even if they make a profit?
Yes because they will have run out of money
Is having a negative cash flow bad for a business?
Not necessarily as it may mean that the flow of money in is
Why do businesses forecast cash flow?
So they can identify the months in which they will be short of cash and the forecast helps them to prepare / find solution
Which cash flow forecasts are more actuate?
Short term
Why aren’t long term cash flow forecasts accurate ?
The prices of goods may change, new competitors may enter the market etc
How can businesses avoid incorrect forecasting made by long term forecasting ?
Updating their forecasts at regular intervals
Can good cash flows still have low profit?
Yes
What is sales revenue?
The income from the sale of good also known as NET sales
What is gross profit?
The profit made after deduction of variable costs
What is net profit?
The actual profit after all costs are deducted
How do you calculate sales revenue and gross profit?
- Income from sales - total costs
2. Revenue - variable costs
Why is profit important?
It is a return on investments (investment + profit )
It is a reward for risk taking
Retained profits used for investment
Can be used for dividends to shareholders
What is a dividend?
A lump of money per share (only applies to public limited companies)
What is VAT?
The tax on purchase price, in the UK it is 20% and is paid at the last stage (retail point)
What products don’t have VAT?
Most essential food products and children’s clothing
What happens to the money collected from VAT?
It goes to the government
What are fixed costs?
Costs which don’t change with output such as rent
What are variable costs?
Costs which do change with output such as the average cost per product
How do you calculate average cost?
Total cost / amount sold
What are some examples of fixed costs?
Rent
Electricity
Salaried staff
Insurance
What are some examples of material costs?
Flour for cupcakes
Hourly staff
Bonus payments
Why do businesses manage costs?
So that they don’t end up with greater costs over profit
How can a business reduce its costs?
Reduce its labour workforce Produce efficiently Only produce what has been ordered Reduce waste Globalisation
What is break even?
Where the business makes no profit or loss
How do you calculate the margin of safety?
Actual sales - break even sales
How does calculating break even help a company?
It tells the business at what point it is that they start to make a profit in terms of quantity sold
Why is calculating break even a bad thing for a business?
It only applies to one product
Based on output being sold
It’s forecast isn’t real
How can a business reduce its variable costs?
Buying in bulk (economies of scale)
How can a business reduce its fixed costs?
Negotiate rent or move somewhere cheaper
How can a business increase its revenue?
Increase quantity sold through promotion
Why does a business need finance?
To pay staff, for marketing, to have enough start up capital, to pay investors back, for growth etc
What is cooperation tax?
A tax put on company profits
What is national insurance?
Payments made by employees and employers for NHS and state pension etc
What does the local government collect?
Rates from business’s
What is income tax?
The tax taken of an employees wages
What is overdraft?
An arrangement with the bank where a business can use more money than it is (interest charged)
Trade credit
A business buys it’s good and pays for them 30 days later (interest free)
Retained profit
A business holds back some profit for later use
Sale of assets
Selling assess for finance to help pay for things (opportunity cost)
Loan
A sum of money borrowed from the bank for a fixed amount of time (interest paid back)
Lease
Where items are ‘borrowed’ and monthly payments are made given back after a certain amount of time
Hire purchase
Obtaining items and making monthly payments (inc interest)
Grants
Money from the government for a specific use
Mortgage
Long term money borrowed from the bank for purchase of property
Share issue
Raising money buy selling a share in the business
