Finance Flashcards
Advantages of a overdraft
useful as a short term source of finance to overcome cash flow problems.
there is no agreements which would require to be paid back over several years.
Advantages of a Mortgage
the amount of money can be paid back over lots of years.
Advantages of a grant
the money given does to need to be repaid.
A lot of money can be received at one time.
Advantages of re-invested profits
there is not any extra costs that need to be paid like a interest to be paid.
Advantages of hire purchase
it allows for businesses to buy assets with small payments.
once all the payments have bee made the business own that asset.
Advantages of leasing
you can obtain a asset without a large amount of money being spent on it.
any repairs are carried out by the leasing company with no extra costs.
any upgrades can be obtained once the lease runs out
Advantage of trade credit
can buy goods and sell them on before payment is required
provided payment is made within the agreed number of months then no interest is charged
Advantages of factoring
allows the business to receive an amount of money very fast
remove the inconvenience of chasing up late payments
Advantages of issue shares
large amounts of money can be raised quickly
Advantage of owners capital
money doesn’t need to be repaid
there isn’t any interest that needs to be paid
Advantage of bank loan
all the money will be obtained in one large amount
any repayments can be spread throughout a long time
Disadvantage of a overdraft
very expensive way to borrow money with very high interest rates
disadvantage of a mortgage
repayments are high because of high interest rates
property can be repossessed if the repayments are not made
disadvantage of a grant
there will be certain restrictions to what the money can be spent on
disadvantage of re-invested profits
there may not be enough money to fund the business
disadvantages of hire purchase
the assets is not owned until the final payment is made
the total amount paid is more than the price of the assets
disadvantages of leasing
the business will not own the assets at the end of the payment scheme
the rental costs can build up and in the long term may be better to just outright buy the asset
disadvantage of trade credit
any discounts from prompt payment are lost
suppliers will be reluctant to continue to offer credit if a business does not pay within allocate time span
disadvantages of factoring
the business has to sell the customer debt for a reduced amount
factoring companies are often only interested in large amount of debt
disadvantages of issue shares
dividends have to be paid to shareholders
can be expensive and time consuming to advertise and organise the sale of shares
what is an income statement
an income statement calculates the profit made from buying ans selling, known as a gross profit and the profit made after the expenses have been deducted from the gross profit which is known as the profit for the year.
what is a statement of financial position
A statement of financial position shows the items the business owns which are known as assets, and the items which they owe which are known as liabilities and finally the overall of the business.
what is a current liablity
Current liability is an item which is owed for less than a year
what does it mean for a business to stay liquid
this refers to liquidity which is the cash-flow situation, business must stay liquid so that they have funds to pay off any of their debts
how to fix the cash flow problem:
too much money tied up in stocks
one possible way to fix this problem would be to use the stock management technique called just in time.
-Another way to fix this problem would be to put on sales to move the excess stock.
how to fix the cash flow problem:
too many credit sales
A way to fix this problem would be to offer discounts to encourage the customers to pay
how to fix the cash flow problem:
too long a payment period for the credit sale
a way to fix this problem would be to charger a higher interest rate on the credit sales as it will encourage the customers to pay sooner
how to fix the cash flow problem:
not enough credit purchases
this could be fixed by the business switching their suppliers to companies that offer interest free credit purchases
how to fix the cash flow problem:
high amounts of finance spent on non-current assets
this problem could be fixed by paying for non-current assets in installments
how to fix the cash flow problem:
increasing amounts of drawings from the owner
this could be fixed by the charging a higher interest rate on drawings so that it will discourage the owner to withdraw money from the business
how to fix the cash flow problem:
not enough sales revenue
this could be fixed by the business making changes to there current marking mix to encourage more sales
how to fix the cash flow problem:
too many unpaid debts
this could be fixed by the business selling debts to debt factoring companies
what are the ratio analysis used for
- it allows the business to compare the performance of the business with previous years
- allows for comparisons to be made with the businesses performance and others in the market
- the business can use it to compare against industry averages
- it highlights areas of the business that needs more improvement and attention
- it can help the business in future decisions making
what are the limitations of ratio analysis
- the information from the ratios can be out of date so they may not be relevant to the current position of the business
- ratios do not take into account external factors like recessions
- the don’t take into internal factors like low staff morale
- the business find it difficult to find competitors which are similar to there size and type for valid comparisons.
