Finance Flashcards
Define retained profits
Profits that owners plough back into the firm after they’ve paid themselves a dividend.
Define re-invested savings
Large, successful firms may have used retained profit from previous yrs to build bank savings or buy stocks and shares.
Can be used to get cash quickly if they need it.
Define fixed assets
Firms can raise cash by selling these (e.g. machinery or buildings) that are no longer in use.
There’s a limit to how many assets you can sell.
Define shares
A limited company can issue more shares.
Money raised doesn’t have to be repaid to shareholders; more shares means less control for existing owners.
Define debentures
Limited companies issue debentures to the public: they’re long-term loans which the firm commits itself to repay with interest - for up to approx. 25 yrs.
People issued w/ debentures don’t own any part of the business - they only lend the business money.
Define loans/mortgages
Larger firms may still need to use these which have to be repaid with interest.
More willing to lend it to large firms as there’s:
- Less risk of failure
- More assets to use as collateral.
Define income statement
Looks at: profit (or loss) a firm makes in a 1 yr period and revenues and costs.
Define statement of financial position
Looks at:
What a firm is worth at any 1 point in time and
What a firm owns and owes.
Define gross profit
Amount of £ a business has left after it has paid its production costs.
Why do firms produce an income statement?
1) It’s a legal requirement for PLCs and Ltds.
2) It summarises all the year’s transactions.
3) It shows the financial “health” of the business.
4) Can be used to compare trade this year with trade last year.
What do different stakeholders want?
1) Owners - Know if they’re a getting good return for their £.
2) Managers - Responsible to owners for business performance.
3) Customers - Want business to provide quality goods at low prices (value for £).
4) Employees - Know their jobs are secure and pay rises.
5) Creditors - Know business can repay any borrowed £.
6) Government - Know how much profit business makes so it can collect tax.
What is gross profit margin?
Ratio that compares gross profit with sales.
Shows how much gross profit is made for every £1 of sales.
This is the profit that a business makes per £1 off turnover the business is earning.
What is net profit margin?
Ratio that compares net profit with sales.
Shows how much net profit is made for every £1 of sales.
The amount of profit that the business is making for every £1 earned before taxation and interest.
How do you calculate gross / net profit margin?
(GP or NP) / Sales x 100
How do businesses reduce gross profit margin?
1) Reduce cost of sales (VC)
2) Buy cheaper raw materials.
3) Increase revenue (even better if it has no impact on anything else).
