Finance Flashcards
bank overdraft
allows business to spend more money than is in their account
A - easy to arrange with bank
- allows them to continue paying expenses
D - high interest rates can be charged
- overdrafts can be with drawn by the bank at anytime and must be repaid then
trade credit
allows business to buy goods from suppliers and pay at a later date
A - helps business to keep going when cash flow is low
- business can sell sock at a higher price and make a profit before paying bills
D - discounts for prompt payment is lost
- suppliers can be reluctant to give trade credit if they do not pay within the agreed time
government grant
money to businesses from the government
A - offers an incentive and aid a business to get started
- the money does not need to be repaid
D - complicated to apply for and certain requirements need met
- grants are usually one-off
hire purchase
business can buy an asset through monthly payments over a period of time
A - after final payment asset is owned by business
- expensive equipment may need initial deposit
D - asset is not owned until last payment
- if interest rates are high can be more expensive than buying it outright
Importance of cash budgeting
- allows business to plan ahead, set aims and targets
- departments can manage their budgets effectively and understand their limits
- allows departments to coordinate with others
causes of cash flow problems
- business may purchase too much stock meaning money is tied up and cash flow is reduced (JIT can be used)
- seasonal items may mean some months they do not have enough cash to cover costs (holding promotions or lowering rice can get rid of stock)
cash flow problems and solutions
cash sales falling - caused by seasonal or external factors (engage in marketing activities)
purchases increasing - money tied up in stock (use JIT)
rent is increasing - business is increasing payments for expenses (switch to cheaper premises or sell online to cut rent costs dramatically)
negative closing balance - business payments outweigh their receipts (arrange for more short term finance like bank loan)
use of finical statements
managers - evaluate the effectiveness of past decisions
employees - finical affairs reassure their job security
competitors - analyse business accounts to make comparisons
shareholders - help when deciding to sell on shares or not
gross profit percentage
gross profit/sales revenue X 100
percentage as high as possible
profit for the year percentage
profit for the year/sales revenue X 100
percentage as high as possible
current ratio
current assets/current liabilities : 1
quick ratio/acid test ratio
current assets - inventory/current liabilities : 1
use of technology
spreadsheets to prepare finical information allows greater accuracy, reduces error and allows charts and graphs
email can be used to circuit finical information quickly and easily
