Finance Flashcards
Methods of internal finance
Owners capital
Retained profit
Sale of assets
Advantages to internal finance
Capital available immediately
Cheep no interest
Not subject to credit checks
Doesn’t involve third parties
Disadvantages to internal finance
Can be limited.
Opportunity cost as could be conflict with shareholders who have a short term view and don’t want dividends cut to increase retained profit.
Sources of finance
Internal Owners capital Retained profit Sales of assets External Family and friends Banks Peer to peer funding Business angles( v capitalists) Croudfunding Loans Share capital Overdrafts Leasing Trade credit
What is a limited liability company
Business has separate identity to owners
Business can be sued but owners cant
Shareholders cant be legally forced to sell personal assets to meet debts
Whats an unlimited liability business
No legal difference between owners and business
Personal assets at risk
Can be sued for unlawful acts if employees
More cautious as higher risk for them
Tend to be small
Finance appropriate for unlimited liability businesses
Personal savings
Retained profit
Peer to peer lending
Croudfunding
Finance appropriate for limited liability businesses
Share capital Debentures-long term loan 2 business Retained profit venture capitalists- want share Business angles
Whats a business plan
A plan for the development of a business, giving details such as the products to be made, resources needed and forecasts such as costs, revenues and cash flow.
Content of business plan
Executive summary= overview of business start up,oppertunities, marketing, sales strategy, operations and finaince
Personnel
Whats a cash flow forcast
Forecast to show inflows and outflows of the business
Inflows-outflows = net cash flow
Cash flow disadvantages
Not accurate Tastes and fashions may change New competition Interest rates change Could be a recession
Cash flow advantages
Used to present to bank for loan
Predict surplus of cash and shortage
Plan ahead
Arrange overdraft before running out of cash
How can u improve cash flow
Make sure credit customers pay on time Obtain loan Use JIT Lease or rent equitment instead of buying Obtain trade credit
What is Sales forecasting
Projection of future sales revenue often based on previous sales data
Purpose of sales forcasting
Allows managers to set sales targets
Accurate predictions reduce uncertainty and allow planning
Factors effecting sales revenue
Economic variables = interest rates, inflation, unemployment, exchange rates, economic growth
Customer trends
Actions of competitors
Advantages of sales forecasting
Plan ahead to avoid surprises
Eg
Personnel dept. Plan staff needed
Production dept. Plan output to meet demand
Finance dept. Forecast cash flow profit and loss to allocate budgets
Marketing dept. Measure sales performance against targets (motivation)
Implications of sales forecasts
Past trends may not continue in the future
External influences
Incorrect market research
Long term forcasts harder to predict than short term
Revenue
Total sales made by business over period of time
Total revenue =
Volume sold x average selling price
Fixed cost
A cost that doesn’t change with output
Profit
Total sales - total costs
Total costs
Fixed cost + variable costs
Contribution and contribution per unit
Amount of money left over after variable costs have been subtracted from revenue
C per unit =
Selling price per unit - variable cost per unit
Total c =
Contribution per unit x no of units sold
breakeven formula
Fixed cost / contribution per unit
Sales revenue calculation
Units sold x sales price
Adv of breakeven
- quick and simple.
- easy to understand.
- helps spot potential problems.
- can assist when applying for a loan
- focuses on what output is required before a business reaches profitability
Dis of breakeven
Most businesses sell more than one product
Unrealistic assumptions fixed costs can change when output changes
Assumed all products made are sold
Sales are unlikely to be the same as output - may be some build up of stocks or wasted output too
What is margin of safety
The difference between actual output and the breakeven output
Axis of breakeven chart
Y = sales and costs X = units of output
Variance calculation
What is -
Adverse
Favourable
Actual - budgeted
Favourable = costs lower than expected = revenue/ profits higher than expected
Adverse = costs higher than expected = revenue/profits lower than expected
Causes of favourable variances
Stronger market demand than expected
Selling prices increased higher than budget
better productivity than expected
Competitor weakness
Causes for adverse variances
Sales forecasts over optimistic
market conditions eg competitors actions
Over spend by budget holders
Budget implications
If unrealistic demotivate
Cause department rivalry
If isn’t flexible opportunities can be missed
Time consuming to do and monitor and may have used inaccurate data
Benefits of budgets
Can be motivating for staff when budgets are met
Provide direction and coordination
Helps employees focus on costs
Highlights losses, wastes and inefficiency
Method to control finance
Types of budgets
Profit budget
=based on combined sales and cost budgets
Cost (or expenditure) budget
= expected cost based in sales budget
Revenue (or income) budget
=expected revenue and sales
Gross profit
Sales revenue - cost of sales
Measure of how much profit is generated from revenue before overheads and other expenses are taken into account
Gross profit margin
(Gross profit/sales revenue) x 100
Tells us if business is able to add value during production process (high margin business must be doing something right)
Operating profit
Gross profit - overheads
Records how much profits made in total from trading activities of the business before any account is taken of how the business is financed
Operating profit margin
(Operating profit/ revenue) x 100
Shows how efficiently a business turns sales into profit
How efficiently a business is run
Net profit
= operating profit +/- finance costs
Profit for the year
Amount of profit left after tax has been accounted for. Directors then decided how much is paid to owners in dividends and how much is left in business (retained profits)
Net profit margin
Net profit(profit for the year)
(Net profit /sales revenue) x 100
Current ratio
Current assets/current liabilities
Acid test ratio
(Current assets - stock) / current liabilities
Increase profit by…
Increasing selling price = depends on elasticity of demand =competitors may react = sales may fall switch to competitors But = customers may think product higher quality
Reduce cost per unit
=added value per unit sold mean higher profit margins customers don’t notice change in price
= will work if customers don’t notice a change in price they may notice change in quality reducing sales
How can a business improve liquidity
Get receivables quickly before paying suppliers
Whats GDP
The total value of a country’s output over the course of a year
