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Business Paper 2 theme 2 > Finance > Flashcards

Finance Flashcards

1
Q

Methods of internal finance

A

Owners capital
Retained profit
Sale of assets

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2
Q

Advantages to internal finance

A

Capital available immediately
Cheep no interest
Not subject to credit checks
Doesn’t involve third parties

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3
Q

Disadvantages to internal finance

A

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.

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4
Q

Sources of finance

A 
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
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5
Q

What is a limited liability company

A

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

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6
Q

Whats an unlimited liability business

A

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

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7
Q

Finance appropriate for unlimited liability businesses

A

Personal savings
Retained profit
Peer to peer lending
Croudfunding

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8
Q

Finance appropriate for limited liability businesses

A 
Share capital 
Debentures-long term loan 2 business 
Retained profit 
venture capitalists- want share
Business angles
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9
Q

Whats a business plan

A

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.

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10
Q

Content of business plan

A

Executive summary= overview of business start up,oppertunities, marketing, sales strategy, operations and finaince
Personnel

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11
Q

Whats a cash flow forcast

A

Forecast to show inflows and outflows of the business

Inflows-outflows = net cash flow

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12
Q

Cash flow disadvantages

A 
Not accurate 
Tastes and fashions may change
New competition
Interest rates change 
Could be a recession
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13
Q

Cash flow advantages

A

Used to present to bank for loan
Predict surplus of cash and shortage
Plan ahead
Arrange overdraft before running out of cash

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14
Q

How can u improve cash flow

A 
Make sure credit customers pay on time
Obtain loan 
Use JIT
Lease or rent equitment instead of buying 
Obtain trade credit
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15
Q

What is Sales forecasting

A

Projection of future sales revenue often based on previous sales data

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16
Q

Purpose of sales forcasting

A

Allows managers to set sales targets

Accurate predictions reduce uncertainty and allow planning

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17
Q

Factors effecting sales revenue

A

Economic variables = interest rates, inflation, unemployment, exchange rates, economic growth

Customer trends

Actions of competitors

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18
Q

Advantages of sales forecasting

A

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)

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19
Q

Implications of sales forecasts

A

Past trends may not continue in the future

External influences

Incorrect market research

Long term forcasts harder to predict than short term

20
Q

Revenue

A

Total sales made by business over period of time

Total revenue =

Volume sold x average selling price

21
Q

Fixed cost

A

A cost that doesn’t change with output

22
Q

Profit

A

Total sales - total costs

23
Q

Total costs

A

Fixed cost + variable costs

24
Q

Contribution and contribution per unit

A

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

25
Q

breakeven formula

A

Fixed cost / contribution per unit

26
Q

Sales revenue calculation

A

Units sold x sales price

27
Q

Adv of breakeven

A
  • 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
28
Q

Dis of breakeven

A

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

29
Q

What is margin of safety

A

The difference between actual output and the breakeven output

30
Q

Axis of breakeven chart

A 
Y = sales and costs
X = units of output
31
Q

Variance calculation

What is -
Adverse
Favourable

A

Actual - budgeted

Favourable = costs lower than expected = revenue/ profits higher than expected

Adverse = costs higher than expected = revenue/profits lower than expected

32
Q

Causes of favourable variances

A

Stronger market demand than expected
Selling prices increased higher than budget
better productivity than expected
Competitor weakness

33
Q

Causes for adverse variances

A

Sales forecasts over optimistic
market conditions eg competitors actions
Over spend by budget holders

34
Q

Budget implications

A

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

35
Q

Benefits of budgets

A

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

36
Q

Types of budgets

A

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

37
Q

Gross profit

A

Sales revenue - cost of sales

Measure of how much profit is generated from revenue before overheads and other expenses are taken into account

38
Q

Gross profit margin

A

(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)

39
Q

Operating profit

A

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

40
Q

Operating profit margin

A

(Operating profit/ revenue) x 100

Shows how efficiently a business turns sales into profit
How efficiently a business is run

41
Q

Net profit

A

= 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)

42
Q

Net profit margin

A

Net profit(profit for the year)

(Net profit /sales revenue) x 100

43
Q

Current ratio

A

Current assets/current liabilities

44
Q

Acid test ratio

A

(Current assets - stock) / current liabilities

45
Q

Increase profit by…

A 
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

46
Q

How can a business improve liquidity

A

Get receivables quickly before paying suppliers

47
Q

Whats GDP

A

The total value of a country’s output over the course of a year

Business Paper 2 theme 2 (3 decks)

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