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Finance Flashcards

1
Q

Why new businesses need finance

A 
Renting/buying a building
Vehicles
Advertising business
Equipment and machinery 
Inventories of raw materials (stock)
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2
Q

Why established businesses need finance

A

Expansion
Improve efficiency (e.g. training staff or improving technology)
Develop new products

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3
Q

Internal source of finance definition

A

Money available from within business

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4
Q

Advantages of internal sources finance

A

No interest charges

Other organisations e.g. bank have no say in how business is run

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5
Q

Disadvantages of internal sources

A

Very limited for many businesses

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6
Q

Owner’s funds definition

A

Money put into business by its owners

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7
Q

Retained profit definition

A

Profit made by business in previous years

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8
Q

Selling assets definition

A

When businesses sell their own assets for cash

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9
Q

Trade credit definition

A

Method of paying suppliers that gives businesses time to pay for purchased stock
30, 60 or 90 days usually

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10
Q

Internal sources of finance

A

Owner’s funds
Retained profit
Trade credit

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11
Q

External sources of finance

A 
Bank loans
Mortgages
Overdrafts
New share issues
Loans from family and friends
Hire purchase 
Government grants
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12
Q

External sources of finance definition

A

Money that comes from outside of business

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13
Q

Advantages of external sources of finance

A

Offers firms large sum of money

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14
Q

Disadvantages of external sources of finance

A

Heavy interest charges

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15
Q

Bank loan definition

A

When bank lends business sum of money

Business pays money back over a long period of time with interest

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16
Q

Mortgage definition

A

Special type of loan used by business to buy property

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17
Q

Overdraft definition

A

The right to borrow a variable amount of money up to an agreed limit

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18
Q

New share issues

A

When business sell sales to earn money

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19
Q

Loans from family and friends definition

A

When business borrows money family and friends to raise finance
Usually only done by small business

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20
Q

Hire purchase definition

A

Method of purchasing assets and paying in instalments

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21
Q

Government grant definition

A

Sum of money given to a business by the government due to a special reason

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22
Q

Advantages of retained profit

A

No interest payments

Can be arranged immediately

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23
Q

Disadvantages of retained profits

A

Only available to profitable businesses

Shareholders may oppose decision

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24
Q

Advantages of selling assets

A

No interest payments

May keep assets (if leased back)

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25
Disadvantages of selling assets
Many businesses don’t have suitable assets | Lease back requires regular payments
26
Advantages of bank loans and mortgages
Can be arranged quickly | Allows repayment over long period of time (helps with cash flow)
27
Disadvantages of bank loan and mortgages
Interest has to be paid Banks may require asset as collateral May be rejected
28
Advantages of selling shares
No interest repayments
29
Disadvantages of selling shares
Only available to companies | Owners lose total control of the company
30
Advantages of government grant
Many government grants don’t have to be repaid
31
Disadvantages of government grafts
Have to meet strict conditions to receive a grant | May have to invest money alongside grant
32
Factors influencing choice of sources of finance for new businesses
Amount of personal finance available | How risky business is judged to be
33
Factors influencing choice of sources of finance for established business
``` Legal structure of business Amount of finance needed Past history prospects Business’ profitability Assets owned by business ```
34
Cash flow definition
Money that flows in and out of a business
35
Cash inflow definition
Money that flows into a business and is available to it
36
Cash outflow definition
When a business makes a payment
37
Causes of cash inflow
Income from sales Loans from banks Money invested by the business’ owners
38
Causes of cash outflow
``` Burying raw materials Wages Rent or mortgage Interest on loans Taxes ```
39
Importance of cash flow
If business doesn’t have enough cash available, they are unable to pay its bills Unpaid suppliers means no future supplies Business is forced to stop trading, leading to business failure
40
Benefits of positive cash flow position
Avoid paying interest charges due to need to borrow loan Business more able to arrange long-term loans (more credibility) Poor cash flow is major cause of business failure
41
Cash flow forecast definition
Financial document including expected inflows and outflows of cash
42
Cash flow statement definition
Financial document including record of previous inflows and outflows
43
Structure of cash flow forecast / statement
``` Cash inflows Total cash inflow Cash outflows Total cash outflow Net cash outflow Opening balance Closing balance ```
44
Importance of cash flow forecasts
Times of shortage of cash in business can be identified | Suitable actions can be taken to avoid cash shortages
45
Causes of cash flow problems
Poor management Business making a loss Offering customers too long to pay
46
Solutions of cash flow problems
Reschedule payments Cut costs Find new source of cash inflows
47
Selecting “best” solution for cash flow problems
Business’ circumstances | Cause of cash flow problem
48
Difference between cash flow and profit
Cash flow is the way money moves through the business and shows balance between cash inflows and outflows Profit is the how much revenue exceeds costs over a period of time
49
Revenue definition and formula
Income it received from selling its products | sales x selling price per unit
50
Price definition
Amount business asks a customer to pay for a single product
51
Sales definition
Number of products sold by a business over some time period
52
Costs definition
The spending necessary to set up and run a business
53
Fixed costs definition
Costs that don’t alter when business changes its output
54
Variable costs definition
Costs that vary directly on business’ level of output
55
Total variable costs formula
variable costs per unit x units
56
Total costs definition and formula
Business’ expenditure over a time period | total costs = fixed costs + variable costs
57
Profit definition
Amount by which revenue exceeds its costs | Profit (or loss) = revenue - total costs
58
Loss definition
How much costs exceeds revenue
59
Reason businesses invest
Businesses needs assets like buildings machinery and vehicles to operate properly Need to develop products to remain competitive
60
Average rate of return definition and formula
Method of deciding whether an investment is worthwhile | average yearly profit x 100 / cost of investment
61
Average yearly profits formula
Total profits / number of years
62
Advantages and disadvantages of ARR
helps in decision-making as easy to compare percentages | not always accurate so may be incorrect
63
Break-even definition
Level of production when revenue from sales is equal to total cost of production Less means business makes a loss More means business makes a profit
64
Break-even chart
Shows how level of production required to break-even
65
Margin of safety definition
Shows how much business’ current level of production exceeds break-even level of output Larger means business’ sales and production can fall significantly before business makes a loss
66
Advantages of break-even analysis
Shows effects of changes in cost and price | Can be used to persuade bank to give business a loan / overdraft
67
Disadvantages of break-even analysis
Assumes business sells all of its output (unlikely) | Costs and prices change rapidly and frequently (charts may be inaccurate as soon as they are made)
68
Why businesses prepare financial statements
Legal requirements Helps business’ managers to make decisions Guides investors
69
Income statement key information
Shows: revenue (sales income) cost of production amount of profit/loss
70
Gross profit formula
Revenue - cost of sales
71
Overheads definition
Costs that don’t alter when level of production changes
72
Operating profits formula
Gross profits - overheads
73
Net profit formula
Operating profits - taxes and interest payments
74
Structure of income statement
``` Sales revenue Cost of sales Gross profit Overheads Operating profit Tax and interest payments Net profit ```
75
Balance sheet key information
Also called “statement of financial position” | Shows assets and liabilities and how they are financed in a time period
76
Asset definition
Anything owned by a business
77
Non-current asset definition
Kept by business for more than a year | Creates revenue for business but is difficult to sell
78
Current asset definition
Assets kept by business for less than a year | Used by business to settle short-term debts
79
Non-current asset examples
Shops Vehicles Machinery
80
Current asset examples
Cash | Stock (inventory)
81
Liabilities definition
Amounts owed by a business to other businesses/individuals
82
Non-current liabilities definition
Debts paid back over many years
83
Current liabilities definition
Debts paid a business within a year
84
Non-current liability examples
Loans | Mortgages
85
Current liability examples
Money owed to suppliers | Tax
86
Total equity definition
Part of a company’s money belonging to shareholders Value left after total liabilities have been subtracted from total assets Net assets = total equity
87
Gross profit margin formula
gross profit / revenue x 100
88
Net profit margin formula
Net profit / revenue x 100
89
How profit margins can be interpreted
Compare against: business’ target to type of profit business’ previous profit margins profit margin to other similar business
90
Importance of financial statements
Assessing business performance | Helps in decision-making
91
Stakeholders of financial performance
Shareholders and owners Managers Suppliers Employees

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