Finance Flashcards
1
Q
Name 4 internal sources of finance
A
selling assets
personal savings / owners capital
retained profit
2
Q
name 9 external sources of finance
A
family and friends selling shares adding a new partner venture capitalist investment mortgages bank loans overdrafts hire purchase leasing
3
Q
What does internal sources of finance refer to?
A
An internal source of finance is the money that is available from within the business
4
Q
What is owners capital?
A
Owners capital is money invested in the business by the owner through personal savings
5
Q
What is retained profit?
A
Money kept aside for future use in the business
6
Q
What are venture capitalists?
A
Venture Capitalists are individuals or organisations that provide finance for businesses with a potential to grow. As a result of this private investment they gain a share in the business
7
Q
What are business angels?
A
Business angels are wealthy individuals who invest their private capital in start-up businesses in return for a share in the business
8
Q
What is interest?
A
Interest is extra money paid by a business in order to borrow money. This usually a percentage of the money borrowed and means that the business pays more than it borrows
9
Q
What are the advantages to using owners capital?
A
- The money is available without the need to go through complicated processes -its easier
- The money doesn’t have to be paid back
- No interest is charged on the money
- The owner still has full ownership and control over the business
- Issues around unlimited liability do not exist
10
Q
What are the disadvantages to using owners capital?
A
- The money will not be available to spend on any other needs
- Interest will be lost when the money is withdrawn from saving accounts
- The owners may not have sufficient funds saved
11
Q
What are the advantages of selling assets in order to gain finance?
A
- The money is available without the need to go through complicated processes -its easier
- The money doesn’t have to be paid back
- No interest is charged on the money
- The owner still has full ownership and control over the business
- Issues around unlimited liability do not exist
- The business will free up space and may not need to pay for the storage or maintenance of the assets no longer
12
Q
What are the disadvantages of selling assets in order to gain finance?
A
- It takes time finding buyers for the assets- Long process
- The assets may have cost more than the price it is sold to others
- The sale of assets may not raise enough funds
- Selling assets to others may increase competition
13
Q
What are the advantages to using money from friends and family?
A
- Interest rates may be low as the family members may be reluctant to charge interest
- The time to repay the loan may be unlimited
- Family members are unlikely to want to take over the business
14
Q
What are the disadvantages to using money from friends and family?
A
- The amount available may be limited, if family savings are low
- Family members may need to be repaid urgently, so repayment could be asked with little notice
- Family members are less likely to want to see a business plan, so details about the likely success of the business are not carefully considered
15
Q
What are the advantages of taking on new partners as a way to gain finance?
A
- More money will be brought into the business
- No interest will need to be paid on that money
- The skills and qualities of the new partner may help increase the business’ profits
16
Q
What are the disadvantages of taking on new partners as a way to gain finance?
A
- The amounts of new finance contributed may be limited
- A new partner will have an impact on the decision making, reducing the control of the established partners/owners, potentially affecting the business negatively
- The new partner may not be welcomed by existing partners, who may receive lower profits
*
17
Q
What are the advantages of selling shares as a way to gain finance?
A
- Vasts sums of money can be raised, particularly with shares sold on the stock exchange
- Shareholders have limited liability
- The money does not have to be repaid by the business. The shareholders can sell their shares to other investors but the business wont be affected.
- Interest is not paid on the money
18
Q
What are the disadvantages of selling shares as a way to gain finance?
A
- It is expensive to set up a public sale of shares - many legal documents are required
- Shareholders are paid a share of profits called dividends
- Control of the business may be lost to other shareholders
- New shares may reduce the value of shares, displeasing existing shareholders
19
Q
Short term sources of finance for cash flow issues
A
- Personal savings
- Money from friends and family
- Overdrafts - ideal for short-term debts. Bills can even be paid through an overdraft if the business has no money in its acoount
- Trade credits - helps the business buy materials without having the cash immediately
20
Q
Longer term sources of finance for things like expansion
A
- Retained profits - Businesses with the aim of expansion will reinvest past profits in order to expand
- selling assets - Businesses that have been in existence for some time will have accumulate assets that they no longer need
- Share issue - Existing businesses are more likely to be PLC’s, which can sell shares to anyone on the stock exchange and so are able to gain more finance
- Bank loans - will be easily obtained for existing businesses looking to expand because of their reputation and because they are able to provide more detailed business plans
21
Q
What are the advantages of receiving investment from venture capitalists as a source of finance?
A
- Venture capitalists are experienced in owning and running businesses
- They can share their advice, experiences and business contacts
22
Q
What are the disadvantages of receiving investment from venture capitalists as a source of finance?
A
- Venture capitalists may want control over the business for which they are providing finance.
23
Q
What are the advantages of taking a bank loan as a source of finance?
A
- Interest rates may be fixed at the start of the loan, so there is certainty about its cost. The interest rate may also be lower than other forms of borrowing
- Businesses have a long time repaying the loans
- Loans are suitable for borrowing large sums of money
- Goods purchased with the loan can become the property of the business immediately
- The loan will not affect the ownership of the business and so the owner has full control
24
Q
What are the disadvantages of taking a bank loan as a source of finance?
A
- Banks will be selective about the type of business given a loan.
- A business loan may need to be drawn up and so it can take a long time to have your loan accepted as the bank wants to know whether you will be able to repay the loan
- The bank may want a collateral the same in value as the loan and may take that if the loan is not paid back
- Failure to repay the loan may use your business to be closed down. For sole traders they may lose personal possessions
25
What is a bank loan?
A bank loan is a long to medium source of finance that can be used to buy producer goods
26
What is a collateral?
A collateral is an asset that the bank holds for security for the repayment of a loan
27
What is an overdraft?
An overdraft gives entrepreneurs and businesses the right to borrow variable amounts of money up to an agreed limit. (A short term loan)
28
What is cash flow?
Cash flow is the money that flows into and out a business on a day to day basis
29
What is trade credit?
Trade credit is a period that suppliers allow customers before payment for supplies must be made
30
What are the advantages of taking an overdraft?
* Interest is only paid on the overdrawn amount
* They are usually small amounts and for the short term to pay day to day expenses
* New agreements don't need to be made between the business and the bank everytime the business becomes overdrawn
31
What are the disadvantages of taking an overdraft?
* The rate of interest is usually higher than that found on bank loans
* Overdrafts can be ended anytime if the bank is not happy with the way the business is being run
* They are short term and for small amounts of money. = Overdrafts are not suitable for the purchase of capital goods.
32
What are the advantages of using trade credit?
* The business can buy goods and will have time to process these, or sell on, before having to pay for them - this would enable a quick profit
* No interest is paid on the credit
33
What are the advantages of using trade credit?
* It is a very short-term source of finance
| * The amounts credited will be small
34
What are the advantages of using hire purchase?
* The item can be used immediately
* Installments are paid regularly
* The equipment will eventually be owned by the business
* The business can return the item during the repayment period without having to pay extra
35
What are the disadvantages of using hire purchase?
* Interest rates tend to be higher than if assets were bought using a bank loan
* The asset is not owned until completely paid for
* The asset can be taken back by the lender if installments are missed. This could threaten the existence of a business
36
What are the advantages of leasing?
* The business does not need to raise finance to pay the full cost of an asset to be able to use it
* Maintenance and repair costs are paid by the owner of the asset, rather than the business.
* Updated equipment will be provide by the owner, so the business can take advantage of advances in technology
37
What are the disadvantages of leasing?
* The asset does not belong to the business
* Regular rental payments must be made to be able to use the equipment
* The rental company must pay for the equipment to earn its own profit so payments tend to be higher than any other source of finance
38
What is hire purchase?
Hire purchase is a system of credit whereby the borrower pays a deposit to be able to use a good for a set period. During this time installments are paid to cover the costs of the good plus added interest
39
What is leasing?
Leasing is a system of renting an asset to a business. The asset remains the property of the business renting out the good
40
What is total revenue?
Total revenue is the full amount of money taken in by a business when selling all its goods in a period
41
What is price?
Price is the amount of money a business asks a customer to pay for a single product or service
42
What is a cost?
Costs are the spending of money that is necessary to set up and run a business
43
What are fixed costs?
Fixed costs are those costs that do not alter when a business changes its output
44
What are variable costs?
Variable costs are those costs that vary directly with the business' level of output
45
What is meant by a total cost?
Total cost is the full amount of money spent by a business when producing goods sold in a period
46
What is meant by profit?
Profit is the difference between the total revenue and the total costs of a business, when revenue is greater than costs
47
What is a loss?
A loss is the amount by which a business's costs are larger than its revenue from all sales
48
How is total revenue calculated?
selling price X number of goods sold
49
How is variable costs calculated?
Variable cost of producing one good X number of goods produced
50
How is total costs calculated?
fixed costs + variable costs
51
How is Profit calculated?
total revenue - total cost
52
What is break-even?
Break-even is the level of production in which the business' total costs and total revenue from sales are equal
53
What does a break-even chart show?
A break-even chart shows the business' costs and revenues an the level of production needed to break-even. This can help the business make adjustments like with the price of products or can even tell the business whether the product is worth continuing
54
Fewer sales than break-even means...
the business is making a loss
55
More sales than break-even means...
the business is making a profit
56
Break-even equation =
fixed costs
----------------------------------------
selling price - variable costs
57
How will a rise in price alter the break-even chart of a business?
It would mean the break-even point would decrease therefore, the business will have to sell fewer goods in order to cover their costs
58
How will a rise in fixed costs alter the break-even chart of a business?
This would mean that the break even point would increase therefore the business will need to sell more goods in order to cover its costs
59
How will a rise in a variable costs alter the break even chart of a business?
this would also mean that the break even point would increase therefore the business will have to sell more goods in order to cover its costs
60
What are the advantages of break-even analysis?
* It helps the businesses to decide whether it is worthwhile to provide a good or service
* It guides the businesses when making decisions, such as whether to increase or on issues to do with costs
61
what are the disadvantages of break-even analysis?
* It assumes the price is constant but, in a competitive market, prices may change
62
What does a profit and loss account show?
a profit and loss account is a financial statement showing a business' sales revenue and costs. Therefore, its profit or loss over a year.
63
What is Sales Revenue/Turnover?
Sales Revenue is the amount of money taken in by a business when selling a good or service
64
What is Gross Profit?
Gross Profit is the profit made before expenses have been paid.
65
What is Net Profit?
Net Profit is the final profit made by a business after all costs have been paid.
66
Examples of cost of sales include:
8
* The cost of the stock bought to produce or to provide * The goods for resale
* The cost of workers directly involved in production
* The cost of gas and electricity directly used in production
67
Examples of Expenses or Overheads:
* Salaries paid to the managers and other staff
* Insurance Premiums
* Rent for premises
* Maintenance costs
68
What do businesses use profit and loss accounts for?
Businesses use profit and loss accounts to make comparisons Based on their Targets, Time and Competitors
69
If the Profit and Loss accounts shows worse than expected results the business will take actions by:
* Increasing advertising to to boost sales and so increase revenue
* Increasing prices
* Purchasing cheaper materials to reduce the cost of sales
* Reducing expenses by cutting back on the number of workers or on advertising
70
What Stakeholders will be interested in the profit and loss account and why?
SHAREHOLDERS: They will want to know if the business had been profitable as this will affect their dividend and the value of their shares. They will also want to know if the business is likely to survive
MANAGERS: They will want to know whether the business has been successful in controlling business costs and generating sales. Results may effect their bonus' and their job security
WORKERS: They will want to know the profitability of the business as this will affect their negotiability on wage increase and perhaps also if they get to keep their job
CUSTOMERS: They will want to know whether a business is likely to continue supplying a product or service
SUPPLIERS: They will want to know the survival of the business as their customer, to ensure markets can be paid and debts can be paid.
BANKS: They will want to know whether the business is likely to be able to pay off its loans and overdrafts. They will also want to know so that they know whether to lend them money.
COMPETITORS: They would want to know in order to make their own comparisons and to make their own strategies.
THE GOVERNMENT: The government would want to know so that they know how much tax is to be collected from the business.
71
What is a Gross Profit Margin?
The Gross profit margin is the gross profit expressed as a percentage of sales
72
What is a Net Profit Margin?
The Net profit margin is the nt profit expressed as percentage of sales
73
How is The Gross Profit Margin calculated?
GPM = gross profit
---------------------- X 100
sales revenue
74
How is The Net Profit Margin calculated?
NPM = net profit
---------------------- X 100
sales revenue
75
What are the three ways to increase sales revenue?
* increasing advertising and promotion to encourage people to buy
* Increasing the price of goods
* Reduce the price of goods
* CUT COSTS
76
What are the negatives of increasing advertising?
Marketing may be expensive and will add to costs
77
What are the negatives of increasing the price of goods?
Sales may fall and as a result if the sales fall significantly the sales revenue will also fall
78
What are the negatives of reducing the price of goods?
The sales will have to increase a lot for sales revenue to increase
79
How can costs be cut?
* By buying lower quality materials
* By buying materials in greater bulk to take advantage of bulk buying economies
* By cutting wages and the salaries of workers
* By introducing new technology to reduce the number of workers needed
* By moving to a different location where rent may be cheaper
80
What are the negatives of buying lower quality materials?
This may reduce the quality of the finished product and so sales may fall
81
What are the negatives of buying goods in greater bulk?
The materials need to be stored adding to the warehouse costs
82
What are the negatives of reducing wages/salaries?
It will reduce the morale of workers and so :
poorer quality service will be provided
soooo
customers will be lost and sales revenue reduced
83
What are the negatives of moving location where rent may be cheaper?
Moving costs may be high. The new location may be less convenient for customers and workers
84
What is a cash flow forecast?
A cash flow forecast sets out a business' expected inflows and outflows of cash over a period
85
What is cash flow?
Cash flow is the money that flows into and out of a business on a day-to-day basis
86
Why is a cash flow forecast important?
* When a business sets, the owners will want to know whether they are likely to have enough cash for their day-to-day needs
* If the business wants to borrow money the bank will want to know whether the business will be able to pay their debts and short term loans
87
What are the three main parts of a cash flow forecast?
* Cash inflow
* Cash outflow
* Net cash flow
88
What are examples of cash inflow?
* The savings of the owners invested into the business
* Expected sales revenue
* Bank loans received from banks and investors
89
What are examples of cash outflow?
* Cost of materials paid to suppliers
* Payments for advertising
* Wages paid to workers
* Rent or mortgage paid for the business premises
* Electricity costs
* Interest paid to banks for loans
* Taxes paid to the government
90
What is net cash flow?
Net cash flow is the Cash inflow - the cash outflow
91
Cash flow forecasts will show the business...
* The times they need to arrange for an overdraft
| * Whether its worthwhile going ahead with a project
92
Why is a cash flow forecast important to each stakeholder?
* SHAREHOLDERS - They will want to know the effects of the business decisions on cash in the business, Particularly if they have been asked to make further investments
* MANAGERS- Will want to see how their decisions will impact the cash in the business
* WORKERS- Will want to know whether there would be an occasion when their pay is delayed
* CUSTOMERS- Who have been asked to pay a deposit in advance of receiving their product may want to know the cash situation of a business
* SUPPLIERS- They may show an interest if the business is predicting cash-flow issues that may delay payments of trade credit. This will help them to decide whether to allow such credit.
* BANKS- As the suppliers of the finance they will decide whether to lend out money depending on whether the business will be able to repay loans and when they may need an overdraft
93
Ways to increase revenue;
* Changing prices
| * Increasing promotions
94
What are the advantages of changing prices?
This may increase revenue, particularly for increase of the price of necessities
95
What are the disadvantages of changing prices?
The effects of a price change on revenue is uncertain, particularly for luxury goods.
96
What are the advantages of increasing promotions?
It may lead to an increase in sales
97
What are the disadvantages of increasing promotions?
There may be no impact on sales
| They will be expensive, so costs will increase and cash will fall.
