Finance and accounts Flashcards
Sources of finances:
Donations Debt Factoring Share capital Retained profits Government grant /subsidies Trade credit Venture capital Selling assets Personal funds Overdrafts Loan capital
Donations
a gift made by an individual or an organization to a non-profit organization, charity, or private foundation
Debt Factoring
a financial arrangement in which afactoringcompany takes responsibility for collecting money relating to a business’s invoices, and immediately pays that business part of the total amount owed on the invoices
Share capital
the part of the capital of a company that comes from the issue of shares.
Retained profits
Is theprofitkept in the company rather than paid out to shareholders as a dividend.
Government grant /subsidies
is a financial award given by the federal, state, or localgovernmentauthority for a beneficial project of some sort
Trade credit
thecreditextended to you by suppliers who let you buy now and pay later.
Venture capital
When someone else is investing gin the business to receive part of the ownership of the business to receive dividends.
Selling assets
Things that are resources owned by acompanyand which have future economic value that can be measured and can be expressed in dollars. Tangible or intangible.
Personal funds
receiving money from family
Overdrafts
when you make any withdrawal for an amount greater than the balance in yourbusinessdebit account. Thismeansyou can continue making withdrawals even if the account is empty
Loan capital
Money raised from loans rather than shares but interest needs to be paid
Capital expenditure
spending on a firm’s fixed assets.
Capital expenditure is normally funded using long-term sources of finance…
Fixed asset
something a firmplan to keep for longer than one year;
Revenue expenditure
spending on a firm’s general operationalcosts.
Revenue expenditure is funded using short- or medium-term sources of finance.
Examples of revenue expenditure include:
Examples of revenue expenditure include:
- Paying wages and salaries to workers.
- Paying suppliers.
- Utility bills such as gas, electricity and water.
- The repayments of debts, such as mortgages and loans.
- Settlingtax bills withthe government.
Two types of spending:
1) Capital expenditure
2) Revenue expenditure
Insolvency
is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent.
If a firm cannot pay its revenue expenditure, it will go out of business rapidly. This is referred to as insolvency.
Internal sourceof finance
is money that israised from the business’s existingassets.
Theyinvolveusing money the company (or owner) has previouslyearned. As internal sources donot have to be repaid, there is lessrisk or cost associated with using them, when compared to external sources.
What are the internal sources of finance ?
- Person funds - -This is money invested by the owner(s)of a company.
- 1) Retained profits - Retained profit is money a firm has left at the end of the trading yearafter paying all costs, expenses, dividends and taxes. (The company’s savings)
- The sale of assets
An asset is something a company owns. Fixed assets are items a company keeps for a period greater than one year, and can be used over and over again. These usually generateincome for a company.
They can be tangible, such as land, building or machinery or intangible, like patents or brand names.
External sources
of finance come from outside the business. They involve an external stakeholder taking a risk and investing into the company.
What are the external sources of finance?
- Equity finance
In return for offering equity finance, the provider will demand ownership of part of the company. Equity finance does not have to be repaid, and no interest is charged. However,the opportunity cost to the business of accepting equity finance is a loss ofcontrol and a loss of future dividends.
- Share capital
This is money that is raised through the issue of shares. (money they get from selling their shares) - Business angels - wealthy people investing there money - type of share capital, only occurs when not on the stock exchange
- Venture capitalists - Companies who use their clients money to fund the investments, only occurs when not on the stock exchange
2 - Debt financing
Debt finance is money that is borrowed from a bank or other financial institution. The borrowed money is available quickly so canfund investments.
However, when money is borrowed,interestmust be paid
Interest – is the cost of borrowing or the reward for saving money in the bank.
-Loan capital
A loan is a medium or long-term (depending on the nature of the loan and the business) source of finance,typically used to buy fixed assets. Mortgages are a special type of long-term loan, lasting 20 or 30 years, used to purchase land or buildings.
- Overdrafts
An overdraft can be thought of as a high-cost, short-term loan. An overdraft is attached to a bank account. It allows the account holder to withdraw an amount of money that is greater than they currently hold.
*Credit cards
Businesses will often use credit cards to finance small purchases needed for business purposes on short notice. A credit card allows you to borrow money, and either pay it back next month (and you won’t pay interest), or pay it back over time and when you can (for an interest charge)
3 ) Financial aid
Financial aid is money that is invested in a business with almost no opportunity cost. It does not need to be repaid and there is no loss of ownership.
-Subsides
a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.
- Grant -
a sum of money given by a government or other organization for a particular purpose.
A grant is like a loan, but with no interest, that does not need to be paid back. Governments may offer grants to businesses that are in a position to help thewider community.
4 ) Other external sources of finance
Our final threesources of finance are equally as important as those above. However, they do not fully fit into any of the three top categories.
- Trade credit
Trade credit- is thecreditextended to you by suppliers who let you buy now and pay later. - Debt factoring
Debt factoringis the process of selling your unpaid customer invoices, known as accounts receivable, to adebt factoringprovider or “factor.” - Leasing
Hiring something for a period of time in exchange for money rather than buying it.
Business angels and venture capitalists explanation
These twosources of finance aresimilarin some ways. Both are a source of share capital and only available to companies that arenotlisted on the stock exchange. Both venturecapitalistsand business angels are experienced investors looking forfast-growing
companies, which can potentially make them a profitablereturn. In addition to their investment, they may offer non-financialsupport, which could take the form of businesscontacts, advice and mentoring.
- Business angels
Business angels are successful, wealthybusiness people, who invest their money into exciting new businesses, with a high growth potential.In return for their investment andguidance, business angels require part ownership of the business and a cut of all future profits.(e.g. Dragons den) - Venture capitalists
The fundamental difference between venture capitalists and business angels is whose money is invested. Business angels are privateindividualswhorisk their money.Venturecapitalists are companies that use the money from their clientsto fund investments. The long-term aim for a venture capitalist is to help the company grow so they can later sell their stakefor an increased price.
Short term:
Less than a year
medium term
1>5 years
long term
more than fives years
List examples of of each type of loan
Short term:
- trade credit
- debt factoring
- leasing
- subsides
Medium term:
- loan capital
- leasing
- subsides
Long term:
- share capital
- venture capital
- business angle
- loan capital
- grants
When considering what type of finance, a business needs other things could be considered other than the type and size of finance needed. These include:
- Gearing
- Purpose
- Ownership
- The purpose of funds
When deciding an appropriate source of finance, consider what the money is going to be used for. If it is a long-term investment such as building a new factory, then onlya long-term source of finance should be recommended. Likewise, ifthe money is needed for a few weeks or months, then a short-term source would be appropriate. - Ownership type and company size
Not all sources of finance will be available to every business. Sole traders and partnerships have limited choices. These businesses have limited experience and size and as a result, banks will be unlikely to lend them large sums of money.
Gearing
refers to the amount of loans a company currently has.
A company is highly geared if more finance comes from loans rather than from money invested into the company by owners. This means banks are unlikely to lend more loans.
Gearing- calculation
long term liabilities / capital employed x 100
Classification of costs
¬ Fixed costs
¬ Variable costs
¬ Direct costs
¬ Indirect costs
Semi- variable
a cost composed of both fixed and variable costs.
Examples:
• mobile phone bills, which feature a monthly fixed fee plus a charge for any additional units that are used
• production staff, who are paid a basic salary plus a bonus for any additional output.
Direct costs
are those that can only be attributed to a single part–that is, directly linked to the sale of the goods or the provision of the service.
Examples include:
• staffing cost of employees in that particular section of the business
• utility costs of a single branch of a chain store
• material costs for a product line
• running costs of a single store.
Indirect costs
are costs that are not directly accountable to a cost object. Indirect costs may be either fixed or variable.
Examples include: • nationwide advertising campaigns • accountancy and auditors' fees • salaries of the board of directors • expenses of running a central human resources department • ICT and infrastructure costs.
Revenue
income from selling goods and services.
also referred to as “sales” or “turnover”
Revenue calculation
Selling price x output
Revenue stream
All the different ways in which businesses generates capital.
All the ways in which a movie makes its money: Food and drink, Merch and Movie tickets.
Break-even chart
A tool that businesses use to determine how many sales are needed to cover all their costs.
Break-even output
The level of output that generates sufficient revenue to cover total costs without any profit left.
