Finance - Definitions Flashcards
Finance
The capital needed to start up and run a business
Internal
Capital found inside the business
External
Capital found outside the business
Internal - Retained profit
The profit made by the business in earlier years
Internal - Owners capital
The owner provide the money for the business. Capital invested by owners
Internal - Share capital
Selling shares for money
Internal - Selling assets
Can provide a business with large sums of money, depending on what is sold
External - Business angels
Individuals who invest in your business, and help support your business.
External - Bank loan
A loan given by the bank. High interest
External - Trade credit
A supplier gives a customer a period of time to pay a bill (30 days)
External - Overdraft
The bank will allow the business to withdraw more money than it actually has in its account
External - Hire purchase / leasing
A business can rent a piece of machinery and pay monthly instalments.
Own the asset after last instalment
External - Government grant
Money given to a business for a particular reason
External - Venture capital
They buy shares in small and risky companies at the early stages of development
External - Mortgages
Loans from banks and building societies used to buy land and buildings
Cash flow
Is the amount of money moving in and out of a business on a day to day basis
Who effects cash flow?
- Season
- External factors
- Competitors
- Changes in demand
Cash flow statement
A cash flow statement is financial amount that records the receipts and payments of a business (previous year)
Net cash flow
Net cash flow is the difference between the cash coming in and the cash flowing out
Cash flow forecast
A financial plan to predict receipts and payments over a future period
Why is it useful to forecast cash flow?
- Identify if and when business has a cash flow problem
- Helps business to plan ahead
- Identify / find sources of finance to resolve
- Show it to the bank to get a loan
- Assess whether business is viable
Liquidity (CF problem)
If a business experiences problems where they do not have enough cash to cover their payments they cannot continue to trade
What causes CF problems?
- If a business overspends
- Unexpected costs
- Seasonal changes
- External factors - e.g. competitor, economy
Trade credit:
1. How can this improve cash flow?
- What if you are giving trade credit to customers?
- You might refuel receipts firn selling the goods, before you have to pay your suppliers leading to a positive cash flow
- You might have money going out to pay your suppliers, but do not get the inflows from your customers until later
Breakeven
The level of output at which the business makes neither profit or a loss
Why is breakeven important?
- Monitor their performance
- Know when they will earn profit
- See if business is viable
- Assess how changes effect breakeven
Margin of safety
- The difference between your actual output and the breakeven.
- Measures the amount by which a businesses current level of production exceeds its break even level of production
How is breakeven useful to a business?
- See how long it will take to be profitable
- See if need any sources of finance
- Wether business is worthwhile
- Assess the impact of change in variables
Breakeven limitations:
- Made assumptions that aren’t true
- Doesn’t consider external factors
- If a time selle product at different prices it is difficult to use
Investment project
When a business invests in an asset in the hope of making a profit from its use
Income statements
A record of the costs and revenues of a business over a period of time (1 year)
Reasons why income statements are useful
- If a business is making a loss it shows directors what is causing it
- Assess business performance in terms of profitability
- Identify which costs need to be reduced
Profitability ratios
These ratios are ways of measuring how profitable a business is so that its performance can be assessed
