Finance Equations Topic 5 Flashcards
Net cash flow formula
Total inflow-total outflow
Opening balance definition
The cash left in the business at the end of the last time period
Closing balance formula
Net cash flow +opening balance
Total Sales revenue
Price times quantity
Total variable costs
Variable costs per unit times quantity
Profit/loss
Total revenue-total costs
Gross profit
Total revenue- cost of sales
Net profit
Gross profit-expenses
Net profit margin
Net profit/total revenue times 100
BEP
Fixed costs/-sales revenue- variable costs
Percentage Change
Actual change/original amount times 100
How to calculate Gross profit margin
Gross profit / Revenue x 100
Average rate of return formula
dividing the average annual profit by the cost of investment and multiplying by 100 percent.
What is finance
Finance is the management of money in a business
The 2 purposes of the finance function
- Provide financial information
- Support business planning and decision making
What financial information does the finance department provide (3 main ones)
- They will work with banks and other lenders to attract finance for the business -LOANS from banks
- calculate the BREAK-EVEN of the business. This is important information to help the business plan and attract funding.
3.make sure all the business TAX IS PAID and that the business complies with any relevant financial laws
What information will the Finance department provide to help with business planning (2main ones)
- may provide the CASH FLOW FORECAST
The finance function may also calculate any potential PROFIT and LOSS for the year - advise the business owners on any project progress and therefore reduce the risk of decisions costing too much money
How does the finance department have an impact on operations and what they budget on? (5 things)
raw materials
components
new machinery
new premises
machine parts
What is the finance departments impact on marketing (5 things they help budget on)
advertising
• promotions
• market research
• social media
• new product development
What is the finance departments impact on HR? (5 things they budget on)
• Recruitment
• Interviews
• Job adverts
• Training staff
• Pay rises
Sources of raising finance internally: own___ cap___
Owners capital
money that has been saved up by an
entrepreneur
Sources of raising finance internally: re_____ pr____
Retained profit
When a business makes a profit it can leave some or all of this money in the business and reinvest it in order to expand.
Raising finance internally: sa___ of as____
Sale of assets
A business can sell a fixed
asset in order to generate finance.
Ways to raise finance externally: over_____
Overdrafts
An agreement with the bank to overspend on an account.
used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks.
Ways of raising finance externally: tr___ cr____
Trade credit
The ability to buy stock now and pay for it at a later date
must be agreed with a supplier
Source of finance externally: loans
A loan is money lent to an individual or business that is paid off with interest over an agreed period of time
Ways of raising finance externally: sh___ iss__
Share issue
The money raised when a business becomes a public limited company by offering shares in the business in return for capital.
money raised by shareholders through the sale of
ordinary shares
