finance ffs Flashcards
what’s the role of finance?
create financial accounts
keep and maintain financial records
make payments
analyse financial performance
why would a business need finance?
-start up costs and running costs
-fund expansion, replace worn out assets, fund new product development
what’s is internal finance?
easing funds from within the business. Often limited but means b keeps full control and doesn’t need to pay high interest
what is external finance?
raising funds from outside the business
raise larger amounts of funds compared to internal sources
examples of internal sources of finance
owners capital
retained profit
selling unwanted assets
examples of external sources if finance
loans
overdraft
trade credit
crowdfunding
new share issue
taking on a new partner
what is retained profit?
when a business has worked out its profits, owners can decide if they want to keep it for themselves or reinvest.
benefits of retained profits
cheap form if finance as no interest is paid
do not reduce ownership of the b (differs to selling shares)
drawbacks of retained profit
if it is facing problems, it is unlikely to have any profit to use
may not be high enough to finance the growth quickly
using too much profits may upset shareholders feel dividends r too low
what is owners capital
invest personal savings, redundancy or inheritance money into a start up
benefits of owners capital
no interest
don’t need to repay
don’t lose control over the b
drawbacks if owners capital
amount available is limited
selling unwanted assets
selling assets such as land, buildings, machinery or equipment on a one off basis
bank loan
amount of money borrowed for a set period with an agreed payment schedule. Repayment amount will depend on size and duration of the loan + rate if interest
benefits of bank loan
no lost control
repayments are spread over time
paying back in instalments helps with budgeting
drawbacks if bank loans
interest must be paid
what is an overdraft
Allows the business to withdraw funds from its account that are not there, up to an agreed maximum limit only used when b needs additional, temporary amounts of money.
benefits of an overdraft
good to cover short term payment problems
awarded quickly
doesn’t require security
drawbacks of an overdraft
repayable to the bank
will be an interest charge
what’s crowdfunding
can attract a crowd of investors - contribute towards an online fundraising target in turn for a reward
benefits of crowdfunding
provides investments when other sources may be unavailable
investors may have experience or skills they can offer
drawbacks of crowdfunding
investors will need to be offered a return
risk that there will be a limit to the amount of money ppl r willing to invest
business may not be of interest
what’s new share issue
new businesses set up as limited companies can sell shares
benefits of share issues
large sums of money can be raised
capital doesn’t need to be repaid
drawbacks of share issue
possible loss of control if og owners sell more that 50% of total shares
need to satisfy shareholders
what is trade credit
provided by a firms suppliers allowing the b to have goods now and pay later
benefits of trade credit
allow bs to use goods in manu process or sell goods before they have to pay
help a temporary shortage of funds
usually interest free
drawbacks of trade credit
difficult for new bs bc risk of a not being paid
goods must be paid for even if they do not sell
interest is charged if credit is not paid within the time limit
what is revenue
it is the income gained by a b from selling goods and services. price x quantity sold
what are costs
the spending that occurs to set up and run a b
what r fixed costs
costs which do not change in relation to output
what r variable costs?
costs which change as a result of changes in output
examples of fixed costs
rent
salaries
insurance
marketing costs
examples of variable costs
raw materials
wages
electricity
total costs
total fixed costs + total variable costs
what’s profit
difference between the total revenue and total costs
total sales - total costs
what’s gross profit
amount of money a b makes after the direct costs of making the products
what’s the net profit
profit the b generates after all other expenses not included in the calc for gross profit
gross profit calculation
total revenue - costs of sales
net profit calculation
total revenue - costs of sales - other expenses
gross profit margin
gross profit / sales revenue x 100
how to improve the gross profit margin
lower selling price as it may increase demand
inc price as may generate more revenue
inc advertising
how can you lower costs of sales
cut down in the price paid to suppliers
change suppliers
net profit margin
net profit / sales revenue x 100
average rate of return
average profit of investment / cost of investment x100
steps for average rate if return
income generated / years
/ by invest
x100
what’s break even
point at which sale revenue is the same as total costs
break even point in units
fixed costs / sales price per unit - variable costs per unit
