Finance in Business Flashcards
(gross) Profit
the difference between revenue and costs.
Profit= revenue-costs
Revenue
Revenue= Quantity of y x price
The overall measure of all sources of a company’s income, including its sales, for a given period of time.
If you want to increase rev, you can increase quantity or price.
Turnover
is the total sales generated by a business in a specific period
Return on investment (ROI)
what you get back from investment.
Earnings per share
HIgher EPS better
EPS= profit/ all shareholders
Price to earnings ratio
ratio based on EPS
EBITDA
Earnings Before Interest Tax Deappreciation and Amortisation
Basically profit before interest and tax. Approximation of cash flow of a company.
Characteristics of debt-based funding:
Companies prefer this option)(bank loan
Legal obligation to repay amounts borrowed
Interest or equivalent charged on funds borrowed
Usually a maturity date
Certain of when it needs to be repaid
Start up has to pay larger interest due to risk aprox. 10-15%
whereas old realiable company 4-5%
Characteristics of equity-based funding:
shares
No legal obligation to repay amounts invested (therefore no maturity date)
Usually funds are exchanged for shares
Investor rewarded through capital growth and/or dividends
Maturity Date (loans)
when money needs to be paid beack to lender
Dividence
Paid once a year to shareholders to reward them for having shares.
Loan (debt based funding)
Bank/lender lend you money, you must pay back by certain date. Is tax deductable.
Debentures/ bonds (debt based funding)
Repay at fix rate of interest, repaid on specific date.
Leasing(debt based funding)
Borrowing. Pay in installments until yo own outright. e.g. like leasing a car till you own it.
Overdraft (debt based funding)
Can go below 0 in your bank account.
allows the individual to continue withdrawing money even if the account has no funds in it or not enough to cover the withdrawal. Basically, overdraft means that the bank allows customers to borrow a set amount of money.
Redeemable preference shares (debt based funding)
are a type of preference share. A company issues them to shareholders and later redeems them. This means the company can buy back the shares at a later date, however there is no obligation for company to repurchase the shares in future.
Redeemable preference shares (debt based funding). Focusing on the preference bit
Those share holders get preferential dividence. Preferential shareholders get paid it first.
Shares/ (mainly) Right Issues (equity-based funding)
way of protecting shareholding. Gives the right for original shareholders to buy new shares to protect the amount of shares they own. Say 3 people own all the shares for a business, if a 4 person comes along they still want there 1/3 so get right to buy first.
Irredeemable preference shares (equity-based funding)
is a kind of preference share which have no maturity period to be redeemed. Means the investors of such shares will not get their capital back.
Crowd sourcing (other/hybrid funding)
micro financing. say 100 individuals lend you £1 each.
the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.
Convertible shares(other/hybrid funding)
is a debt that can be turned into shares in the future
Factoring (other/hybrid funding)
Companies facing a cash-flow squeeze and slow-paying customers often sell their invoices or accounts receivable to specialized companies called factors. … Companies that use factoring like it because they get money quickly rather than waiting the usual 30 or 60 days for payment.
e.g. sell it to factoring company for £15, then factoring company get whole £20 back.
Difference between debentures and bonds
Debentures- can be traded
Bonds- can’t be traded
Angels (other/hybrid funding)
A high net individual. Like dragons den. Wealthy investor. Not common.
Venture capitalist- give you money for shares in your business.
Why do shareholders trade shares?
As companies have no obligation to buy them back.
How much is a company worth
shares x current share prices
constantly goes up and down.
Why is equity funding more expensive than debt funding
Equity risky- chance yo won’t get your money back at all
Debt- certain when you are going to get your money back and how much.
Why are bonds cheaper then debentures?
A bond is typically a loan that is secured by a specific physical asset. A debenture is secured only by the issuer’s promise to pay the interest and loan principal.
What is a financial statements?
Retrospective view of the company
Provide limited but useful insights into the performance and position of an organisation
Prepared in accordance with accounting standards (eg. Tesco Plc financial statements are prepared based on IFRSs)
There is a lot of useful information in the notes to the financial statements!
Order of how things come on Profit or Loss Statement
Revenue Cost of sales (Direct costs) Gross profit Operating expenses Finance expenses Income tax expense
Revenue (eq)
price x quantity
Cost of sales (direct costs)
cost of providing your service/company
Gross profit (eq)
revenue- cost of sales
Operating expenses (indirect costs)
Overhead costs e.g. marketing and management
are the costs a company incurs that are not related to the production of a product. These expenses include items like payroll, rent, office supplies, utilities, marketing, insurance and taxes. Operating expenses are essentially the costs to keep the business running.
Financial Expenses
Value of expenditures incurred by the organization during the reporting period due to interest, fees, and commissions incurred on the organization’s liabilities, including any client deposit accounts held by the organization, borrowings, subordinated debt, and other financial liabilities during the reporting period.
Income tax expense
19% avg company tax
Profit or Loss statement shows
profitiablity over last 12 months
Shareholders own
a company
Board of directors run
a company
Balance sheet/ Statement of Financial Position what does it measure
Measures financial position
Balance sheet/ Statement of Financial Position whats in it
Comprises of three elements:
Assets
Liabilities
Equity
Assets (eq)
assets = liabilities + equity
Balance sheet/ Statement of Financial Position shows
shows end of financial year (most companies this is 31st December)
Show you the financial position of company at one single point in time.
Asset (def)
A resource that is controlled by a business as a result of past events, is expected to generate an inflow of future economic benefit.
Liabilities (def)
A present obligation arising from past events, which is expected to result in the outflow of economic benefits.
Equity (def)
Owner’s capital in the business, i.e. the residue of assets less all liabilities.
Funds that belong to the owners of the business.
Assets = liabilities + Equity
The accounting equation will always hold true on a balance sheet.
If numbers on a financial statement are in brackets it means
they are negative
3 types of financial statements:
Profit or Loss statement
Balance Sheet/ Statement of Financial Position
Statement of cash flows
Statement of cash flows shows
how much money has come into the business and how much has left
This shows actual cash that went in and out of the business
Internal and external cash flows are very (statement cash flows)
different in terms of structure and format.
External cash flow statements reconcile to (statement of cash flows)
the balance sheet and income statement and show cash movements in the business in three sections
What are the three sections of external cash flow statement:
(statement of cash flows)
Cashflow from operations
Cashflows from investing activities (shares brought into other companies)
Cashflows from financing activities (this is debt and equity)
Ratios are useful because:
Techniques used to better understand the performance and position of a company at a given point in time using the information provided in the financial statements.
There are hundreds of ratios and different organisations calculate them in various ways.
Contrary to popular belief it is possible to create your own ratios.
They are useful when used against a benchmark or comparison.
Ratios are limited because:
Like financial statements they are retrospective.
They are particularly limited if they are not calculated on a consistent basis
They often do not show the full picture of what has happened in a company – consider the example of earnings per share (EPS)
You always need a benchmark to compare it ratios to
can be last years figures or other companies figures
Gross profit (eq) (is a %)(profitability)
Gross profit= (gross or net profit/ revenue) *100
info comes from profit or loss account
Gross profit and net profit (explanation)(is a %)
The higher the better.
Gross profit measures profitability excluding
overheads and other costs.
Net profit includes all costs.
Return on Capital Employed (eq)(is a %)(profitability)
Return on Capital Employed = (Operating profit or Earnings before tax (P&L)/ Total Capital Employed (BS)) *100
Return on Capital Employed (explanation)(is a %)
The higher the better.
How many £s of profit are generated per £ invested
in the business?
Revenue per employee (eq) (is a £) (profitability)
Sales Revenue per Employee = Sales Revenue (P&L)/ Number of Employees
Revenue per employee (explanation) (is a £)
The higher the better
One measure of employee efficiency.
Capital Employed =
debt +shareholders funds
Current ratio (eq)(ratio or %)(liquidity)
Current Assets / Current Liabilities
Current ratio (explanation)(ratio or %)
Usually 1:1 or higher is a good sign.
It may be lower in some industries (eg. Retail)
This is a critical ratio as cash is king!
Quick Ratio (eq)(ratio or %)(liquidity)
(current assets -inventory)/ current liabilities
Grants
Government funds, free money and a lot of it.
are non-repayable funds or products disbursed or given by one party (grant makers), often a government department, corporation, foundation or trust, to a recipient, often (but not always) a nonprofit entity, educational institution, business or an individual.
Boot strapping
Doing everything cheap and on the cheap. Cut costs, maybe cut corners
Rewards-based crowdfunding:
I.e. You give money to a start up and they will give you VIP merchandise, special access to events/parties etc
No equity or return…
Equity-based crowdfunding:
I.e. You give money to a start up and they will give you an equity stake in their business.
You may lose your entire investment.
Debt-based crowdfunding:
I.e. You give money to a company and they agree to pay you back on an agreed date for an agreed rate of interest (2 – 6%)
QUICK RATIO (ratio or %)((def)
The same as current ratio but excludes inventory .
This is because stock is less liquid.
Ability to pay debts as they fall due (ratio)(eq)
= Cash generated from Operations/Current Liabilities (BS)
Ability to pay debts as they fall due (ratio)(def)
Lenders may ask for a ratio of 3:1 or higher as a covenant.
Cash generated from operations comes from the
cash flow statement.
Gearing ratio (eq)
= Debt / (debt + equity)
Gearing ratio (def)
A company is highly geared if it is funded primarily by debt.
Investors usually prefer a balance between debt and equity.
Shareholders like this ratio in the middle, as don’t want a company too reliant on one thing
Dividend Yield (%)(eq)
Dividend per Share net of base income tax rate / Market Value per Share
Dividend Yield (%)(def)
The higher the better.
Effectively measures dividend ROI for shareholders
Only useful for companies that issue dividends
Earnings per Share (pence)(Eq)
Net profit available to shareholders / Number of Shares in Issue
Earnings per Share (pence)(def)
The higher the better but this can be misleading if a share issue or buy back takes place in the year.
Used as the basis for P/E ratio
Published in financial statements
PE Ratio (ratio)(eq)
Market Price Per Share / Earnings Per Share
PE Ratio (ratio)(def)
A higher P/e ratio usually indicates that the market is anticipating growth in that company.
It changes when the share price changes and is reported on daily in the press.
