Finance-Prelim Flashcards
What are some short-term sources of finance?
Bank overdraft, government grant, retained profits, leasing, hire purchase, trade credit
Describe a bank overdraft.
Allows a business to overdraw an amount of money from their bank account.
What are the advantages of a bank overdraft?
-Easy to set up
-Quick to access finance
What is a disadvantage of a bank overdraft?
-must be paid back quickly or can be expensive due to high interest rates
Who is a bank overdraft available to?
-sole traders
-partnerships
-LTDs
Describe a government grant.
given to encourage entrepreneurs to start up a new business or open a business in a particular area by offering expert knowledge as well as financial assistance
What is an advantage of a government grant?
-Provides finance which does not need to be repaid
What is a disadvantage of a government grant?
-one off payments
- must fulfil criteria
Who are government grants available to?
-social enterprises
-charity
Describe retained profits.
When a business saves a portion of its profits and reinvests back into the company
What is an advantage of retained profits?
profits belong to the company so the owner is in control
What are the disadvantages of retained profits?
-relying on profits is risky, some months a business may not make profits
-May run out of retained profits quickly
Who are retained profits available to?
-Sole trader
-Partnership
-LTD
-Social enterprises
Describe leasing.
A business can lease or rent vehicles or machinery from another company. They pay a monthly fee and the leasing company takes care of maintenance.
What are the advantages of leasing?
-leasing company will repair and maintain the machinery which saves business costs
-if a business has limited finance this does not require a large initial payment.
what are the disadvantages of leasing?
-the business will never own the asset
-in the long run, the monthly costs will total to more than it would have cost to buy the asses outright
Who is leasing available to?
-sole trader
-partnership
-LTD
What are some medium-long term sources of finance?
Bank loan
Share issue
Mortgage
debt factoring
loan from family and friends
Describe a bank loan.
Lend a business money over a short period of time. This is then paid back in monthly instalments with interest.
What are the advantages of a bank loan?
-payments are in regular fixed instalments which means
-it is easier for the business to budget
What are the disadvantages of a bank loan?
-interest must be paid along with the amount borrowed.
-small businesses tend to pay higher interest rates
Who is a bank loan available to?
-sole trader
-partnership
-LTD
-social enterprise
Describe a share issue.
selling more shares to raise capital for the business
What are the advantages of a share issue?
-large sums of money can be raised
-does not need to be paid back
What are the disadvantages of a share issue?
-more shares means more dividends
-selling shares may result in less control of the business
Who are share issues available to?
LTD’s
Describe a mortgage.
A loan from the bank which can only be used to buy property.Paid back in monthly instalments.
What are the advantages of a mortgage?
- business can borrow a large sum of money over a ling period
-Monthly payments are agreed with the back which makes it easier for the business to budget.
What are the disadvantages of a mortgage?
-interest has to be paid on top of repaying the mortgage.
Who are mortgages available to?
-sole trader
-partnership
-LTD
What is a sole trader’s source of finance?
owner savings
What is a partnership’s source of finance?
partners investing their savings
What is an LTD’s source of finance?
Financed through selling shares to family and friends
What is the public sector’s source of finance?
tax
What are the third sector’s sources of finance?
grants, donations, fundraising
What is the break-even point?
A business breaks even if it does not make a profit or a loss.
The breakeven point is where TOTAL REVENUE is the same as TOTAL COSTS.
Why is the Break Even Important for a business?
Breakeven is a useful planning tool used by managers to identify the number of items they must sell to ensure they will at least cover their costs and not make a loss – the breakeven point.
What is a fixed cost?
These are the expenses the business incurs which do not change with output.
These costs are usually the same amount each month.
what are some examples of fixed costs?
Items such as rent, advertising, rates and salaries are fixed costs.
What are variable costs?
These are the expenses which change according to the level of output, therefore, the more the business produces the higher the variable costs will be.
What are some examples of variable costs?
Items such as raw materials or electricity are variable costs
How do you calculate variable costs?
Cost Per Unit X Number of unit
What is the total cost?
Total cost is the fixed costs and variable costs added together. This is the amount of money the business spends to make and provide its goods and/or services.
What is short-term finance?
Finance which is needed to cover the day to day expenses and running costs
What is long-term finance?
Finance which is used to grow and is paid back over a number of years
What is trade credit?
This is when a business can purchase goods from suppliers with a delayed payment (buy now pay later).
What is an advantage of trade credit?
Can sell goods using materials not yet paid for. Improving cash flow.
What are the disadvantages of trade credit?
-If a business does not pay on time there may be a charge
- If this happens repeatedly the business may get a ‘poor credit rating’ and be refused credit in the future
Who is trade credit available to?
Private Sector
What is leasing?
A business can lease (or rent) vehicles or machinery from another company. They pay a monthly fee and the leasing company takes care of the maintency.
What are the advantages of leasing?
-The leasing company will repair and maintain the machinery which saves the business costs.
-Does not require a large initial payment
What are the disadvantages of leasing?
-The business will never own the asset
-In the long run the monthly costs will total to more than it would have cost to buy the asset outright.
Who is leasing available to?
Private sector
What is a hire purchase?
Allows a business to buy an asset and pay it back over a period of time e.g. 36 months. An initial deposit is required followed by monthly payments.
What are some advantages of a hire purchase?
Allows a business to buy expensive machinery with only an initial deposit.
What are some disadvantages of a hire purchase?
-The business does not own the asset until the final monthly payment e.g. at the end of the 36 months.
-Interest also must be paid which can make the asset more expensive in the long run
Who is a hire purchase available to?
the private sector
What are personal savings?
Owner’s use their own savings to invest in to the business
What are some advantages of personal savings?
The owner has complete control
Reduces the amount which needs to be borrowed
What are the disadvantages of personal savings?
Savings could be small and may not last long
Owners with unlimited liability would risk losing their savings
Who are personal savings available to?
Sole trader
Partnership
Social Enterprise
What is a loan from family and friends?
A business owner can borrow money from family or friends
What is the advantage of a loan from family and friends?
The owner may not have to pay any interest on the loan
What is the disadvantage of a loan from family and friends?
This could lead to arguments or disagreements between family and friends
Who is a loan from family and friends available to?
Sole trader
Social Enterprise
What is debt factoring?
This is when a business sells their debts to a debt factoring company.
What are the advantages of debt factoring?
-The business will recoup some of the debt that they are owed.
-They save the time of having to chase up customers to pay the debt.
What is the disadvantage of debt factoring?
The business will not receive the full amount of the debt that they are owed.
Who is debt factoring available to?
private sector
Be able to draw a break even diagram.
What is a cash budget and waht does it allow you to do?
A cash budget is a document that can be prepared to help manage cash flow.It allows the business to plan for the future
What are some cash flow problems?
Sales are decreasing
Purchases are increasing
Wages are increasing
Closing balance is decreasing
Paying for an asset in full
What is the purpose of creating a cash budget?
To show if the business will have a surplus (more cash expected to come in than will go out) or deficit (more cash expected to go out than will come in) of cash.
It can show if additional finance is required, e.g., overdraft or loan.
It can identify suitable times for a business to make an investment e.g. buying a new vehicle
It can help control expenses by highlighting periods when expenses could be high.
It can help in making decisions and budgeting
It can be used to compare the budgets from different departments in the business
What is the solution to sales decreasing?
Increase selling price
Increase promotions
What is the solution to purchases decreasing?
Find a cheaper supplier
Ask for a bulk buying discount (economies of scale)
Ask for trade credit- so pay the supplier at a later date
What is the solution to wages increasing?
Reduce staff hours
Offer no overtime
Make redundancies
What is the solution to the closing balance decreasing?
Reduce the number of payments
Find a cheaper premises to reduce rent payments
What is the solution to paying for an asset in full?
Lease the asset
Use hire purchase
What are some reasons for poor cash flow?
Spending too much on stock that has not sold
Giving customers too long to pay off debt
Not receiving enough money from sales
Not receiving enough time to pay suppliers bills
Owners taking too much money out of the business
How can you improve cash flow?
Looking for a cheaper supplier to reduce cost of purchase
Selling machinery no longer needed
Increasing marketing to boost sales
Offering discounts to customers if they pay on time
Taking out a bank loan or overdraft
key points?
A cash budget is a future prediction: the information in the cash budget has not already happened, it is a prediction of the future. Do not use the past tense.
A cash budget looks at CASH FLOW, never mention profit or loss!!
A cash budget predicts the next few MONTHS. It is not an annual prediction
What is an income statement?
An income statement shows how much profit or loss a business has made over a period of time (usually one year).
Compare a cash budget to an income statement?
A cash budget looks at cash whereas an income statement looks at profit/loss.
A cash budget is a forecast whereas an income statement is based on actual figures.
What is the purpose of an income statement?
-To calculate gross profit which is the profit made from buying and selling.
-To calculate the profit for the year which is the total profit the business has made once all expenses have been deducted.
-To calculate the cost of sales
-To show net sales
-To calculate the total cost of expenses
-To show other incomes
-For legal reasons: an LTD must publish their income statement each year
-To aid decision making
-For tax reasons- corporation tax based on the profit for the year
What are sales?
The income (revenue) received by the business from selling its goods
What is opening inventory?
The inventory left over from last year which can be sold in the current year
What are purchases?
The amount of inventory purchased in the current year
What is closing inventory?
The amount of Inventory left at the end of the current year which has not been sold (becomes the opening inventory for the following year).
What is gross profit?
Sales income less the cost of sales
Profit from buying and selling
What are expenses?
The expenses incurred in running the business, for example, wages, salaries and utility bills (gas, electricity)
What is profit for the year?
Gross Profit less expenses
Overall profit that has been made that year
Revise income statements
How can a business increase sales revenue?
Increased advertising
● Short term promotions eg BOGOF
● Increase price
How can a business reduce costs?
Find a cheaper supplier of stock
● Reduce number of employees
● Reduce number of hours worked by employees (eg overtime)
● Find a cheaper supplier of utilities
● Buy stock in bulk to receive discounts
What are some features of spreadsheets?
formulae, charts, templates, ‘what if’ function
What can formulae be used for and what does it do?
Calculations
This reduces calculation errors e.g. using autosum
Information can be updated quickly
What can charts be used for and what do they do?
can be created to display information
This can make the information easier to understand
What can templates be used for and what do they do?
can be used to create income statements or cash budgets
This creates professional documents
What can the ‘what if’ function be used for?
can be used to help managers make decisions
How can email be used?
Email can be used to send information and attachments to various people, including, staff within the finance department, suppliers and customers.
Can also be used to remind customers when their payments are due.
How can accounting software be used?
Specialist software can be used to process financial information quickly, eg Sage.
Reports can be produced using templates to ensure consistency.
Some packages can link to HMRC to calculate how much tax is due to be paid
How can presentation software be used?
Presentation Software can be used when presenting financial information to staff to inform them on the business’ performance
Could be used to display financial data to shareholders at the Annual General Meeting (AGM)
How can websites/apps be used?
Customers can gain access to their account information, including outstanding balances using the Internet. And use the website to pay outstanding invoices
Use online banking apps to check the business’ bank balances
Pay suppliers using online payment systems
