finance (the last one) Flashcards
owners savings
Owner invests their own savings into the company.
Advantage - The owner has complete control and it reduces the amount
which needs to be borrowed
Disadvantage - Owners with unlimited liability would risk losing their
savings
bank loan
Money from the bank that needs to be repaid, with interest.
Advantage – Payments are made in regular fixed instalments improving
cash flow.
Disadvantage – Interest can be expensive
bank overdraft
Bank Overdraft
Allows a business to withdraw more money from a bank account than is
available.
Advantage - Easy to set up, quick to access finance
Disadvantage - Must be paid back quickly otherwise can be expensive
government grant
Money from the Government that does not need to be repaid but there
is conditions attached.
Advantage - Provides finance which does not have to be repaid
Disadvantage - Tend to be one off payments – difficult to achieve (lots
of paperwork)
retained profits
This is when a business saves a portion of its profits and reinvests back
into the company.
Advantage - Profits belong to the company, so owner is in control
Disadvantage - Relying on profits is risky, as some months a business
may not make profits
trade credit
This is when a business can purchase goods from suppliers with a
delayed payment.
Advantage - Can sell goods using materials not yet paid for, improving
cash flow.
Disadvantage - Trade credit is at the discretion of the supplier
sale of assets
Selling machinery, vehicles or even land and buildings which are idle.
Advantage – Large amounts of money can be raised that was originally
tied up in assets.
Disadvantage – Equipment may then need to be rented when required
which can be expensive
share issue
Selling shares to new or current shareholders. Can only be used for
Limited Companies.
Advantage – large sums of money can be raised
Disadvantage – more shareholders = more dividends = less profit
hire purchase
Paying the item up in monthly instalments but eventually the business will
own the item (unlike Leasing)
Advantage – Will receive the item immediately without paying for it.
Disadvantage – The item isn’t actually owned until all payments have been
made - interest is added on could make this expensive.
venture capitalists
Provide finance to a business when banks decide a loan is too risky.
Advantage - Organisations who have poor credit rating might be able to
get finance
Disadvantage – Control and a share of the profits is given up to the
Venture Capitalists
debt factoring
Unpaid customer invoices are sold to a factoring company at a discount.
They then collect and keep the customer debts. They will get some cash
quicker rather than waiting to be paid the full amount.
Advantages - Responsibility is then passed on to the factoring company -
saving time and effort
Disadvantages - Business will receive less money than is actually owed.
crowdfunding
This is finance that is raised by online appeals. The idea is that lots of
people will donate money to a project or cause.
Advantages - large amounts of cash can be raised fairly quickly as many
individuals will donate small amounts if they believe in the cause
Disadvantages - some CF projects have equity attached to them, meaning
the individuals ask for a share in the business before they will invest
mortgage
A special type of loan used to purchase property and land
Advantage - can be taken over a long period of time e.g. 25 years
Disadvantage - if interest rates change, repayments might increase
factors that determine the source of finance
Ease of obtaining the source of finance; for example a successful
business can easily obtain a bank loan
The amount if finance the business is looking for. The business
might have to consider more than one source of finance
The length of time they have to pay back the finance. The business
might need a very long term source of finance, in which case an
overdraft is not suitable
The amount of interest that they have to pay back. Loans that
carry high rates of interest may not be suitable
The conditions attached to the source of finance eg a government
grant might have conditions attached that the business cannot
meet
purpose of a cash budget
A cash budget is a financial statement used for the following reasons:
To predict a positive cash flow situation (SURPLUS)
To predict a negative cash flow situation (DEFICIT)
To allow investment to be planned during a surplus
To allow action to be taken to avoid a deficit
To be compared with actual figures used to measure the
performances of individual departments or divisions
how to solve cash flow
Too much money tied
up in stock
Use JIT inventory stock control/sell of excess
inventory (through a sale)
Too long a payment
period for credit
sales
Charge higher interest on credit sales to
encourage customers to pay sooner
Not enough credit
purchases
Switch suppliers to those with interest-free
credit available on purchases
Increasing expense
costs
Try to reduce expenses – spend less on
rent/selling online through e-commerce
cash budget analysis
cash sales are falling
expenses are increasing
negative closing balance
CASH SALES
ARE FALLING
Could be caused by seasonal factors
such as selling goods suitable for
summer months only
There may also be other EXTERNAL
FACTORS e.g. a recession
Business should engage in
marketing activities e.g.
lowering prices, launching
promotions (BOGOF) to
encourage custom
EXPENSES ARE
INCREASING
The business is paying
increasing costs for
expenses, e.g. rising rent
costs in a certain month
Switch to cheaper premises or sell
online to cut costs dramatically
NEGATIVE
CLOSING
BALANCE
The business had a
deficit in a certain
month which means their
payments outweigh their
receipts
Arrange more finance in the short
term, such as another loan,
overdraft or attract investment,
e.g. through venture capital or
business angels
benefits of cash budget
It helps to highlight periods when cash flow problems may
occur — which allows the organisation to take corrective
action
Can be shown to a potential lender — which can then be used
to secure borrowing (bank loan etc.)
It can show periods of surplus cash — which can then be
used for capital investment (machinery/equipment)
It can be used to set departments/managers a budget —
which gives them a target to focus on.
It can be used to aid future financial planning — which can
help identify when an overdraft is required.
income statement terms
PROFIT FOR
THE YEAR
SALES
REVENUE
COST OF SALEs
ROSS PROFIT
EXPENSES
SALES
REVENUE
The amount of money made form selling goods or services
COST OF SALES
The amount of money spent on selling goods, calculated by:
(opening inventory + purchases) – closing inventory
GROSS PROFIT
The profit made from buying and selling, calculated by:
sales revenue – cost of sales
EXPENSES
Running costs incurred throughout the year (wages,
advertising)
PROFIT FOR
THE YEAR
The profit made after expenses are deducted, calculated
by; gross profit - expenses
statement of financial position terms
Non-current
assets
Items owned for a period of more than 1
year
Current
assets
Items owned for a period less than 1 year
Current
liabilities
Items OWED for a period of less than 1
year
Non-current
liabilities
Long term debts of the business, e.g. bank
loan, debentures etc.
profitability - gross profit ratio
GROSS PROFIT PERCENTAGE:
This measure the % of profit
made from buying and selling.
The higher the % the better.
How to improve:
Increase sales revenue by
increasing prices
Switch to a cheaper supplier
of purchases
profitablity - profit of the year ratio
PROFIT FOR THE YEAR PERCENTAGE:
This measure the % of profit made
ONCE EXPENSES ARE DEDUCTED.
The higher the % the better.
How to improve:
Reduce expenses by making staff
redundancies/cut overtime.
Increase sales revenue e.g.
increasing selling price.
profitablity - return on capital employed
RETURN ON CAPITAL EMPLOYED:
This measure the % of investment
that is returned to investors such
as SHAREHOLDERS. The higher
the better!
How to improve:
Attempt to increase profit for
the year e.g. by reducing
expenses or improving revenue.
liquidility - current ratio
CURRENT RATIO:
Measures the ability of a business to pay back
short term debts.
It is always expressed at X:1, over 2:1 is ideal, as it
has twice the current assets as current liabilities
and therefore a healthy cash flow.
How to improve:
If a business has less than 2:1 they need more
assets e.g. sell non-current assets for cash.
They should reduce current liabilities.
