finance unit Flashcards
what is a bank overdraft
Allows a business to overdraw an amount of money from their bank account
advantages of a bank overdraft
- Easy to set-up
- Quick to access finance
disadvantages of a bank overdraft
Must be paid back quickly or can be expensive due to high interest rates
what sources of finance would be used in private sector
- bank overdraft
- government grant
- retained profits
-leasing
-bank loan - share issue
- mortgage
what sources of finance would be used in third sector
- government grant
- retained profits
-bank loan
what is a government grant
A government grant is finance granted to a business from the government. This is often given to encourage entrepreneurs to start up a new business or open a business in a particular area
advantages of a government grant
Provides finance which does not have to be repaid
disadvantages of a government grant
- One off payments
- Will have criteria the business must fulfil in order to obtain the grant e.g. provide employment in an area
what is retained profits
This is when a business saves a portion of its profits and reinvests back into the company.
advantages of retained profits
Profits belong to the company, so owner is in control
disadvantages of retained profits
- Relying on profits is risky, as some months a business may not make profits
- May run out of retained profits quickly
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.
advantages of leasing
- The leasing company will repair and maintain the machinery which saves the business costs.
- If a business has limited finance this does not require a large initial payment
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.
what is a bank loan
A bank loan is when a financial institution such as a bank or building society will lend a business money over a set period of time. Usually 5 to 20 years.
advantages of a bank loan
- Payments are in regular fixed instalments
- This makes it easier for the business to budget
disadvantages of a bank loan
- Interest must be paid along with the amount borrowed
- Small business tend to pay higher interest rates
what is a share issue
Selling more shares raises capital for the business
advantages of share issue
- Large sums of money can be raised
- This does not need to be paid back
disadvantages of share issue
- More shareholders means more dividends (profits are shared)
- Selling shares may result in less control of the business
what is a mortgage
A loan from the bank which can only be used to buy property. This is paid back in monthly installments.
advantages of a mortgage
- The business can borrow a large sum of money over a long period of time e.g. 25 years.
- Monthly payments are agreed with the bank which makes it easier for the business to budget.
disadvantages of a mortgage
Interest has to be paid on top of repaying the mortgage.
what is a fixed cost
These are the expenses the business incurs which do not change with output.
what is a variable cost
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.
examples of fixed costs
- rent
- advertising
- rates
- salaries
examples of variable costs
- raw materials
- electrisity
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
what is the break even formula
fixed costs/ contribution ( selling price - VC) = break even
break even graph
look at graph
how to calculate sales revenue
selling price x units sold = sales revenue
how to calcualte profit or loss
slaves revenue - total cost = profit/loss
how to calculate selling price
output/sales revenue = selling price
how do business generate cash
making profit from what they sell e.g sales
examples of how business spend money
- advertising
- wages
- rent
- purchases
why do business have to have enough cash
so they can purchase stock
pay wages, rent, advertising
cash flow problems
- sales decreasing
- purchases increasing
- wages are increasing
- closing balance is decreasing
- paying for an assest in full
how to solve the cash flow problems
- sales decreasing - increase selling price , increase promotions
- purchases increasing - find a cheaper supplier, ask for bulk buying discount, ask for trade credit
- wages are increasing - put employees on 0 hour contracts or make staff redundant, offer no overtime
- closing balance is decreasing - reduce the number of payments
- paying for an assest in full- lease or use a hire purchaes
what is a gross profit
Sales income less the cost of sales
Profit from buying and selling
what is profit of the year
Gross Profit less expenses
Overall profit that has been made that year
what are expenses
the expenses incurred in running the business, for example, wages, salaries and utility bills (gas, electricity)
how to 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
how to increase sales revenue
●Increased advertising
●Short term promotions eg BOGOF
●increase price
spreadsheets
- Formulae can be used to perform calculations
This reduces calculation errors e.g. using autosum - Charts can be created to display information
This can make the information easier to understand - Templates can be used to create income statements or cash budgets
- documents can be used by multiple employees
- can be used to remind customers when there payments are due
- can be used to send information to people
powerpoint
- can be used to display financial data to shareholders
- for presenting financial data to staff
accounting sofware
-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
