financial information and decisions Flashcards
quantative factors
financial factors and numerical outcomes
qualitative factors
non-financial factors and looking beyond numerical outcomes of the business and to assets etc.
examples of quantitative factors
cost of site
transport costs
market potential
government incentives
examples of qualitative factors
size of available site
legal restrictions
quality of local infrastructure
ethical issues and concerns
overdraft
an agreement with the bank which allows a business to spend more money than they have in its account up to an agreed limit. the loan has to be repaid within 12 months
trade credit
a business does not always have to pay their bills as soon as they recieve them but they are given period of credit, normally around 30-60 days.
personal savings / owners capital
this involves using the owner’s savings. this is good because they do not have to pay any interest. however, there is an opportunity cost with this option.
venture capital
money invested into the business in exchange for part ownership of the business. the person investing tends to be a successful entrepreneur.
share capital
money invested into the business by selling shares either on the stock exchange or to friends and family.
loans
money borrowed from the bank in the long term. the business will have to pay back interest on top of the money they have borrowed.
retained profit
profit remaining after all expenses, tax and dividends have been paid. profit which is ploughed back into the business
crowd funding
this is when a large number of people each pay a small amount of money to the business.
internal funding
funds found within the business
external funding
funds found from outside the business
working capital
this is the amount of money available for the day to day running of the business, referred to as the difference between current assets and current liabilities
debt factoring
selling trade receivables to improve business liquidity
sale and leaseback
obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. ownership remains with the leasing company
debenture
bonds issued by companies to raise long term finance usually at a fixed rate of interest.
hire purchase
the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion o f the final repayment.
micro-finance
small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time.
micro-credit
the provision of small-scale loans to the poor for example by credit unions.
micro-savings
for example, voluntary local savings clubs provided by charities
micro-insurance
especially for people and businesses not traditionally served by commercial insurance
business - a safety net to prevent people from falling back into extreme poverty.
remittance management
managing remittance payments sent from one country to another including, for example, transfer payments made through mobile phone solutions.
Who usually performs better as clients of micro finance and why?
Women, their participation has mor desirable long term development outcomes.
start up capital definition
the capital needed by an entrepreneur when first setting up a business
working capital definition
the capital needed to finance the day to day running expenses and pay short-term debts of the business
non current fixed assets definition
resources owned by a business which will be used for a period longer than one year, for example buildings and machinery
capital expenditure definition
spending by a business on non-current assets such as machinery or buildings
why do businesses need finance
to set up the business
to pay day to day expenses like wages, suppliers and fuel.
to purchase buildings and other non-current fixed assets
to invest in the latest technology
to finance expansion
to finance R&D
long term finance definition
debt or equity used to finance the purchase of non current assets or finance expansion plans. long term debt is borrowing a business does not expect to repay in less than five years
short term finance definition
loans or debt that the business expects to pay back within one year
why do sole traders and partnerships not use loans often
they are often considered by lenders to be too high risk
how can business use some of their working capital to finance capital expenditure
using cash balances (keeping enough for the day to day running of the business)
reducing inventory levels (less warehouse costs)
reducing trade receivables
what are the three types of short term external finance
overdraft
trade credit
debt factoring
what are the six types of long term external finance
bank loan hire purchase leasing mortgage debenture share issue
what are the limitations of taking longer to pay the supplier in order to have more money available for longer
any early payment discount will be lost
the supplier may refuse further deliveries to the business until the outstanding payment has been made
if delayed payment occurs too often, then the supplier may demand payment before delivery.
trade recievables definition
amount owed to a business by its customers who bought goods on credit
bank loan definition
provision of finance by a bank which the business will repay with interest over an agreed period of time
bank loans are offered with a _______ or ________ rate of interest
fixed or variable
advantage of a fixed rate of interest as opposed to a variable rate
it will not change depending on economic factors
mortgage definition
long term loans used for the purchase of land or buildings
share issue definition
source of permanent capital available to limited liability companies
equity finance definition
permanent finance provided by the owners of a limited company
what type of companies can use share issue
public/private limited companiees
a company can offer to sell shares up to a maximum number. this is called…
authorised share capital
who can private limited companies sell shares to
existing shareholders or private investors (not to public)
who can public limited companies offer shares to
the general public
does the money raised through a share issue have to be repaid
no it becomes permenant capital
benefit of debt financing for long term finance
does not change the ownership of the company. leaders have no say in the running of the company
benefit of equity financing for long term finance
it never has to be repaid. there is no ongoing cost. if the business makes a loss it does not have to pau dividends to shareholders.
limitation of debt financing for long term finance
interest is charged on the amount borrowed and this increases business costs. interest must be paid even of the business makes a loss. the amount borrowed must be repaid.
limitation of equity financing for long term finance
the increase in shareholders ‘dilutes’ the ownership of the company. producing a prospectus to offer the shares for sale is expensive.
factors influencing the choice of finance
size and legal form of business (e.g. sole traders and smaller businesses unlikely to get loans) amount required (large = share issues or debenture, small = bank loans or leasing and hire purchase) length of time (long term = debentures or share issues, short term = overdraft) existing borrowing (if the business already has existing borrowing, then borrowing again will be harder.
net cash flow
cash inflow minus cash outflow
what is positive cash flow
when the cash inflow is greater than the cash outflow
what is negative cash flow
when the cash inflow is less than the cash outflow
why is having a greater cash inflow and smaller cash outflow better than having a small cash inflow and large cash outflow
any temporary cash shortage may cause problems for the business and result in an increase in borrowing costs
what do businesses need to prevent a negative cash flow
an accurate forecast of the size and timing of cash inflows and outflows. this enables businesses to identify any future periods where cash shortages may occur
what should a business do as a result of a negative cash flow
the managers need to increase the inflows or reduce the outflows
how to finance a short term cash shortage
ask trade receivables to pay more for goods more quickly by offering discounts to customers who have been sold goods on credit.
negotiate longer credit terms with suppliers
delay the purchase of non - current assets until the cash flow improves.
why do businesses need cash
to pay wages
to pay suppliers
for rent, heating, lighting and other costs
cash flow forecast def
an estimate of the future cash inflows and outflows of the business
net cash flow def
cash inflow - cash outflow
what does a cash flow forecast aim to do
it enables businesses to identify any future time periods when cash shortages may occur.
how can a business finance a short term cash shortage
ask trade receivables to pay more for goods more quickly by offering discounts
negotiate longer credit terms with suppliers
delay the purchase of non-current assets until the cash flow improves
find other sources of finance for the purchase of non-current assets
liquidity def
the ability of a business to pay its short term debts
a business which does not have enough working capital will be
illiquid
what is the working capital cycle
the time it takes from buying raw materials, making these into goods for sale, finding buyers for finished goods, and then receiving payment from customers.
credit sales def
goods sold to customers who will pay for these at an agreed rate in the future
what does the length of the working capital cycle depend on
level of inventories held by a business
how long production takes
how quickly buyers are found
the length of the credit period given to customers
how can a business improve it’s working capital
reducing inventory levels
negotiating longer credit terms with suppliers
reducing the amount of time it takes to receive customer payments.
gross profit def
the difference between revenue and cost of sales
profit def
the difference between revenue and total costs
total costs
costs of sales plus expenses
revenue def
the amount earned from the sale of products
profit =
revenue - total costs
cost of sales def
the cost of purchasing the goods used to make the products sold
expenses def
day-to-day operating expenses of the business
gross profit =
revenue - cost of sales
profit (2) =
gross profit - expenses
revenue =
selling price x quantity sold
the total cost of a business supplying its goods and services can be divided into
cost of sales and expenses
what is profit used for
measuring sucess of a business
measuring success of a manager
decision-making on whether to continue a product or not
finance the purchase of non-current assets, expansion
attract investors who will provide the additional funds needed to finance business expansion
give differences between cash and profit
money invested or borrowed increases cash but not profit
capital expenditure decreases cash but not profit
sales of goods on credit increases profit but cash does not increase until payment is received.
which is more important for the business long term, cash or profit
profit
which is more important for the business short term, cash or profit
cash
income statement def
financial statement which records the revenue, costs and profits of a business for a given period of time
when does an income statement have to be produced
legally once a year, but may be produced more for managerial use
what is the most important figure on an income statement for stakeholder groups
profit
use of income statements to owners/shareholders
profit after tax belongs to them.
use of income statements to shareholders
usually the higher the profit the higher the dividends
the market value of shares may rise or fall
use of income statements to employees
high profit increases job security
can evaluate salary as compared to profit
profit sharing schemes
use of income statements to lenders
want to be sure that profit is enough to pay interest and the amount borrowed back
use of income statements to the government
the higher the profit the higher the tax recieved by the government wil be
use of income statements to suppliers
profitable firms will continue to purchase supplies
use of income statements to managers
can compare profit with a past profit or with competitors
retained profit is an important source of finance.
balance sheet def
an accounting sheet that records the assets, liabilites and owners’ equity of a business at a paticular date
assets
resources that are owned by the business
liabilities
debts of the business that wll have to be repaid sometimes in the future
non-currerent (or fixed) assets
resources that a business owns and expects to use for more than one year
examples of non-current (or fixed) assets
land, buildings, machinery, computers and motor vehicles
current assets def
resources that the business owns and expects to convert into cash before the date of the next balance sheet
trade recieveable
the amount of money owed to the business by customers who have been sold goods on credit
current liabilities
debts of the business which it expects to pay before the date of the next balance sheet
trade payable
the amount a business owes to its suppliers for goods bought on credit
non-current liabilities
debts of the business which will be pauable after more than one year
owner’s equity
the amount owed by the business to its owners; includes capital and retained profit
shareholder’s equity (funds)
alternative term for owner’s equity, but can only be used by limited liability companies
what does a balance sheet show
the assets the business owns
what the business is owed
what the business owes
how the business finances its activites.
how often must a balance sheet produced
once a year
how often must an income statement produced
once a year
internal sources of finance
owners savings
retained profits
sale of non current fixed assets
use some of the business’’s working capital
debt-factoring def
selling trade recievables to improve busines liquidity
leasing def
obtaining the use of non-current asset by paying a fixed amount per time period of time. ownership remains with leasing company
why should a business check its performance regularly
identify strengths and weaknesses
show whether the business is meeting its objectives
improve future business performance
which ratios are used to measure a business’ profitability
gross profit margin
profit margin
return on capital employed
gross profit margin % =
(gross profit / revenue) x 100
what does gross profit % margin show
gross profit as a percentage of revenue
how much gross profit is earned per $1 of revenue
gross profit margin def
ratio between gross profit and revenue
gross profit def
difference between revenue and cost of sales (revenue - cost of sales)
profit margin def
ratio between profit before tax and revenue
profit margin % =
(profit/revenue) x 100
how does a business improve its gross profit
increasing revenue without a similar cost in sales - increase in price
reducing cost of sales without similar reduce in revenue - achieved through buying cheaper supplies
adding value def
selling a product for more than it cost to produce it
what does gross profit ratio measure
the amount of profit made for every $1 of revenue
what does profit ratio measure
the amount of profit made for every $1 revenue after allowing for expenses
profit def
difference between revenue and total costs
= revenue - (cost of sales + expenses)
capital employed
the amount invested in the business by the owners.
return on capital employed =
(profit/capital employed) x 100
what does it mean if the ROCE increases from one year to the next, or is higher than competitors
the business’s profitability has improved
what does ROCE tell us
how much profit is earnt for every $1 invested in the business
what is capital employed usually used to buy
profit earning assets such as buildings and machinery
liquidity def
the ability of a business to pay its short term debts
what does liquidity mean
a business’s access to cash
how do you monitor a business’s liquidity
current ratio
acid test ratio
what does the current ratio show
the ratio between current assets and current liabilites
current ratio =
current assets / current liabilities
what is the acid test ratio
ratio between liquid assets and current liabilities
problems with the current ratio
some current assets are more difficult to turn into cash than others
why are inventories the least liquid of the current assets
the finished goods inventories have to be sold
when they are sold on credit, the business has to wait for customers to pay.
acid test ratio =
(current assets - inventories) / current liabilities
what does the acid test ratio do that the current asset ratio doesnt
it excludes inventories from current assets. this means it is a better measure of a business’s liquidity.
how do owners/shareholders use accounts
Whether they are getting a good return on their investment.
how do potential investors use accounts
Interested in the profits and return they might expect to recieve from their investment.
how do managers use accounts
Responsible for runnning of business so will want to know if financial objectives have been achieved.
how do employees use accounts
Interested in profitability and job security. Could use figures to support claims for higher wages.
how do trade payables use accounts
Suppliers can ensure the business is able to pay them back. Interested in liquidity. Will help them to increase their own revenue and profits.
how does the government use accounts
Companies have to pay tax, so the higher the progits the higher the tax revenue recieved by government. Expanding companies will also provide employment.
how do customers use accounts
Want to know that business will continue supplying them with goods and services meeting their needs and wants.
how do lenders use accounts
Banks and other lenders will want to know they will recieve interest on money loaned. Interested in profits and liquidity.
revenue =
selling price x quantity sold
profit =
gross profit - expenses
net cash flow =
inflows - outflows
closing balance =
net cash flow + opening balance
break even units =
fixed costs/(selling price - variable costs)
