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
