Financial information and financial decisions Flashcards
Roles of finance department
Preparing financial statements
Recording transactions
Make important financial decisions
Prepare Cash flow forecast
Why need finance or capital
Starting and running a business
Expanding existing businesses
Working capital
Internal sources of Finance
Retained profits
Owners savings
Selling of assets
Selling of inventories
Adv & Dis of retained profit
No interest to be paid
No repayment
New businesses wont have much
Difficult for small business to get large amounts
Sale of existing assets - adv+dis
Better use of capital
No repayment
Takes time
New businesses cannot use it
Sale of inventories
Reduces storage- space and cost
Opportunity cost of selling it to customers for higher prices
Should not dissapoint customers with little to no stock.
External finance
Grants and subsidies from government
Bank loan
Issue of shares
Micro finance
Crowdfunding
Debentures
Factoring of debts
Short term
Short term :
Overdrafts from bank
Trade credit
Factoring of debt (immeadiate cash but does not receive 100%)
Long term
Long term : Bank loans
Hire purchase
Leasing
Issue of shares
Debentures
Issue of shares
Ad+Dis short term
Overdraft
a business could use this to pay wages or small amounts
Interest paid only for overdrawn amount
Cheaper than ST loans
Overdraft amount varies
Ad+dis Trade credit
Interest free loan
Supplier may refuse discounts or supply if delayed too much
Adv and Dis Bank loan
quick to arrange
varying length of time
Large companies—low interest rates
Repaid
Bank has right to sell property of business if not paid
Adv and Dis Hire purchase
Does not need to find large sums of cash
Cash deposit has to be paid at the start of the period
Interest payments–high
adv+dis Leasing
Does not need to find large sums of cash
Maintenance done by company
Leasing costs will be higher than purchasing the asset
Factors
size of business
amount required
purpose and time
Size of business and legal form
public lit companies have larger sources because — less interest
Amount needed
Small amount then short term finance and internal - Owner’s saving or retained profit.
Large amount then long term and external such as bank loan
Purpose and time period
- If use is long term –> finance long term
- use is short term —-> finance short term
- If the business already has loans then the bank will be hesitant to give more loans
Banks lending factors
Cash flow forecast
Income statement - showing chance of profit
Details of existing loans
Why loan is needed
Cash flow
Inflows and outflow over a period of time
Cash inflows
Sale of goods
Sale of assets
Payments from debtors
Borrowing money
Investors
Cash outflows
Payments to creditors
Purchases (assets, good etc)
Wages, Rent etc
Repaying loans
Cash flow and profit
Profit consists of goods sold on credit whereas cash flow is the amount of cash sales a business made in a month.
insolvency
Businesses run out of cash
Why does insolvency occur
Long trade credits
Less trade credit received
Many assets purchased
Cash flow forecast
Shows estimate inflows and outflows and balance
Net flow
Inflows - outflows
Use of cash flow
Helps starting business
For Bank managers to give loans
Managing existing business (controlling expenditure if more outflows)
Short term solutions
Loans
Delaying payments
Reducing selling in credit
Delaying purchases
Long term solutions
Attracting new investors
Cutting costs (less outflows) and lean production
New products —> more customers —-> more sales
Working capital
Capital needed to pay day-day expenses of business
Calculate working capital
Current assets - Current liabilities
Importance of profits
Reward for entrepreneurs
Source of finance
Indicator of success
Gross profit
Revenue - cost of sales
Net profit
Gross profit + incomes - expenses
Retained profits
Net profit - tax & dividends
Current assets
Short tem assets the businrss owns for less than a year
Non current assets
Long term ones more than year
Current liabilities
debts owed by the business for less than a year
Current liabilities
debts owed by the business for less than a year
Current liabilities
debts owed by the business for less than a year
Non current liabilities
debts owed by the business for more than a year
Shareholders funds / Capital
Assets - liabilities
Shareholders funds / Capital
Assets - liabilities
Shareholders funds / Capital
Assets - liabilities
Capital Employed
Shareholders funds - Non current liabilities
Profitability ratios
measurement of the profit made relative to either the value of sales achieved or the capital invested in the business
Liquidity ratios
Ability of the business to pay back its short term debts
Profitability RATIOS :Gross profit margin
gross profit/ sales revenue
x 100
Net profit margin
net profit / sales revenue x100
Return on capital employed
Net profit/ capital employed x 100
Liquidity ratios : Current ratio
Current asset / current liabilities
Acid test ratio
Current assets - inventories/ current liabilities
Users and why they use accounts
Managers
Keeps control over performance of each product /division of business
Make decisions like changing prices, expand, change supplier etc etc
Ratios to compare prev years and other businesses
Too much of current ratio
Working capital tied up is unprofitable assets
