Management Of Finance Flashcards
Describe what a bank overdraft is and discuss the advantages and disadvantages.
A bank overdraft is when a business takes out more money than it has in its bank account.This is usually a short-term source of finance.
Advantages
• allows a business to take out more than it has in its bank account;
• useful for addressing short-term cash flow issues.
Disadvantages
• daily interest or daily charges may apply;
• not useful for addressing long-term cash flow problems.
Describe what a bank loan is and discuss the advantages and disadvantages.
A bank loan is when a business borrows money from a bank and repays it over a specified period of time in regular instalments with interest.
Bank loans can be short or long term.
Advantages
• easier to budget as a business is paying the loan back in regular instalments instead of a
one-off payment;
• can be taken out over a long period of time.
Disadvantages
• interest can be expensive, which means monthly repayments can be expensive;
• can affect credit ratings if a business does not keep up with monthly repayments.
Describe what a government grant is and discuss the advantages and disadvantages.
A government grant is money that is given to a business by the government which is not repaid.
This is sometimes given to entrepreneurs when they first start up a business.
Advantages
• does not need to be repaid;
• can gain good publicity as grants can be given due to something positive that a business is
doing.
Disadvantages
• usually only a one-off payment;
• can come with strict conditions, e.g. a business must be located in a particular area or take on a set number of employees;
• can be time-consuming as there can be many forms to fill out etc.
Describe what a hire purchase is and discuss the advantages and disadvantages.
Hire purchase is paying for an item with regular instalments over a specified period.
Advantages
• easier to budget as payment is made with regular instalments instead of a one-off payment;
• can be taken out over a medium/long-term;
• once a business has made its final payment then it will own the item.
Disadvantages
• interest has to be paid on top of regular repayments;
• the item is not owned until the final payment is made;
• if a business does not keep up with repayments then it can face repossession of the item.
Describe what leasing is and discuss the advantages and disadvantages.
Leasing is when a business ‘rents’ an item. This can be used for IT equipment, vehicles and
equipment.
Advantages
• easier to budget as payment is made with regular instalments;
• once the leasing period is over, the item can be updated and a new leasing period can begin.
Disadvantages
• a business does not own the leased item;
• can be more expensive than hire purchase or using a bank loan to pay for the item.
Describe what a mortgage is and discuss the advantages and disadvantages.
A mortgage is a type of loan which is used to pay for property/land. This is a long-term source of finance.
Advantages
• taken out over a long period of time;
• easier to budget as it will be paid back over a long period of time.
Disadvantages
• a business can face repossession if it does not keep up with monthly repayments;
• interest has to be paid on top of repaying the loan.
Describe what a loan from family / friends is and discuss the advantages and disadvantages.
A loan from family/friends is when a business borrows money from a family member or friend, usually with no interest.
Advantages
• no interest or very little interest to be paid;
• family/friends may offer a loan if a business has been turned down from a bank.
Disadvantages
• can cause disagreements.
Describe what share issue is and discuss the advantages and disadvantages.
Share issue is selling shares to existing or new shareholders. This is only available to LTDs.
Advantages
• can raise a large amount of capital.
Disadvantages
• can be expensive to issue more shares;
• a private company can only have a maximum of 50 shareholders.
Outline what the fixed costs of a business are.
Costs which stay the same no matter how many units are produced
Outline what variable costs are to a business.
Costs which change depending on the level of output.
Describe what the break-even point is.
The break-even point is when a business is making no profit or loss.
How can the break-even point be identified on a chart?
The point where the sales revenue and total costs meet.
How do you calculate total profit?
Total Profit = sales revenue — total costs
How do you calculate selling price?
Selling Price = sales revenue / output
Take your numbers from the break even point
How do you calculate the break even point?
Break-even point = fixed costs / (sales — variable costs)
Describe how spreadsheets can be used by finance departments.
• Calculate profit using formulae
• Create accounts such as income statements - templates may be used which make it less time consuming for the user.
• Create charts / graphs which allow the business to show profit levels over time.
Describe how a finance dept can use word processing.
• Create financial reports for shareholders
• Create letters to send to customers reminding them to pay their bills on time
Describe how a finance dept can use presentation software.
• Create *(presentations to show financial performance** to shareholders.
Describe out a finance dept can use databases.
• Store contact details of customers to remind them of their payment dates.
Describe how a finance dept can use email.
Remind customers of outstanding payments.
Describe how a finance dept uses online banking.
• Pay bills online (eg: electricity)
• Transfer money to a customer or receive payment from a customer.
Describe how a finance dept can use accounting software.
• Create final accounts such as income statements
Describe how a finance dept can use electronic payment systems.
• Receive payment from customers
What is a cash budget?
A cash budget is a plan of how a business expects to spend money (payment) and receive money (receipts)
What is the opening balance?
The money that you have at the start of the week/month
What is the closing balance?
The money you have at the end of the week/month (this is also the next week/month’s opening balance)
What are receipts?
The money you get during the week/month
What are payments?
The money you spend during the week/month
What is a surplus?
A positive balance. This will happen when receipts are greater than payments
What is a deficit?
A negative balance. This will happen when payments are greater than receipts
Outline reasons why a business may experience cash flow problems.
• low sales - sometimes there simply aren’t enough sales coming in, e.g. people watching their outgoings after spending lots at Christmas
• an increase in expenses
• a one off payment of new assets, e.g. machinery;
• a deficit closing balance, i.e. more money is going out than coming in;
• money is tied up in inventory, e.g. inventory can’t be sold because it has gone out of date or
out of fashion;
Describe reasons as to why a business may produce a cash budget.
- To see if it’s facing a surplus or deficit. If it is facing a deficit, it can take steps as to how it can be avoided
- To see whether another source of finance is needed
- To highlight periods where expenses are particularly high
- To help with decision-making
- To avoid cash flow problems. This is when more money is going out than coming in.
- To get a loan/mortgage from the bank
- To compare projected and actual figures. This can help see discrepancies between the figures that were planned and the actual figures.
Describe ways in which a business can resolve cash flow problems.
• Introducing a new marketing campaign to increase sales eg: introducing new promotions
• Cutting down on staff overtime to reduce wage cost
• Find a cheaper supplier or negotiate better prices/credit terms
• Finding a cheaper energy supplier to cut down on electricity/gas costs
• Using a bank loan/hire purchase/leasing to fund buying new assets
• Encourage customers to pay earlier by offering discounts on earlier payments
• Selling any unnecessary assets that are no longer used eg: old machinery
