Management of finance (Unit 5) Flashcards
What is the role of a finance department
Ensuring bills are paid on time, e.g. electricity.
Paying wages and salaries.
Managing the budgets for the other departments, e.g. marketing.
Chasing up customers who have not yet paid.
Creating final accounts, e.g. income statements.
What factors influence the type of finance a business uses
the purpose of the finance
objectives of the organisation
amount of finance required
the type of business (not all sources of finance are available to all businesses)
length of time the finance is required for
What are the main sources of finance
bank overdraft
bank loan
grant
mortgage
share issue
owner investment
loan from family or friends
hire purchase
crowd funding
leasing
retained profit
venture capital
Which sources of finance are considered internal
Owner investment
Retained profit
What is a bank overdraft
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.
Which sources of finance are considered external
Bank overdraft
Bank loan
Mortgage
Hire purchase
Leasing
Loan from family or friends
Grant
Share issue
Crowd funding
Venture capital
What are the advantages of using a bank overdraft
allows a business to take out more than it has in its bank account;
useful for addressing short-term cash flow issues.
Can be arranged quickly
What are the disadvantages of using a bank overdraft
daily interest or daily charges may apply;
not useful for addressing long-term cash flow problems.
Usually only available for small sums of money
Describe a bank loan
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 taken out over a short period of time, e.g. 2 years, or longer periods of time, e.g. 15 years.
What are the advantages of a bank loan
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.
Can be arranged quickly
What are the disadvantages of a bank loan
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.
What is a government grant
A government grant is money that is given to a business by the government which does not have to be repaid.
This is sometimes given to entrepreneurs when they first start up a business.
Although this is usually exclusive to the third sector
What are the advantages of a government grant
does not need to be repaid;
can gain good publicity as grants can be given due to something positive that a business is doing.
What are the disadvantages of a government grant
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 hire purchase
Hire purchase is paying for an item with regular instalments. A deposit is usually required as well. A hire purchase is usually paid back in monthly instalments and over a specified period of time.
What are the advantages of hire purchase
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.
Expensive assets can be purchased and paid back over time
What are the disadvantages of hire purchase
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 leasing
Leasing is when a business ‘rents’ an item. This can be used for IT equipment, vehicles and equipment.
What are the advantages of leasing
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.
Large amounts of money are not required up front to lease machinery
The leasing company are responsible for repairs and maintenance
What are the disadvantages of leasing
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 a mortgage
A mortgage is a special type of loan which is used to pay for property/land. This is a long-term source of finance and is usually taken out over 20-25 years.
What are the advantages of a mortgage
taken out over a long period of time;
easier to budget as it will be paid back over a long period of time.
Large amounts of finance can be raised quickly
What are the disadvantages of a mortgage
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 loan from family/friends
A loan from family/friends is when a business borrows money from a family member or friend, usually with no interest.
What are the advantages of a loan from family/friends
no interest to be paid;
family/friends may offer a loan if a business has been turned down from a bank.
May not need to be paid back
What are the disadvantages of a loan from family/friends
can cause disagreements.
Money may be lost if business is not successful
What is share issue
Share issue is selling shares to existing or new shareholders. This is only available to private limited companies (Ltd). Remember, in a private limited company, shareholders are invited to join the company.
What are the advantages of share issue
can raise a large amount of capital.
Finance raised does not need to be paid back
What are the disadvantages of share issue
Shareholders need to be paid a dividend each year
Shareholders become part owners of the business
What is crowd funding
Crowd funding involves getting small amounts of finance from a large amount of people. This is usually done through social media or crowd funding websites. Crowd funding investors may:
donate money
get rewards for their investments
receive a share of the profits
What are the advantages of crowd funding
Access to large amount of investors
Fast way to raise finance
What are the disadvantages of crowd funding
A public request for investment risks your project being copied by competitors
If the targeted amount isn’t reached the money is returned to investors and the business gets nothing
What is venture capital
Venture capital is money that investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an element of risk with the business.
What are the advantages of venture capital
Available for more risky investment
What are the disadvantages of venture capital
Venture capitalists may want a share of the business meaning some control may be lost
A larger return may be required due to the high risk nature of the investment
What are the two types of costs
Fixed costs and variable costs
What are fixed costs
Fixed costs - costs which stay the same no matter how many units are produced, e.g. rent will have to be paid whether a business has produced 0 or 10,000 units;
What are variable costs
Variable costs - costs which change depending on the level of output, e.g. the more a business is producing, the higher the cost of the electricity used.
What are total costs
Total costs are the fixed and variable costs added together.
What is the break even point
The break-even point is when a business is making no profit or loss.
Why do businesses find the break even point
A business has to work out the break-even point to find out how many units will need to be produced before making a profit. A chart will usually be created to identify the break-even point.
How do you identify the break even point
The break-even point can be identified as the point where the sales revenue and total costs meet.
What is a cash budget
A cash budget is a plan of how a business expects to spend money (payments) and receive money (receipts).
Why might a business make a cash budget (Know atleast 4 reasons)
to see if it is facing a surplus (more money coming in than going out) or a deficit (more money going out than coming in):
if a business is facing a deficit, then it will have to think about this can be avoided;
note that profit and loss are not used in a cash budget as it is just a plan of expectations for spending and receiving money.
to see whether another source of finance is needed, e.g. a bank overdraft to overcome a month where there may be a deficit;
to highlight periods where expenses are particularly high;
to help with decision-making, e.g. when to make a purchase;
to avoid having cash flow problems:
this is when more money is going out than coming in - this can lead to difficulty paying bills etc;
note that these are also known as liquidity problems.
to try to get a loan or mortgage from a bank:
the cash budget can be taken to a bank to show that repayments are affordable.
to compare projected and actual figures:
a manager may look to see if there are any discrepancies between the figures that were planned and the actual figures, e.g. sales may have been lower than expected, and then investigate possible reasons for this.
What are the reasons a business may face cash flow problems
low sales - sometimes there simply aren’t enough sales coming in
an increase in expenses
a one off payment of new assets
a deficit closing balance
money is tied up in inventory,
customers are not paying up on time, which can lead to bad debts;
suppliers are not giving the business credit, which is buying goods from suppliers but paying for them at a later date.
How can a business resolve cash flow issues
introducing a new marketing campaign to increase sales, e.g. introducing new promotions to entice customers into stores;
cutting down on staff overtime to reduce wage cost (do not use ‘get rid of staff’ or ‘cut down on employee wage’ in your answers);
finding a cheaper supplier of raw materials or negotiating prices or a credit agreement to cut down on cost of purchases;
finding a cheaper energy supplier to cut down on electricity/gas costs;
using a bank loan/hire purchase/leasing to fund buying new assets, e.g. machinery;
encouraging customers to pay early by offering discounts on early payments;
selling any unnecessary assets that are not longer used, e.g. old machinery.
What is an income statement
An income statement shows the income and expenditure, and the profit/loss made by a business throughout the year.
What is sales revenue
sales that a business has received throughout the year by selling to customers.
What is cost of sales
the cost of producing a product or buying a product in to sell onto customers.
What is gross profit
the profit made from buying and selling goods.
Define expenses
items that a business must pay for to keep running, e.g. electricity, wages, loan repayments.
Define profit/loss for the year
the profit made once expenses have been subtracted.
Note that if a business has made a loss then the figure will be shown in brackets, e.g. (5,000).
Why do businesses produce income statements
to calculate the total costs of expenses
to calculate the profit/loss made for the year
legal reasons (all limited companies are required to produce an income statement)
tax reasons (profit needs to be calculated so businesses can accurately calculate their tax payments)
to calculate cost of sales
to compare with previous years or other companies
What is a spreadsheet
A spreadsheet is a piece of software which is used for calculations using formulae.
Examples of spreadsheet software include Microsoft Excel and Apple Numbers.
Why would the finance department use spreadsheets
calculate profit using formulae;
create accounts such as income statements - templates may be used which make this less time-consuming for the user;
create charts/graphs which allow the business to show profit levels over time;
copy and paste data into other software such as Microsoft Word;
change figures easier when compared to paper-based documents, e.g. formulae will automatically update values;
perform ‘what if’ scenarios by temporarily changing data to see the effects.
How is word processing used by the finance department
Word processing, e.g. Microsoft Word:
create financial reports for shareholders;
create letters to send to customers reminding them to pay their bills on time.
How is presentation software used by the finance department
Presentation software, e.g. Microsoft PowerPoint:
create presentations to show financial performance to shareholders.
How are datasbases used by the finance department
Databases, e.g. Microsoft Access:
store contact details of customers to remind them of their payment dates.
How is Email used by the finance department
E-mail, e.g. Microsoft Outlook:
remind customers of their outstanding payments.
How is online banking used by the finance department
Online banking:
pay bills online, e.g. electricity;
transfer money to a customer or receive payment from a customer.
How is accounting software used by the finance department
Accounting software, e.g. Sage:
create final accounts such as income statements.
How are electronic payments systems used by the finance department
Electronic payment systems, e.g. Apple Pay:
receive payment from customers.
