Managment of Finance Flashcards
Short Term sources of finance?
Bank overdraft
Debt Factoring
Trade Credit
Bank Overdraft?
Take out more money than you have in your account that you need to pay back
ADV/ DISAD of bank overdraft?
+ Simple to arrange
- Can be expensive if used long term due to interest rates
- Bank can reduce limit or cancel overdraft anytime
Debt Factoring?
Business can sell their debts to factors for a reduced price, so they can chase it up
Trade credit?
Business can buy supplies then pay later
ADV/ DISAD of trade credit
+ improves cash flow
- if not paid in set period suppliers might be reluctant to relate sale
Medium Term Sources of finance?
Leasing
Gov Grant
Bank Loan
Hire purchase
Leasing?
Assets and equipment is rented for a time period
ADV/ DISAD of leasing
+ Equipment can be changed regularly to stay up to date
+ doesn’t own asset which has warranty meaning business don’t have to pay for any breakdowns
- leasing over a long period of time is expensive
Gov Grant?
Loan given by the government which doesn’t need to be repaid
Bank Loan
Money given to business by bank which needs to be repaid with interest
Hire purchase?
How businesses pay for expensive assets
Deposit is paid then rest is paid with interest in instalments
Long term sources of finance?
Mortgage
Share capital
Debentures
Sale & Leaseback
Venture Capital
Crowdfunding
Mortgage
Bank loan that is paid back over a large period of time eg. 25 years
Deposit is required
Share Capital
Money raised through selling shares
Sale and Leaseback
business sell assets/ property which they will then rent back
Venture Capital?
Loan money to new startup company’s with a risky trade credit with strong potential
Crowdfunding
Those who believe in the business will invest in the business
People invest in exchange for value of assets
Liquidity?
Business has enough money to pay bills
Cash budget
Estimation of the cash flow over a period of time
Allows planning of any extra cash that can be invested in new assets
Cash flow issues?
Capital tied up in stock
High interest rates
Low sales
Expensive raw materials
Changes in demand
Cash flow solutions?
Capital tied up in stock
High interest rates
Low sales
Expensive raw materials
Changes in demand
- reduce stock levels, sell stock, use JIT
- Change bank
- Increase advertising
- Change suppliers
- Have a sale, rebrand product
Income Statements?
financial statements that show a businesses income and expenses
Purpose of income statement
shows profit/ loss made by company
can be used to compare growth profit and annual profit over several years
comparisons can be made with similar companies
Statements of financial position?
shows a businesses financial value
what does a statement of financial position show?
asset - what the business owns
liabilities - what the business owes
working equity?
money business has access to immediately which isn’t tied up in assets etc
who uses financial information?
rivals - interested in profits of business
banks- helps to determine if they choose to lend
gov - to calculate tax rates
owners - to ensure company is running successfully
Limitations of ratio analysis
doesn’t take into account external factors
other companies may use different methods to value stock
comparisons with other firms can be difficult
information used is historical (past info)
Profitability rates eg
Gross profit
Profit of the year
Liquidity ratios eg
current ratio
asset test ratio
Efficiency ratio
Rate of inventory turnover
technology in finance
powerpoint can be used to make spreadsheets which show financial figures
internet banking
word can be used to send emails etc about bills etc
Apple Pay etc can be used to electronically pay for materials
