Section 3 - Finance Flashcards
What is a cost?
An amount a business pays for a good or service
What is a fixed cost?
Costs that do not change with the output (amount business sells/produces) that must always be paid
What are some examples of fixed costs?
- Rent
- Salary
- Utility bills
- Business rates
- Insurance
- Taxes
What is a variable cost?
Costs that change depending on what the business produces
What are some examples of variable costs?
- Wages
- Stock/raw materials
- Gas bills/electricity
- Marketing (e.g. increase at Xmas as more demand)
What is the formula to work out total costs?
total costs = fixed costs + variable costs
What is price?
How much you sell a product for to your customers
What is revenue?
All the money that comes into a business
What is the formula to work out revenue?
Revenue = SPPU (selling price per unit) x output
What is the formula to work out profit?
Profit = sales - total costs
Why is revenue important to a business?
- Main source of income for business
- Helps business break even/make a profit
- Helps cover fixed costs
- Business needs to decide whether rely on sales by value (number sold) or value (monetary worth of sales, e.g. higher quality) when deciding on price
Why is profit important to a business?
- Main aim of most businesses
- Provides return on investments (can decide if worth it)
- Indication of performance
- Can be used to reward shareholders/staff
- Can show if right decisions being made for business
- See how they’re managing costs
What is retained profit?
- Profit not given to the owner of the business, but kept back to be spent within the business. Aka undistributed profit
- No interest/dividends
What is overdraft?
Borrowing money from a bank by withdrawing more money than is actually in a current account. Interest is charged on the amount overdrawn
What is equity/equity capital?
The monetary value of a business which belongs to the business owners. In a company this would be the value of their shares
What is a loan?
Borrowing a sum of money which then has to be repaid with interest over a period of time, typically in fixed monthly instalments
What is a mortgage?
A loan where property is used as security
What is security/collateral?
Assets owned by a business which are used to guarantee repayment of a loan. If the business fails to pay off the loan, the lender can sell what has been offered as security to get the repayment
What are the main sources of finance?
- Bank loan
- Overdraft
- Owner’s savings (equity capital)
- Friends + family
- Inviting shareholders
- Re-mortgage house
- Government grants
What are the advantages of using an overdraft as a source of finance?
- Guaranteed to get it, can’t get refused
- Easy + quick
- No fixed repayments, can pay whenever
What are the disadvantages of using an overdraft as a source of finance?
- Very high fees
- Very high interest
What are the advantages of using a bank loan as a source of finance?
- Told upfront how much to repay + when, plan ahead
- Reliable, not going to need the money back any sooner than agreed
What are the disadvantages of using a bank loan as a source of finance?
- High interest rates
- Not flexible, can’t carry over if can’t afford one month
What are the advantages of using friends and family as a source of finance?
- Usually more flexible on repayments
- No interest
What are the disadvantages of using friends and family as a source of finance?
- Can lead to bad relationships if struggle to pay
- They may need money back, financial difficulties
- Can be liable for part debts in the business
What are the advantages of using owner’s savings (equity capital) as a source of finance?
- No repayments
- No interest
What are the disadvantages of using owner’s savings (equity capital) as a source of finance?
-Limited supply, may need other sources in addition
What are the advantages of re-mortgaging a house as a source of finance?
- Lower interest
- Can change mortgage to one where it is easier to save/gain more money
What are the disadvantages of re-mortgaging a house as a source of finance?
- No flexibility
- Lots of costs
- Home can get repossessed
What are the advantages of inviting shareholders as a source of finance?
- No interest
- No repayments
What are the disadvantages of inviting shareholders as a source of finance?
- Lose some control
- Get less of the profit
What are the advantages of using government grants as a source of finance?
- No interest
- Can still invest savings etc
What are the disadvantages of using government grants as a source of finance?
- Lots of competition to obtain
- May not cover all financial costs, may need other sources of finance
What is cash flow?
The amount of money moving in + out of a business over a period of time
What is a cash flow statement?
A financial account that record the receipts + payments of a business
What is a receipt?
Money into the business
What is a payment?
Money out of the business
In order to make a profit, what needs to be bigger, receipts or payments?
Receipts
What are some examples of receipts for a business?
- Sales
- Loan
- Interest on savings
- Rent on other properties
- Sales of assets
- Grants from government
- Shares sold
- Money from owners
What are some examples of payments for a business?
- Utilities (gas, electricity etc.)
- Rent
- Fuel
- Insurance
- Stock/product
- Staff (wages)
- Security
- Loan repayments
- Advertising
What is the formula to work out net cash flow?
Net cash flow = receipts - payments
Why do businesses create a cash flow forecast?
- See how much money they have + how much they can reinvest in business
- Identify areas where spending too much so can reduce
- Predict cash they will have
- Come up with methods to solve issues
- Help decide on a source of finance
How can a business improve their cash flow?
- Lower payments
- Increase receipts
How can a business lower their payments?
- Lower wages
- Change supplier
- Buy less stock
How can a business increase their receipts?
Increase prices
How can selling share capital be used as a source of finance?
Selling shares of the business in exchange for quick money. Changes price over time
How can trade credit be used as a source of finance?
Don’t have to pay straight away, keep money at moment and can pay later when you have a bit more money
How can sale and lease back be used as a source of finance?
Sell supplies + equipment + rent it back at small prices
How can a business angel be used as a source of finance?
An entrepreneur gives you money but gets a share the business
What is a direct cost?
Expenses that can be attributed to making a particular product
What are some examples of direct costs?
- Labour
- Raw materials
- Operating machinery
What is an indirect cost?
General overheads of running a business
What is average cost?
The average cost to make each product
What is the formula to work out average cost?
Average cost = total cost / output
What are the three main reasons a business has poor cash flow?
- Poor sales
- Overtrading (taking on too many orders)
- Poor business decisions (from not planning/not enough market research)
