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Business > Section 3 - Finance > Flashcards

Section 3 - Finance Flashcards

1
Q

What is a cost?

A

An amount a business pays for a good or service

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2
Q

What is a fixed cost?

A

Costs that do not change with the output (amount business sells/produces) that must always be paid

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3
Q

What are some examples of fixed costs?

A
  • Rent
  • Salary
  • Utility bills
  • Business rates
  • Insurance
  • Taxes
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4
Q

What is a variable cost?

A

Costs that change depending on what the business produces

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5
Q

What are some examples of variable costs?

A
  • Wages
  • Stock/raw materials
  • Gas bills/electricity
  • Marketing (e.g. increase at Xmas as more demand)
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6
Q

What is the formula to work out total costs?

A

total costs = fixed costs + variable costs

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7
Q

What is price?

A

How much you sell a product for to your customers

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8
Q

What is revenue?

A

All the money that comes into a business

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9
Q

What is the formula to work out revenue?

A

Revenue = SPPU (selling price per unit) x output

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10
Q

What is the formula to work out profit?

A

Profit = sales - total costs

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11
Q

Why is revenue important to a business?

A
  • 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
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12
Q

Why is profit important to a business?

A
  • 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
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13
Q

What is retained profit?

A
  • Profit not given to the owner of the business, but kept back to be spent within the business. Aka undistributed profit
  • No interest/dividends
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14
Q

What is overdraft?

A

Borrowing money from a bank by withdrawing more money than is actually in a current account. Interest is charged on the amount overdrawn

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15
Q

What is equity/equity capital?

A

The monetary value of a business which belongs to the business owners. In a company this would be the value of their shares

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16
Q

What is a loan?

A

Borrowing a sum of money which then has to be repaid with interest over a period of time, typically in fixed monthly instalments

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17
Q

What is a mortgage?

A

A loan where property is used as security

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18
Q

What is security/collateral?

A

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

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19
Q

What are the main sources of finance?

A
  • Bank loan
  • Overdraft
  • Owner’s savings (equity capital)
  • Friends + family
  • Inviting shareholders
  • Re-mortgage house
  • Government grants
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20
Q

What are the advantages of using an overdraft as a source of finance?

A
  • Guaranteed to get it, can’t get refused
  • Easy + quick
  • No fixed repayments, can pay whenever
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21
Q

What are the disadvantages of using an overdraft as a source of finance?

A
  • Very high fees

- Very high interest

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22
Q

What are the advantages of using a bank loan as a source of finance?

A
  • Told upfront how much to repay + when, plan ahead

- Reliable, not going to need the money back any sooner than agreed

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23
Q

What are the disadvantages of using a bank loan as a source of finance?

A
  • High interest rates

- Not flexible, can’t carry over if can’t afford one month

24
Q

What are the advantages of using friends and family as a source of finance?

A
  • Usually more flexible on repayments

- No interest

25
Q

What are the disadvantages of using friends and family as a source of finance?

A
  • 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
26
Q

What are the advantages of using owner’s savings (equity capital) as a source of finance?

A
  • No repayments

- No interest

27
Q

What are the disadvantages of using owner’s savings (equity capital) as a source of finance?

A

-Limited supply, may need other sources in addition

28
Q

What are the advantages of re-mortgaging a house as a source of finance?

A
  • Lower interest

- Can change mortgage to one where it is easier to save/gain more money

29
Q

What are the disadvantages of re-mortgaging a house as a source of finance?

A
  • No flexibility
  • Lots of costs
  • Home can get repossessed
30
Q

What are the advantages of inviting shareholders as a source of finance?

A
  • No interest

- No repayments

31
Q

What are the disadvantages of inviting shareholders as a source of finance?

A
  • Lose some control

- Get less of the profit

32
Q

What are the advantages of using government grants as a source of finance?

A
  • No interest

- Can still invest savings etc

33
Q

What are the disadvantages of using government grants as a source of finance?

A
  • Lots of competition to obtain

- May not cover all financial costs, may need other sources of finance

34
Q

What is cash flow?

A

The amount of money moving in + out of a business over a period of time

35
Q

What is a cash flow statement?

A

A financial account that record the receipts + payments of a business

36
Q

What is a receipt?

A

Money into the business

37
Q

What is a payment?

A

Money out of the business

38
Q

In order to make a profit, what needs to be bigger, receipts or payments?

A

Receipts

39
Q

What are some examples of receipts for a business?

A
  • Sales
  • Loan
  • Interest on savings
  • Rent on other properties
  • Sales of assets
  • Grants from government
  • Shares sold
  • Money from owners
40
Q

What are some examples of payments for a business?

A
  • Utilities (gas, electricity etc.)
  • Rent
  • Fuel
  • Insurance
  • Stock/product
  • Staff (wages)
  • Security
  • Loan repayments
  • Advertising
41
Q

What is the formula to work out net cash flow?

A

Net cash flow = receipts - payments

42
Q

Why do businesses create a cash flow forecast?

A
  • 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
43
Q

How can a business improve their cash flow?

A
  • Lower payments

- Increase receipts

44
Q

How can a business lower their payments?

A
  • Lower wages
  • Change supplier
  • Buy less stock
45
Q

How can a business increase their receipts?

A

Increase prices

46
Q

How can selling share capital be used as a source of finance?

A

Selling shares of the business in exchange for quick money. Changes price over time

47
Q

How can trade credit be used as a source of finance?

A

Don’t have to pay straight away, keep money at moment and can pay later when you have a bit more money

48
Q

How can sale and lease back be used as a source of finance?

A

Sell supplies + equipment + rent it back at small prices

49
Q

How can a business angel be used as a source of finance?

A

An entrepreneur gives you money but gets a share the business

50
Q

What is a direct cost?

A

Expenses that can be attributed to making a particular product

51
Q

What are some examples of direct costs?

A
  • Labour
  • Raw materials
  • Operating machinery
52
Q

What is an indirect cost?

A

General overheads of running a business

53
Q

What is average cost?

A

The average cost to make each product

54
Q

What is the formula to work out average cost?

A

Average cost = total cost / output

55
Q

What are the three main reasons a business has poor cash flow?

A
  • Poor sales
  • Overtrading (taking on too many orders)
  • Poor business decisions (from not planning/not enough market research)

Business (13 decks)

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