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gcse business > section 5 > Flashcards

section 5 Flashcards

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1
Q

finance

A

Finance is the money required in the business.

Finance is needed to set up the business, expand it and increase working capital

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2
Q

start-up capital

A

the capital needed by an entrepreneur when first starting a business

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3
Q

why businesses need finance

A
  • to set up a business (start-up capital)
  • to pay day-to-day expenses (working capital)
  • purchase non-current (fixed) assets (capital expenditure
  • market research
  • expansion
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4
Q

working capital

A

the capital needed to finance the day-to-day running expenses and pay the short-term debts of a business

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5
Q

non-current (fixed) assets

A

resources owned by a business which will be used for a period longer than one year, for example buildings and machinery

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6
Q

capital expenditure

A

spending by a business on non-current assets such as machinery and buildings

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7
Q

long-term finance

A

debt or equity used to finance the purchase of non-current assets or finance expansion plans. long-term debt is borrowing a business does not expect to repay in less than five years

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8
Q

short-term finance

A

loans or debt that a business expects to pay back within one year

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9
Q

retained profit

A

profit remaining after all expenses, tax and dividends have been paid and which is ploughed back into the business

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10
Q

internal sources of finance

A
  • owner’s savings
  • retained profits
  • some of the business’s working capital
  • sale of non-current assets such as equipment and machinery
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11
Q

retained profits +- (internal finance)

A

+ no interest paid
+ no need to repay
- Takes time to raise this
- Might not raise enough
- can only be used as a source of finance if the business is profitable

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12
Q

owner’s savings +- (internal finance)

A

+ no interest paid
+ no need to repay
- Risk losing own money
- Might not raise enough

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13
Q

sale of non-current assets +- (internal finance)

A

+ no interest paid
+ no need to repay
- must find a buyer first, may be a slow process
- Might not raise enough
- Limited number of assets can be sold

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14
Q

use of working capital +- (internal finance)

A

+ no interest paid
+ no need to repay
- Can upset customers, if asked to pay earlier
- Can lead to insufficient inventory levels

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15
Q

use of working capital examples

A
  • cash balances (the amount of money currently available to the business)
  • reducing inventory levels (selling inventory to free up cash)
  • reduce trade receivables
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16
Q

external sources of finance

A

short-term sources and long-term sources

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17
Q

short-term sources of finance

A
  • overdraft
  • trade credit
  • debt factoring
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18
Q

overdraft

A

an agreement with the bank which allows a business to spend more money that it has in its account up to an agreed limit. the loan has to be repaid within 12 months.

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19
Q

overdraft +-

A

+ quick to arrange
+ flexible source of finance (can change the amount of borrowing)
- Interest needs to be paid
- Recalled at short notice

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20
Q

trade credits

A

when a business delays paying suppliers for some time, improving their cash position.

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21
Q

trade credits +-

A

+ No interest paid
+ Easy to arrange
- Suppliers can refuse future deliveries
- Can damage relations

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22
Q

trade receivables

A

amount owed to a business by its customers who bought goods on credit

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23
Q

debt factoring

A

selling trade receivables to improve business liquidity

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24
Q

debt factoring +-

A

+ Immediate cash
+ No responsibility to collect
debts
- Never receive full amount owed

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25
Q

long-term sources

A
  • bank loan
  • hire purchase
  • leasing
  • mortgage
  • debenture
  • share issue
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26
Q

bank loan

A

provision of finance by a bank which the business will repay with interest over an agreed period of time

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27
Q

bank loan +-

A

+ Large amounts of money can be borrowed
+ No risk to ownership
+ Business has a set time period to repay
- Needs to be repaid with interest
- Collateral will be requested

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28
Q

leasing

A

obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. Ownership remains with the leasing company

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29
Q

leasing +-

A

+ No large initial payment needed
+ Leasing company covers the repair cost
+ Replace asset if technology improves
- The business never owns the asset
- Overall cost can be high due to monthly
payments

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30
Q

hire purchase

A

the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion of the final repayment

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31
Q

hire purchase +-

A

+ No large initial payment needed
+ The business owns the item at the end
- Responsible for maintenance
- Overall cost can be high due to monthly
payments

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32
Q

mortgage

A

a long-term loan used for the purchase of land or buildings

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33
Q

debenture

A

a bond issued by a company to raise long-term finance usually at a fixed rate of interest

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34
Q

share issue

A

a source of permanent capital available to limited liability companies

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35
Q

share issue +-

A

+ No need to repay
+ No interest paid
- Risk for takeover, if too many shares are issued
- Only for limited/incorporated businesses
- Less control for existing shareholders

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36
Q

debt or equity financing

A

advantages and limitations

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37
Q

equity finance

A

permanent finance provided by the owners of a limited company

38
Q

micro-finance

A

small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time

39
Q

crowd- funding

A

financing a business idea by obtaining small amounts of capital from a large number of people, most often using the internet and social media networks

40
Q

factors influencing the choice of finance

A
  • size and legal form of business
  • amount required
  • length of time
  • existing borrowing
41
Q

why is cash important to a business

A
  • pay employees wages
  • pay suppliers
    pay rent, heating, and lighting etc
42
Q

cash-flow forecast

A

an estimate of the future cash inflows and outflows of a business

43
Q

net cash flow

A

cash inflow minus cash outflow

44
Q

constructing a cash flow forecast

A
  • net cash flow= inflow - outflow
  • closing balance of one month is opening balance of next
  • net cash flow + opening balance= closing balance
45
Q

liquidity

A

the ability of a business to pay its short-term debts

46
Q

the working capital cycle

A
  • inventories purchased on credit
  • production of goods for sale
  • goods sold to customers on credit
  • cash
47
Q

the length of the working capital cycle depends on

A
  • the length of the credit period customers are given (credit sales)
  • how long it takes to produce the goods for sale
  • how quickly they find buyers
48
Q

credit sales

A

goods sold to customers who will pay for these at an agreed date in the future

49
Q

gross profit

A

the difference between revenue and cost of sales

50
Q

gross profit formula

A

revenue - cost of sales

51
Q

profit (net profit)

A

the difference between revenue and total costs

52
Q

(net) profit formula

A

revenue - cost of sales - expenses
or
gross profit - expenses

53
Q

total cost

A

costs of sales plus expenses

54
Q

revenue

A

the amount earned from the sale of products

55
Q

revenue formula

A

selling price x quantity

56
Q

cost of sales

A

the cost of purchasing the goods used to make the products sold

57
Q

expenses

A

day-to-day operating expenses of a business

58
Q

importance of profit to private sector businesses

A
  • measure the success of a business
  • measure the performance of managers
  • finance the purchase of non-current assets + expansion
  • attracts investors
59
Q

difference between profit and cash

A
  • money invested in a business or borrowed by a business increases cash but not profit
  • capital expenditure such as buying a new machine decreases cash but not profit
  • sales of goods on credit increases profit but does not increase cash until buyer pays for the goods
60
Q

income statement

A

a financial statement which records the revenue, costs and profits of a business for a given period of time

61
Q

uses of income statements

A
62
Q

statement of financial position

A

an accounting statement that records the assets, liabilities and owners’ equity of a business at a particular date

63
Q

assets

A

resources that are owned by a business

64
Q

liabilities

A

debts of the business that will have to be paid sometime in the future

65
Q

constructing a statement of financial position

A

net assets=non-current assets + current assets - current liabilities

capital employed= owner’s capital + retained profit + non-current liabilities

66
Q

non-current (fixed) assets

A

resources that a business owns and expects to use for more than one year

67
Q

current assets

A

resources that the business owns and expects to convert into cash before the date of the next statement of financial position

68
Q

trade receivables

A

the amount of money owed to the business by customers who have been sold goods on credit

69
Q

current liabilities

A

debts of the business which it expects to pay before the date of the next statement of financial position

70
Q

trade payables

A

the amount a business owes to its suppliers for goods bought on credit

71
Q

non-current liabilities

A

debts of the business which will be payable after more than one year

72
Q

owner’s equity

A

the amount owed by the business to its owners, includes capital and retained profits

73
Q

shareholders’ equity (funds)

A

alternative term for owner’s equity, but can only be used by limited liability companies

74
Q

liabilities

A
  • current liabilities
  • non-current liabilities
  • owner’s equity
  • shareholders’ equity
75
Q

assets

A
  • current assets
  • non-current assets
76
Q

interpreting a statement of financial position

A
77
Q

analysing a business’s profitability (ratios)

A
  • gross profit margin
  • profit margin
  • return on capital employed
78
Q

gross profit margin

A

ratio between gross profit and revenue

79
Q

gross profit margin formula

A

gross profit/revenue x100

80
Q

profit margin

A

ration between profit (before tax) and revenue

81
Q

profit margin formula

A

profit /revenue x 100

82
Q

adding value

A

selling a product for more than it cost to produce it

83
Q

return on capital employed (ROCE)

A

ratio between profit before tax and capital employed

84
Q

ROCE formula

A

profit/capital employed x100

85
Q

liquidity

A

the ability of a business to pay its short-term debts

86
Q

how to measure liquidity

A
  • current ratio
  • acid test ratio
87
Q

current ratio

A

ratio between current assets and current liabilities

88
Q

current ratio formula

A

current assets/current liabilities

89
Q

acid test ratio

A

ratio between liquid assets and current liabilities

90
Q

acid test ratio formula

A

(current assets - inventories)/current liabilities

91
Q

profitability vs liquidity

A
92
Q

why and how accounts are used

A

gcse business (3 decks)

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