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Business > Theme 2 - Finance > Flashcards

Theme 2 - Finance Flashcards

1
Q

Name reasons why businesses need finance?

A

pay employees, marketing and advertising, day to day operations, innovation, start up costs

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2
Q

What is capital expenditure?

A

spending on businesses resources that can be used repeatedly over a period of time - machinery

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3
Q

What is revenue expenditure?

A

spending on business resources that will generate sales for a short/medium term - advertising, staff and raw materials

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4
Q

What is revenue?

A

Revenue is the income earned by a business over a period of time.

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5
Q

What does the amount of revenue earned depend on?

A

the number of items sold and their selling price.

revenue = price x quantity.

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6
Q

What is the revenue calculation?

A

revenue = price x quantity

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7
Q

What are costs?

A

Costs are the expenses involved in making a product.

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8
Q

what are variable costs and example?

A

costs that change with the amount produced. For example, the cost of raw materials rises as more output is made.

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9
Q

What are fixed costs and example?

A

costs that stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

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10
Q

what are direct and indirect costs?

A

Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.

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11
Q

what is the total cost?

A

The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

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12
Q

What is profit?

A

profit is the surplus left from revenue after paying all costs

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13
Q

How is profit found?

A

Profit is found by deducting total costs from revenue. In short: profit = total revenue - total costs.
Profit is the reward for risk taking

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14
Q

profit calculation

A

profit = total revenue - total costs

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15
Q

How can losses be prevented?

A

cutting costs - eg by letting staff go and asking those who remain to accept lower wages
increasing revenue - eg by cutting prices and selling more items - if demand is elastic

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16
Q

What is retained profit?

A

profit that has been made by the business in previous years

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17
Q

advantage and disadvantages of retained profit

A

+ - No interest or debt

- - money will be lost if business fails, start ups cant use this, conflict between investors, reduces profit.

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18
Q

what is owners capital?

A

Personal savings of the entrepreneur that they might want to invest into the business

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19
Q

advantage and disadvantages of owners capital

A

+ - no interest and no dilution of ownership

- -money will be lost if the business fails, limited amount of money

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20
Q

What is sale of assets?

A

Entrepreneurs may sell their personal things to get money

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21
Q

advantage and disadvantages of sale of assets

A

+ - dont have to invite anyone in meaning there is no dilution of ownership
- - can be difficult to sell things if they are obsolete

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22
Q

what is a bank loan?

A

provides a long term finance for a start up with the bank stating the fixed period the loan is provided , the rate of interest and amount of repayments, money that is borrows from the bank

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23
Q

advantages and disadvantages of bank loans

A

+lower rate of interest than a bank overdraft
+payment made over time- no debt
- expensive with interest
-may require security -personal things

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24
Q

What is a bank overdraft?

A

the bank lets the business go below zero, in return for charging a high rate of business
- allows a business to exceed their amount of money

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25
Q

advantages and disadvantages of bank overdrafts

A

+helps businesses handle seasonal fluctuations in cash flow
+helps when they run into short term cash flow problems
-interest charges are very high compared to loan
-only a short term solution

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26
Q

share capital

A

outside investors which for start up business will be family and friends

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27
Q

advantages and disadvantages of share capital

A

+may not want to get involved with the day to day operations
+no debt and no partner to help
-tensions may rise
-give control to someone else

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28
Q

what is venture capital?

A

made by funds managed by professional investors. They get involved in high risk opportunities and expect high reward

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29
Q

advantages and disadvantages of venture capital

A

+business network
+money and support
+distribution channels
-part loan

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30
Q

What is trade credit?

A

the credit extended to you by suppliers who let you buy now and pay later - dependant on the industries and relationships

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31
Q

advantages and disadvantages of trade credit

A

+minimal cash outlay, discounts for fast payments, good for cash flow

  • fees and penalties if you pay late
  • loss of trade crew if you unreliable and pay late
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32
Q

what is leasing?

A

businesses sign a contract to pay a rental fee to the owner of an asset in return for the use of the asset over a period of 2-4 years - machinery or vehicles

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33
Q

advantages and disadvantages of leasing

A

+manages and avoids big cash outflow when buying new assets, new technology
-expensive in the long run, early termination fees

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34
Q

what is financing through family and friends?

A

provide money either directly to the entrepreneur or into the business

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35
Q

advantages and disadvantages of family and friends helping to finance

A

+this can be quicker and cheaper to arrange -flexible

-can add stress if the business gets into difficulties

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36
Q

Business angles

A

External investors in a start up business. Professional investors who prefer to invest in businesses with high growth prospects

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37
Q

Advantages and disadvantages of business angels

A

+brings skills, experiences and contacts to a company

- some loss of control over business from entrepreneur

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38
Q

Crowdfunding

A

An alternative method of raising finance where the entrepreneur attracts a crowd of investors who all contribute to an online fundraising target

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39
Q

Advantages and disadvantages of crowdfunding

A

+ popularity has increased
+easy way to promote business
+early and initial way of testing the market
-risk of others copying idea -public display
Could take a long time to raise
Could potentially ruin reputation

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40
Q

Banks

A

If you get a loan the bank will insist on collateral. If the business is starting up without property assets, the collateral will be personal, such as the deeds to the owners home - they want to provide finance not to be a partner

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41
Q

Advantages and disadvantages of banks

A

+provides money for start up

- putting personal things at risk

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42
Q

Grants

A

Hand outs to small firms from governments. A grant may be given to encourage a start up or a relocation that is considered valuable - conditions- location,technology, environment, ethical

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43
Q

Advantages and disadvantages of grants

A

+encourage start ups to relocate to areas of unemployment
+done have to give it back
-a lot of competition to get grants
-lots of conditions

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44
Q

What factors depend on the source of finance to choose?

A
  • how established the business is
  • how quickly money is needed
  • cost of borrowing (interest)
  • willingness to surrender ownership
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45
Q

What is capital?

A

Any sum of money that can be used to fund operations

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46
Q

What is stock/inventory?

A 
Products that you intent to sell 
Could be:
-raw materials 
-work in progress 
-finished goods
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47
Q

What is a current asset?

A

Something a business owns that the business can sell and turn into cash within one year

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48
Q

Creditor

A

Anyone the business owes money to

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49
Q

Debtor

A

Individual or organisation who owes the business money

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50
Q

Current liability

A

Something that the business owes within one year

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51
Q

Working capital

A

Current assets - current liabilities

Day to day money in the business

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52
Q

Working capital equation

A

WC = current assets - current liabilities

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53
Q

How do you improve working capital?

A

Increase assets and decrease liabilities

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54
Q

How do you improve working capital?- increase assets

A

Collect debts quickly -give a short time to pay

Increase sales revenue - price rise

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55
Q

How do you improve working capital? - decrease liabilities

A

Pay debts quickly

Get a bank loan instead of an overdraft or negotiate better deals with suppliers

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56
Q

What is unlimited liability?

A

The business and the person have the same legal entity
If an individual invests in an organisation they can lose not only the investment but also personal possessions
-sole traders and partnerships

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57
Q

What is limited legal liability?

A

Two separate entities

If an individual invests in an organisation they would only lose what they have invested

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58
Q

LTD

A

Private limited company

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59
Q

PLC

A

Public limited company

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60
Q

What is a business plan?

A

A document setting out the strengths, aims and strategies of a business, it is therefore an important planning tool

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61
Q

What should be included in a business plan?

A 
Financial situation- sources of finance,budgets, costs 
Contingency plan 
HR plan 
Marketing plan 
Production plan
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62
Q

Disruptive technology

A

Technology that makes the service that you sell useless

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63
Q

Benefits of having a business plan

A 
Budget money 
Helps to secure finance 
Gives you direction/motivation 
Helps create objectives 
Reduces risk
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64
Q

Drawbacks of a plan

A

Uncertainty makes it hard to be accurate -more opportunities may come up
Takes time and money to produce
Doesn’t guarantee success
Constant change in market
Overestimate what you can achieve
Restrictive - lack of freedom
Particularly inaccurate in a dynamic market

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65
Q

What groups of people would be interested or need a business plan?

A 
Shareholders 
Stakeholders 
Bank 
Suppliers 
Manager of business 
Employees for job security
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66
Q

Cash flow

A

The money flowing in and out of a business

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67
Q

Inflow- income - receipts - examples

A

Money going in

Revenue, loans, sales, sources of finance, investment

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68
Q

Outflow - expenses - payments

A

Money going out

Stock, wages , rent rates , utilities

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69
Q

Net cash equation

A

Net cash = inflow - outflow

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70
Q

Why is cash flow forecasting used?

A

Anticipates timings and amounts of any cash shortages

Arrange financial cover for any shortages

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71
Q

Causes of cash flow problems

A

Have to pay suppliers before you sell products
May have more outflows than inflows
Starting balance may be low
Balance of payment -paying for stock upfront and giving customers too long to pay - trade credit
Unforeseen circumstances
Stock piling
Trends
Failure to negotiate good terms - discounts with suppliers

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72
Q

Solutions to cash flow problems - increase inflow

A 
Generate alternative revenue streams 
Increase price of products 
Diversify product range 
Promote product range 
Promote products 
Offer less trade credit 
Increase production
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73
Q

Solutions to cash flow problems - decrease outflow

A 
Use cheaper suppliers 
Spread out payments
Build relationship with suppliers 
Change suppliers 
Just in time - only get stock that you need 
Improve efficiency - no waste 
Pay staff less - cut backs 
Change location - lower rent
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74
Q

Extrapolation

A

Making the assumption that what happened before will happen again - the trend will continue

75
Q

Positives of extrapolation

A

Not much data required
Simple method
Using existing data
Quick and cheap

76
Q

Negatives of extrapolation

A

Unreliable if in the past there was significant fluctuation
Retrospective
Assumption -unlikely in competitive business environments
Ignores qualitative data

77
Q

Correlation

A

Looks at the strength of the relationship between two variables plotted with a scatter graph

78
Q

Independant variable

A

the factor that causes the dependant variable to change

79
Q

Dependant variable

A

The variable that is influenced by the independent variable

80
Q

Positive correlation

A

A positive relationships exists where as the independent variable increases in value, so does the dependant variable falls in value

81
Q

Negative correlation

A

A negative correlation exists whereas the independent variable increases in value, the dependant variable falls in value

82
Q

No correlation

A

There is no discernible relationship between the independent and dependant variable

83
Q

Positives of correlation

A

Data from market

Aids planning

84
Q

Negatives of correlation

A

Can only use 2 variables

85
Q

What is moving averages?

A

A technique for identifying an underlying trend by smoothing out fluctuations in data

  • it smooths out the trend in the raw data
  • It makes it easier to analyse erratic data
86
Q

What is sales forecasting?

A

A business process, assessing the probable outcome using assumptions about the future

87
Q

What is a sales forecast?

A

Projection of future sales revenue, often based on previous sales and market data

88
Q

How do they do a sales forecast?

A
  • previous sales data
  • Trends -market trends, consumers, social/ethical
  • seasonal factors
  • experience of managers
  • economic climate
89
Q

What are the challenges of predicting accurately?

A 
Unforeseen circumstances 
Changes in economic climate 
climate change 
Bad PR 
Change in legislation 
Trends - may fluctuate - dynamic market 
disruptive market
90
Q

Economic factors that effect sales forecasting

A 
business cycle 
exchange rates 
interest rates 
trade 
political 
unemployment 
change in legislation
91
Q

3 Period moving average

A

add up 3 periods and divide by 3

92
Q

Positives of 3 period MA

A

Removes the extreme values

93
Q

Negatives of 3 period MA

A

Assumptions - using previous data
Dependant on the scale
Disregards some data that could be used to show where the business needs to be improved - erratic values are for planning

94
Q

4 period MA

A

1/2 of 1st , add with 2nd, 3rd, 4th and 1/2 of 5th and divide by 4

95
Q

Positives of 4 period ma

A

Good for erratic data
easier to analyse smoother trends
Accounts for variation in data
More statistically reliable - 4 period ma

96
Q

Negatives of 4 period ma

A

Trends can change due to time period used
Don’t take into account any changes that you can’t expect - new competitors
uses past info
most useful in stable periods
reduced accuracy and original data distorted as averaged out

97
Q

Sales volume

A

the number of products/ services sold over a period of time

98
Q

Sales revenue

A

The revenue from selling products/services over a period of time

99
Q

Fixed costs

A

A cost which does not change with output

100
Q

Variable costs

A

A cost that varies directly with output

101
Q

Total costs

A

Fixed costs + Variable. costs

102
Q

Profit

A

The difference between total revenue and total costs

103
Q

Direct costs

A

is the price that can be directly tied to the production of specific goods or services

104
Q

Indirect costs

A

They are not directly accountable to a cost object

105
Q

margin of safety

A

units sold - breakeven

106
Q

break even formula

A

Fixed costs / contribution per unit

107
Q

Contribution per unit

A

Sales price per unit - variable cost per unit

108
Q

Benefit of break even

A

gives objectives to business on how much they need to sell - setting targets
Provides a focus/guidance
Good for identifying for potential changes of cost and price
Planning tool

109
Q

Drawbacks of break even

A

Assumes that everything is sold
assumes that the business sells everything at the same price during the year
Variable costs aren’t constant - can only be as accurate as the predictions of sppu -vppu

110
Q

total contribution formula

A

total contribution = cpu x units sold

111
Q

What is a budget?

A

A forward financial plan concerning the revenue that a firm or department must aim to reach over a given amount of time

112
Q

Different types of budget

A

Revenue budget
Expenditure budget
Profit budget

113
Q

What is a revenue budget?

A

sets out expected sales revenues from selling its products
Includes level of sales and selling price
Start up business may have low revenue budget

114
Q

What is expenditure budget?

A

Part of the company’s whole budget that deals with the costs required to operate the business
Labour, materials

115
Q

What is profit budget?

A

Shows the expected income
How much profit is likely from your expected level of trading
Start up may not make any for the first few years

116
Q

What are the 2 methods of creating a budget?

A

Historical budget

Zero-based budgets

117
Q

Historical budget

A

Uses lasts year data as basis
Realistic - based on actual results
However, circumstances may have changed
- doesn’t encourage efficiency

118
Q

Zero based budget

A

Budgeted costs and revenues are set to zero
Budget is based on new proposals for sales and costs
Makes budgeting more complicated and time consuming but potentially more realistic

119
Q

Variance analysis

A

Calculating and investigating the differences between actual results and the budget

120
Q

Positive/favourable variance

A

better than expected

121
Q

Negative/adverse

A

Worse than expected

122
Q

Why are budgets set?

A
  • To enable spending power to be delegated to managers who know the needs to be spent which speeds ups decision making
  • Establish priorities and set targets
  • Assign responsibilities and allocate resources
  • Control finance
  • monitor performance
123
Q

Drawbacks of setting budgets

A
  • Time and money consuming
  • Strategic rigidity - hard to stick to targets if market shifts
  • Budgeting is based on predictions - relies on market research accuracy and changes in trends
  • external factors - changing competitors and economy
  • Decisions made by government and other public bodies - inflation
124
Q

Inflation

A

The general rise in price

125
Q

Income statements

A

A financial document that summarises a businesses historic trading activity- sales revenue- and expenses to show whether it has made a profit or loss over a period of time

126
Q

Profit equation

A

Profit = total revenue - Total costs

127
Q

Why are there different types of profit?

A

If a business is not doing well, then it uses different kinds of profit to work out where the issue is

128
Q

Why does a business need profit?

A

To re-invest
As a reward for the business owners
As a measure of performance

129
Q

Structure of an income statement

A 
Revenue 
Cost of sales 
Gross profit 
Fixed overheads 
Operating profit 
Net financing costs  - positive or negative 
Profit before tax 
Corporation tax 
Net Profit
130
Q

Gross profit formula

A

Revenue - cost of sales

131
Q

Cost of sales

A

How much it costs to make the product

132
Q

Operating costs formula

A

Gross profit - fixed overheads

133
Q

Fixed overheads

A

Fixed costs, a cost that doesn’t change with output

Rent and utilities

134
Q

Net Profit formula

A

Profit before tax - corporation tax

135
Q

Net financing costs

A

The amount of interest paid

136
Q

Current rate of corporation tax

A

19%

137
Q

Profit Utilisation

A

The way in which profit is used
The split between how much is distributed to shareholders (dividends) and how much is re-invested back into the business (retained profit).

138
Q

Profit Quality

A

A measure of whether profit is sustainable in the long run high quality profit is profit that will continue; Low quality profit will arise from exceptional or extraordinary circumstances that are unlikely to continue

139
Q

Which part of the income statement do employees want?

A

Net profit and fixed overheads

- If making a good net profit, employees will have job security and negotiate pay

140
Q

Which part of the income statement do government want?

A

Profit before tax and corporation tax

-to see if businesses are paying the amount of corporation tax

141
Q

Which part of the income statement do shareholders want?

A

Net profit, cost of sales, fixed overheads

  • look at profit utilisation
  • To know how well the business is doing, and how much dividends they are going to be paid, to see if the business is being run well and where to cut back costs
142
Q

Which part of the income statement do managers want?

A

Revenue, gross profit, cost of sales, fixed overheads, operating profit

  • To know if they are meeting their targets
  • To know how much they need for budgets
  • To know where to cut costs
  • Tells them how good their decisions are
143
Q

Which part of the income statement do suppliers want?

A

Net profit, financing costs

  • how much debt the business is in
  • see how much money they are making to see if it is reliable
144
Q

Which part of the income statement do potential shareholders want?

A

Net profit and revenue

Want to see if they have a steady stream of money

145
Q

Which part of the income statement do bank want?

A

Net profit and financing costs

-How reliable the business is

146
Q

Profitability ratios

A

A technique for analysing a businesses financial performance by comparing one piece of accounting information to another

147
Q

Gross profit margin

A

Gross proft/sales revenue x100

148
Q

Operating profit margin

A

Operating profit/ revenue x100

149
Q

Net profit margin

A

Net profit / revenue x100

- a ratio that expresses a businesses profit after the deduction of all costs as a percentage of sales

150
Q

How do you make sure the gpm is as high as possible?

A

Reduce cost of sales - use cheaper suppliers and negotiate price
Increase revenue

151
Q

How do you make sure the opm is as high as possible?

A

Reduce/manage fixed overheads

Reduce operating costs

152
Q

How do you make sure the npm is as high as possible?

A

Manage and reduce all costs

153
Q

Drawbacks to income statement and profitability

A

Need previous data

Need competitors data

154
Q

ROCE

A

Return on capital employed - how much money you get back on the money that you invested into the organisation

  • compares profit earned with the amount of capital employed in the business
  • the higher the better (20-30%)
  • measures the efficiency with which the firm generates profits from funds invested in the business
  • investors will look at this to see what return they will get and whether it is better than the bank
155
Q

ROCE eqaution

A

Operating profit/capital employed

Capital employed = total equity+non-current assets

156
Q

How do you improve ROCE?

A

Increase operating profit

Reduce capital employed

157
Q

External factors that affects profit margins

A
  • Environmental factors - natural disasters
  • Economy - spending patterns and recessions
  • Legislation - change in
  • Negative PR
158
Q

Cash

A

the money circulating around the business at any given time - money available could be in the form of a loan

159
Q

Profit

A

Total revenue - total costs

Generate profit by selling goods and services and deducing costs that are associated plus tax

160
Q

Balance sheet

A

A financial statement that summarises the net worth of a business
-Tells you the way that the business has raised its capital and the uses to which capital has been put out

161
Q

Liability

A

Something the business owes

162
Q

Assets

A

Something the business owns

163
Q

Structure of balance sheet

A

-Non current assets- buildings, vehicles, machinery , brand
-Current assets - Cash, stock/inventory, money in bank, debtors
-Current liabilities - trade credit/suppliers, overdraft
-net current assets= current assets-current liabilities
-non-current liabilities- bank loan, mortgage
- Net assets = non current assets+net current assets - non current liabilities
-financed by - retained profit, shareholder investment
= total equity

164
Q

Non current assets

A

assets owned for more than a year

  • vehicles
  • buildings
  • machinery
  • brand
165
Q

Current assets

A

something you own for less than a year

  • cash
  • stock/inventory
  • debtors
  • money in bank
166
Q

current liabilities

A

Something the business owes within a year

  • Bank overdraft
  • Trade credit/suppliers
167
Q

Net current assets

A

Current assets - current liabilities

168
Q

Non- current liabilities

A

Something you owe over a year

  • bank loan
  • mortgage
169
Q

Net assets

A

Non-current assets + net current assets - non current liabilities

170
Q

Financed by

A

Where does the money come from
- retained profit
- shareholder investment, reserves
=total equity

171
Q

Liquidity

A

Shows whether a firm is able to meet its short term liabilities and meet its debts - measures the cash position
Business could be making profit but not be able to pay their bills

172
Q

Current Ratio

A

Shows a businesses ability to meet debts over the next year

Current assets / current liabilities (CL always 1)

173
Q

Ideal current ratio

A
  1. 5:1
    - too high- not taking advantage of investment opportunities
    - too low - can’t pay bills
174
Q

Acid test ratio

A

Measures short term liquidity - more accurate indicator as it takes out inventories which is to be considered less liquid than cash
(Current assets - stock) / current liabilities

175
Q

How to improve liquidity?

A

Decrease liabilities
-sell assets
-increase non current liabilities- bank loan
-Negotiate with creditors to get better prices
Increase current assets
-Reduce trade credit
-Sell stock - increase sales revenue

176
Q

Working capital

A

Net current assets

Money circulating in the business day to day

177
Q

Why is working capital important to a business?

A

Buy materials, stock and pay wages, day to day bills - electricity and phone bills

  • ensuring that the cash available is sufficient to meet the cash requirements at any one time
  • Gives you continuity
  • Shortage of cash means that no funds are available for development
178
Q

Ways to improve working capital

A
  • Earn additional profit
  • Sell stock
  • Borrow money on long term basis
  • Replace short-term debt with long term debt
  • Sell long term assets for cash
  • negotiate terms and prices with suppliers
179
Q

Causes for working capital problems

A

When a business is expanding too quickly
Holding too much stock
Trade credit too long
Too many short term debts

180
Q

Reasons for business failure

A
  • Lack of demand
  • Bad cash flow
  • Not adapting
  • New technology
  • trends, debts, lack of innovation
  • competitors
  • online shopping
181
Q

Internal reasons for business failure

A

Marketing failure
lack of innovation
skills set of staff not good
poor leadership

182
Q

external reasons for business failure

A 
competitors
legislation
new technology 
interest rate increase 
negative PR
economic change 
new trends
183
Q

Financial reasons for business failure

A 
below break even point for a long time 
bad budgeting 
poor financial planning
poor cash flow 
overtrading 
debt

Business (64 decks)

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