Theme 2 key terms (Done) Flashcards
Define finance.
Finance is the management of the investment needed to; open, run and grow a business.
Reasons to raise finance.
- To pay debts.
- To help a business over a slow trading period.
- To expand (growth).
- To start up a business.
- To buy stock- ask a supplier for trade credit.
What is owner capital (aka owners equity)?
The amount of money owed to the owner once all the debts of the business are paid off.
Who is most likely to use owners capital?
Sole traders and partnerships are most likely to use owners capital to expand and grow their business.
What are retained profits?
Profits that are re-invested into the business to help it grow.
What is an advantage of retained profits.
No interest to pay as it belongs to the business.
What is a disadvantage of using retained profits?
Once retained profits are used, they’re gone.
Why would a business sell assets?
To raise finance for growth and expansion.
What are examples of assets that may be sold?
- Machinery.
- Land.
- Premises.
- Vehicles.
What are the advantages of selling assets?
- Improves efficiency.
- Increase capacity utilisation.
- Raise finance to invest in another brand.
What are the disadvantages of selling assets?
- May not raise enough money for growth/expansion.
- Less items on balance sheet which is less attractive to investors.
- Possible sign of financial trouble.
What are three advantages of internal finance?
- The capital is available immediately (assets can be sold quickly and retained profits will be in a bank account ready).
- Internal finance is cheap (no interest payments).
- No need to involve third parties.
What are two disadvantages of internal finance?
- Internal finance can be limited (e.g. a business may not be sufficiently profitable to use retained profit).
- There are no inflationary benefits with internal finance. Inflation can reduce the value of debt if external sources are used.
What is limited liability?
Where shareholders can only lose the original amount they invested in a business
Unlimited liability
Where business owners are liable for all business debts
What are cash inflows?
The flow of money into a business
What are cash outflows?
The flow of money out of a business
What is consumer income?
The amount of income remaining after taxes and expenses have been deducted from wages
What are consumer trends?
Habits or behaviours of consumers that determine the goods and services they buy
What is unit cost?
The cost of producing one unit, calculated by dividing the total cost by the output
What is contribution?
The amount of money left over after variable costs have been subtracted from revenue
What is margin of safety?
The range of output between the break even level and current level of output, over which a profit is made
What is variance?
The difference between actual financial outcomes and those budgeted
What is gross profit?
The difference between revenue/ turnover and cost of sales
