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
What is operating profit?
The difference between gross profit and business overheads, such as selling and administrative expenses
What are current liabilities?
Money owed by the business that must be re-payed within one year
What are working capital?
The funds left over to meet day-to-day expenses after current debts have been payed out
What is overtrading?
The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast
What is batch production?
A method that involves completing one operation at a time on all units before performing the next
Define capital intensive?
Production methods that make more use of machinery relative to labour
Define capital productivity?
The amount of output each unit of capital (eg one machine) produces
What is cell production?
It involves producing a family of products in a small self-contained unit within a factory
What is division of labour?
Specialisation in specific tasks or skills by an individual
What is flow production?
Large-scale production of a standard product, where each operation on a unit is performed continuously one after the other, usually on a production line
What is Kaizen?
A method involving continuous improvement
Define labour intensive?
Production methods that make more use of labour relative to machinery
What is labour productivity?
The amount of output each unit of labour (eg one worker) produces
What is lean production?
An approach to operations that focuses on the reduction of resources
What is outsourcing?
Giving work to sub-contractors to reduce costs
What is capacity utilisation?
The use that a business makes of its resources
What is over-utilisation?
The position where a business is running at full capacity and ‘straining’ resources
What is under-utilisation?
The position where a business is producing at less than full capacity
