Topic 5 Flashcards
1
Q
Finance is:
A
The management of Money within a business.
2
Q
What are the 5 aspects of finance:
A
- management and control
- strategy and risk
- funding
- compliance
- accounting
3
Q
What is strategy and risk?
A
- about reducing risk.
- seeing if an opportunity is ‘worth it’
- analysing if profit would be made
- will advise the business on what’s best to do.
4
Q
What is funding?
A
- putting money into a certain area of the business.
- fundraising
- selling to gain finance
- how much money to put back into the business
- analysing how to split budgets to different departments in the business.
5
Q
What is compliance ?
A
- compliance with the law
- about tax
- making sure they pay as much as possible yet all is legal.
6
Q
What is Accounting ?
A
- writing up income statements
- using balance sheets
- records all input and outputs yearly.
7
Q
What is management and control?
A
- they produce a large amount of financial data to show where the company should spend there money.
- what’s the most profitable direction for the business.
- set budgets for each department
- control business activity to meet financial objectives.
8
Q
What does an income statement show ?
A
The sales revenue and profit the business makes over the year.
9
Q
What is revenue?
A
Money from sales.
10
Q
What is expenditure?
A
Money going out of the business.
11
Q
What is net profit?
A
Sales revenue - expenditure.
12
Q
What is in a balance sheet?
A
- assets - things what the business owns
- liabilities - things the business ows.
13
Q
Why do businesses need finance?
A
- start up
- pay wages and salaries
- to expand
- to market products.
- pay rent and fixed costs
- to but raw materials
- buy equipment.
14
Q
If a business is starting up it will need finance for:
A
- stock
- to buy fixtures and fittings for the shop
- pay rent.
15
Q
If a business needed to expand they need finance for:
A
- buying a new property
- buying more raw materials
- external growth, buying another company.
16
Q
What is finance used for to run the business everyday:
A
- pay staff
- pay rent
- other fixed assets E.G. electricity, water, heating.
- cash flow
17
Q
What is another reason need finance?
A
RECRUIT STAFF!!!
18
Q
What is finance spent on when marketing?
A
- social media
- give away.
- competitions.
- radio/ TV adverts.
- newspapers.
19
Q
What is short term?
A
Less than 3 years.
20
Q
What is medium term?
A
3-5 years.
21
Q
What is long term?
A
5 or more years.
22
Q
What are the 6 internal sources of finance?
A
- personal savings
- sale/leaseback
- factoring
- retaining profit
- sale of fixed assets
- divestment.
23
Q
What is personal savings?
A
Using the owners Money which he puts in himself.
24
Q
What is sale/leaseback?
A
Sell an asset (a building) and then lease it back off the new owner.
25
What is factoring?
Sell the debt to a debt collector.
26
What is retaining profits?
Use last years profit to invest in the business.
27
What is sale of fixed assets?
Selling unused items in the business this could be as small as old computers or buildings.
28
What is divestment?
Close down some parts of the business.
29
What are the advantages of using personal savings?
- fast
| - cheap.
30
What are the disadvantages of using personal savings?
- risky
| - opportunity cost.
31
What are the advantages of using sale/leaseback?
-Gain lots of money
32
What are the disadvantages of sale/leaseback?
- slow
- Costly
- risky
33
What is an advantage of factoring?
- gain lots of money quite quickly
| - good for cash flow
34
What are the disadvantages of factoring?
- costly
| - don’t get full amount.
35
What are the advantages of retained profit?
- quick
| - cheap
36
What are the disadvantages of using retained profit?
- opportunity cost
| - no dividend for shareholders.
37
What are the advantages of the sale of fixed assets?
- cheap
| - gain money without losing anything of value.
38
Disadvantage of the sale of fixed assets?
- cant use the things you’ve sold anymore.
39
What are the advantages of divestment?
- don’t have to pay interest
| - stops the business losing money. —> no risk
40
Disadvantage of divestment?
- shuts down a part of the business which could lead to a drop in sales revenue.
41
What is external source of finance?
When money is raised from outside the business.
42
What are the benefits of getting a loan from the bank?
- setting up a business
| - longer loan, lower monthly payments.
43
what are the risks of Loaning from a bank?
- have to pay every month
| - have to pay interest.
44
What are the benefits of getting a overdraft from the bank?
- its quick
| - they can be very flexible, even daily!
45
What are the drawbacks of overdraft from a bank?
- due o them being short term its high interest.
| - banks may refuse.
46
What are the advantages of tarde credit from suppliers?
- get stock as well as gain money.
| - gives time to sell the products and then pay it off.
47
What are the disadvantages of getting trade credit from suppliers?
- need a good relationship with suppliers.
| - need a good reputation and track record.
48
What are the advantages of a new partner to raise capital?
- gains LOTS of money
| - brings in ideas, experience and contacts as well.
49
What are the disadvantages of getting a new partner to raise capital?
- Lose a % of the business, lose control.
| - share profits and less dividend to shareholders.
50
What are the benefits of using share issue to gain finance?
- Gain major finance.
| - No interest needs to be paid.
51
What are the disadvantages of share issue to raise money?
- vulnerable to take overs.
| - less profit between shareholders.
52
What’s the benefits of using crowd funding to gain finance?
- can be used as marketing
- advertisement
- last resort?
53
What are the disadvantages of using crowd funding to gain finance?
- doesn’t raise that much money.
| - can be time consuming.
54
Sales revenue=
Price x quantity sold
55
What are fixed costs?
Costs which stay constant despite any factor for example its not effected by amount of sales.
56
What are variable costs?
Costs which change due to circumstances, E.G. hours worked or how many products sold.
57
What are some examples of fixed costs?
- rent
- insurance
- salary’s
- marketing
- leasing
- utilities.
58
Examples of variable costs?
- packaging
- stock
- wages
- transport.
59
Net profit =
Sales revenue - total profit.
60
Total costs =
Fixed costs + variable costs.
61
Gross profit =
Sales revenue - variable costs.
62
Average cost =
Total cost / quantity sold.
63
Definition of gross profit?
Amount of money you make out of sales minus costs it took to make.
64
Net profit definition:
- final, bottom line profit after all cost have been took away.
65
What things are on a income statement?
- sales revenue
- variable costs
- gross profit
- fixed costs
- net profit.
66
What is break even?
How many sales it takes to cover all costs.
67
What lines do you plot on break even graphs?
- fixed costs
- total costs
- sales revenue.
68
What are the advantages of knowing your break even point?
- helps set targets
- helps monitor business success
- helps justify borrowing money
- tells you if you are wasting your time.
69
Contribution =
Selling price - variable costs.
70
Break even =
Fixed costs / contribution.
71
What is margins of safety?
How many products you are above the break even point.
72
Margin of safety =
Amounts of products sold - break even point.
73
What are some problems with using break even?
- fixed costs can change
- its only a prediction
- it assumes price never changes
- it assumes every stock you buy get sold.
74
What are some solutions to bad cash flow?
- reduce wages
- increase price
- sell more products
- change supplier to lower stock prices.
75
What are the benefits of cash flow forecasting?
- helps you identify future problems
- helps you set targets for managers
- helps control spending.
76
Problems of cash flow forecasting?
- Assumes all customers will pay on time
- cant predict unexpected expenses.
- preferences may change.
