Topic 5-Finance Flashcards
Why is finance important?
Without it finance can restrict business activity.
What is revenue?
The money made from sales.
What does sources of finance mean?
Where a business gets its money from.
What is break-even?
The number of products a business needs to sell in order to cover its costs.
What is cash flow?
A record of the money coming in and out of a business.
What is the purpose of the finance function?
To manage the money that businesses need to operate.
Why might a business need finance?
- To expand.
- Run the business.
- Recruitment.
What is a loan?
Money borrowed from a bank which is paid back with interest.
What is an advantage to a loan?
Repayment is spread over time.
What is a disadvantage to loans?
Interest has to be payed.
What is an overdraft?
An arrangement between a bank and a business so that a business can spend more money than it has in its account.
What is an advantage of an overdraft?
It can meet short term cash flow problems.
What is a disadvantage to an overdraft?
Interest is charged.
What is trade credit?
When the payment to suppliers is delayed.
What is an advantage to trade credit?
It is usually interest free.
What is a disadvantage to trade credit?
The goods must be paid for even if they do not sell.
Give two ways a business can increase its revenue…
- Increase selling price as long as they don’t lose many customers.
- Increase output.
What is the equation for revenue?
Revenue=Price x Quantity
Give two examples of fixed costs…
- Rent.
- Heating bills.
What are the two types of costs?
Fixed and variable.
What is the equation for total variable cost?
Total variable cost=Amount produced x variable cost per unit.
How can a business reduce costs?
- Lower it’s cost location.
- Store closures.
- Cheaper materials.
What is the equation for profit?
Profit= total revenue- total cost.
What is the equation for margin of safety?
Margin of safety= actual sales- break even level of sales.
What is the equation for break-even?
Fixed costs/(selling price-Variable cost per unit)
What is variable cost per unit also known as?
Contribution.
What is the equation for gross profit?
Revenue- cost of sales(variable)
What is the equation for net profit?
Gross profit -Fixed costs.
What are two uses of break even?
May help to get a loan from the bank and helps to make judgements about prices and costs.
Why is break even useful for a start up business?
It lets them see how much they need to sell to make a profit.
What are two limitations of break even?
The forecast figures could be different in reality and it only works for one product.
Why may forecast figures be different in reality?
The number of competitors may change.
What is a way to overcome the forecast figures issue with break even?
By updating as the costs or prices change to ensure its accurate.
Why would increased competition affect break even?
Because they may have to lower prices therefore making the break even point higher.
What is capacity utilisation?
A measure of the extent to which the products capacity has been used.
How do you work out capacity utilisation?
Actual level of sales/maximum possible output X100
Why do businesses need cash?
- To pay employees wages.
- To pay for stock.
What is cash flow?
The amount of money flowing into and out of a business.
What is positive cash flow?
When there is more money flowing into ,than out of a business.
What is negative cash flow?
When there is more money flowing out of a business rather than into.
What are two causes of negative cash flow?
- Opportunity cost.
- Seasonal businesses.
What is opportunity cost?
When a business spends too much cash because they thought it would be better invested rather than saving.
What happens if a business doesn’t have enough cash?
They become insolvent.
What is a cash flow forecast?
A statement showing the expected flow of money into and out of a business over a period of time.
Give an example of an inflow…
Payment from customers.
Give an example of an outflow…
Advertising costs.
Why should businesses forecast cash flow?
- To help plan for the future.
- Avoids cash flow problems.
What are some limitations of forecasting cash flow?
The figures are only estimates and figures may change.
How can a business make cash flow forecasts more accurate?
By basing in on past experience.
The further ahead the cash flow forecast is…
The less likely it is to be accurate.
What is the term used to describe a business going bankrupt?
Liquidation.
When can negative cash flow become a serious problem?
When it contributes over consecutive months.
Give two ways a business can solve a cash flow problem…
- Cut costs.
- Overdraft.
What could be an impact on cutting costs?
If it is cheaper supplies it could impact of quality.
What does ARR stand for?
Average rate of return.
How do you calculate average rate of return?
Profit/number of years
THEN
annual average profit/Initial cost X100.
When is ARR useful?
When comparing different investments.
What is average rate of return?
The amount you receive from making an investment.
What is the ARR given as?
A percentage.
