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AQA GCSE Business > Topic 6 > Flashcards

Topic 6 Flashcards

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1
Q

What are sources of finance?

A

A means of raising funds that are needed by a business for purposes such as expansion

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2
Q

What does raising finance mean?

A

The proxess of getting the money needed, for example to start or expand a business

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3
Q

What is an asset?

A

Something that is owned by a business, such as land, buildings, vehicles and machinery

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4
Q

What is cash flow

A

Cash flow is the money that flows into and out of a business on a day-to-day basis

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5
Q

What are some examples of cash inflow?

A
  • income from sales
  • loans from banks
  • money invested by the business’s owners
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6
Q

What are some examples of cash outflow?

A
  • buying raw materials
  • wages
  • rent or mortgage
  • interest on loans
  • taxes
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7
Q

Why is cash flow important?

A

Managing a business’s cash flow effectively is a very important task for managers. If a business does not have enough cash available to pay its bills, it could fail. A business that is unable to pay its suppliers will probably not receive any further supplies. It may be unable to pay its workers. The business will probably be forced to stop trading in these circumstances.

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8
Q

What are some benefits of having a positive cash flow position

A
  • Avoid interest charges by not borrowing.
  • Overdrafts are costly for covering cash flow issues.
  • Positive cash flow increases loan approval likelihood.
  • Lenders trust timely repayments with good cash flow.
  • Positive cash flow lowers business failure risk.
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9
Q

What is a cash flow forecast?

A

A cash flow forecast is a plan of expected inflows and outflows to and from a business over a period of time.

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10
Q

What is a cash flow statement?

A

A cash flow statement is a record of the cash inflows and outflows that took place over an earlier period of time

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11
Q

A cash flow forecats is separated into 3 sections, what are they?

A
  1. Total Cash Inflow
  2. Total cash outflow
  3. Net cash flow
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12
Q

Why are cash flow forecasts important?

A
  • Cash flow forecasts: Crucial for two reasons:
    • Identify potential cash shortages.
    • Take proactive measures to prevent cash problems.
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13
Q

What are some causes of cash flow problems?

A
  • poor management
  • the business is making a loss
  • offering customer too long to pay
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14
Q

What are solutions to cash flow problems?

A
  • reschedule payments
  • cut costs
  • use overdrafts
  • find new sources of cash inflows
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15
Q

What are the factors for selecting the ‘best’ solution?

A
  • cause of the cash flow problem
  • the business’s circumstances
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16
Q

What is profit?

A

Profit measures the difference between the values of a business’s revenue (sales) and its total costs.

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17
Q

What is the difference between profit and cash flow?

A

Cash flow and profit are very different things:

  • Profit shows the extent to which a business’s revenue exceeds its total costs over a trading period (normally one year). Profit is measured at the end of the period. It reveals nothing about the timing of any payments or receipts.
  • Cash flow is the money that flows in and out of a business each day. It is related to the timing of payments and receipts. A business may be profitable, but still be short of cash if its customers are slow to pay.
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18
Q

What is revenue and how do you calculate it?

A

Revenue is the income that a busines recieves from selling its goods and services.

Revenue = number of units sold x average selling price

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19
Q

What are fixed costs?

A

These are costs, such as rent and insurance, which do not change when the level of output or production alters.

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20
Q

What are variable costs?

A

Variable costs are like wages and expenditure on fuel and raw materials. They rise directly with the level of output, so if output or production increases, variable costs increase too.

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21
Q

What are investments?

A
  • Investment: Spending on assets like factories or machinery.
  • Reasons include:
    • Increasing production.
    • Buying new assets (e.g., land, machinery).
  • Aim: Making a profit.
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22
Q

What is the average rate of return (ARR)?

A

Compares the average yearly profit from an investment and is stated as a percentage

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23
Q

How to calculate ARR?

A

ARR = (average yearly profit / cost of the investment) x 100

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24
Q

Hwo do managers use the results of ARR calculations?

A
  • Managers prefer higher ARR figures.
  • Highest ARR chosen when comparing investments.
  • Riskier investments need a much higher ARR.
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25
Q

How would managers compare the ARR figures for an investment against interest rate?

A
  • Check interest rate for borrowing money or on available funds.
  • Compare interest rate with ARR (Average Rate of Return).
  • If ARR < interest rate, may decide against investment.
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26
Q

What is a break-even output?

A

The level of prodction which a business’s total costs and revenue from slaes are equal

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27
Q

What is a break-even chart?

A

Shows a business’s costs and revenues and the level of production needed to break-even

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28
Q

What doe break-even charts tell us?

A
  • break-even output
  • loss-making range of output
  • profit-making range of output
  • margin of safety
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29
Q

What is the margin of safety in a business?

A

Measures the amount of which a business’s current level of production exceeds its break-even level of output

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30
Q

What are the pros of break-even analysis?

A

Pros:
- Break-even charts show price changes.
- Higher price means fewer units of output for break-even.
- Changing costs affect break-even.
- Rising costs mean higher output needed to break-even.
- Break-even analysis aids loan applications.

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31
Q

What are the cons of break-even analysis?

A

Cons:
- Break-even analysis assumes full output sales.
- No sales mean no revenue.
- Changing costs/prices affect break-even output.
- Regular changes make analysis challenging.

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32
Q

What are the four main reasons why businesses prepare financial statements?

A
  • Assess business performance.
  • Aid managerial decisions (e.g., expansion).
  • Assist investors and stakeholders.
  • Legal obligation in the UK for financial statements.
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33
Q

What are two major financial statements that businesses prepare?

A
  • the income statement
  • the statement of financial position (also known as a ‘balance sheet’).
34
Q

What is an income statement?

A
  • Income Statement: Shows revenues, costs, and profit/loss.
  • Reflects business performance over time.
  • Essentially a financial statement for assessing profitability.
35
Q

What is a statement of financial position?

A
  • Financial position statement: Lists a business’s assets and liabilities.
  • Snapshot of financial status on a specific day.
36
Q

Why do businesses prepare financial statements?

A
  • the law
  • To help the business’s managers make decisions
  • to guide investors
37
Q

What key pieces of information does an income statement provide?

A
  • Revenue, also known as ‘sales income’.
  • Production Costs
  • Profit/Loss
38
Q

What are the six sections of an income statement?

A
  • revenue
  • cost of sales
  • gross profit
  • overheads
  • operating profits
  • net profit
39
Q

What is gross profit?

A
  • Gross profit = sales revenue - cost of sales
  • Calculated over a period (typically a year)
40
Q

What is net profit?

A
  • Net profit: Sales revenue minus costs.
  • Includes cost of sales, overheads, and other expenses.
  • Calculated over a period, usually a year.
41
Q

What is a liability?

A

A liabilty is a sum of money that is owed by a business to another business or an individual.

42
Q

What are two types of assets?

A
  • non-current assets
  • current assets
43
Q

What are non-current assets?

A
  • Non-current assets are long-term holdings.
  • Examples: shops, vehicles.
  • Generate revenue and profits.
44
Q

What are current assets?

A
  • Current assets: Held for less than one year.
  • Examples: Cash, raw material inventories.
  • Used to settle debts (e.g., paying for raw materials).
45
Q

What are two types of liabilities?

A
  • non-current liabilities
  • current liabilities
46
Q

What are non-current liabilities?

A
  • Non-current liabilities: Debt Paid over many years.
  • Examples: Bank loans, mortgages for property.
47
Q

What are current liabilities?

A
  • Current liabilities: Debts due within a year.
  • Examples:
    • Money owed to suppliers
    • Taxes due for payment
48
Q

What is total equity?

A
  • Total equity: Shareholders’ portion of company money.
  • If a company stops trading:
    • Sells assets.
    • Pays off liabilities (debts).
  • What’s left is total equity.
49
Q

How can a balance sheet tell if a business is safe or not?

A
  • Safety: Net assets = Total equity.
  • Imbalance = Risk.
  • Balance sheet reveals break-even.
  • Identifies net and gross profit.
  • Safety from current and non-current liabilities.
50
Q

What are some key indicators of a business’s performance over time from its income statement?

A
  • revenue from sales and goods
  • gross and net profits
51
Q

What is a financial ratio?

A

A financial ratio compares two figures from a business’s financial statements.

52
Q

How do you calculate gross profit margin?

A

Gross profit margin = gross profit/revenue x 100

53
Q

How do you calculate net profit margin?

A

Net profit margin = net profit/revenue x 100

54
Q

What do stakeholders look at in income statements?

A
  • the level of sales achieved
  • the costs the business has had to pay
  • the amount of profit or loss that has been made.
55
Q

What are retained profits?

A

profit which is kept back in the business and used to pay for investment in the business

56
Q

What are the pros and cons of retained profit?

A

Pros:
- dont have any debt
- maintain full control without any extra shareholders or creditors

Cons:
- newly formed business may not be able to do this
- the amount of profit available may be limited
- keeping more profit reduces payments to owners (like dividends)

57
Q

What are the pros and cons of owenrrs capital?

A

Pros:
- no interest payments
- no need to repay
- high level of commitment from the owner (motivation

Cons:
- amount available is likely to be limited
- if there is more than one owner, this could cause friction if everyone is not able to contribute the same amount

58
Q

What are the pros and cons of unwanted assets?

A

Pros:
- convenient
- makes more space for profitable uses

Cons:
- may be difficult or may take time to sell the assets

59
Q

What are pros and cons of family and friends loans?

A

Pros:
- low interest
- money may not need to be paid back

Cons:
- money may be lost it the business fails
- arguements may occur between family members

60
Q

What are pros and cons of a new share issue?

A

Pros:
- permanent capital (no refunds)

Cons:
- risk of takeover
- have to pay more dividends to shareholaders

61
Q

What are the pros and cons of overdrafts?

A

Pros:
- quick and easy to arrange
- flexible you only borrow what you need at the time

Cons:
- interest rates are variable (high)
- bank can ask for the overdraft to be repaid at very short notice
- you cant borrow as much compared to a loan

62
Q

What are some pros and cons of trade credit?

A

Pros:
- quick capital
- can improve company image as debt deadlines can be met immediately (good rep.)

Cons:
- failure to pay withing the credit period may result in future credit being refused
- only suitable as a short-term source of finance
- interest
- pay-back

63
Q

What are the pros and cons of hire purchase?

A

Pros:
- can recieve item immediately without payment in full
- cost of item is spread which may make it more affordable
- item is owned by organisation after final installment is paid

Cons:
- interest can make it expensive
- item is not owned until payments finish
- deception (fakes)

64
Q

What are the pros and cons of government grants?

A

Pros:
- does not need to be paid back
- available to small businesses

Cons:
- business needs to meet certain criteria
- it is time-consuming to apply for grants and to complete the paper work
- can only be used for specific purposes

65
Q

What are external sources of finance?

A

Refers to money that comes from outside the business, for example, a loan from a bank

66
Q

What are internal sources of finance?

A

Money that is available within the business, for example, retained profits from previous years

67
Q

What are retained profits?

A
  • Profit = Revenue - Production Costs
  • Profit is made when revenue exceeds costs.
  • Retained profits serve as future finance.
68
Q

What does selling unwanted assets mean?

A
  • Assets: Owned items like buildings, vehicles.
  • Unused assets can be sold for finance.
  • Sale and Leaseback: Sell asset, then lease it back.
  • Pays monthly/annual fee to new owner.
69
Q

What is trade credit?

A
  • Trade credit: Suppliers give time to pay (30-90 days) for raw stock
  • Source of finance: Money for supplies stays within the business.
  • Allows for better cash flow management.
70
Q

What are some examples of internal sources of finance?

A
  • retained profits
  • selling unwanted assets
  • trade credit
71
Q

What are some examples of external sources of finance?

A
  • loans from family and friends
  • new share issue
  • loan
  • mortgage
  • overdraft
  • hire purchase
  • government grants
72
Q

What are loans from family and friends?

A

A common source of finance for a new business is a loan from the owner’s friends or family members.

73
Q

What are new share issues?

A
  • Companies sell shares for payment, not sole traders.
  • Shareholders own part of the company.
  • Public limited companies can sell shares to anyone.
  • Public companies list shares on the Stock Exchange.
  • Private limited companies need existing shareholders’ agreement to sell shares.
  • Shareholders often family members.
  • Shareholders influence decisions and receive dividends.
74
Q

What are bank/loans?

A
  • Loan: Money provided by a bank or building society.
  • Repaid in instalments over time.
  • Interest charged on borrowed amount.
  • Collateral may be required.
  • Collateral: Asset sold if loan not repaid.
75
Q

What is a mortgage?

A
  • Mortgage: Specialized loan for property purchase.
  • Provided by banks/building societies.
  • Repaid over long periods.
  • Property/land serves as collateral.
76
Q

What is an overdraft?

A
  • Overdraft: Flexible loan up to agreed limit.
  • Allows spending beyond available funds.
  • Useful when short on cash.
  • High interest charges apply.
77
Q

What is hire purchase?

A
  • Hire purchase: Loan for vehicles/machinery.
  • Repaid in instalments.
  • High interest charges.
  • Business doesn’t own asset until final payment.
78
Q

What are government grants?

A
  • Government grants for business expansion.
  • Entrepreneurs may receive grants for job creation in high-unemployment areas.
79
Q

What are the benefits of positive cash flow?

A
  • Capitalize on new product and market opportunities with available cash.
  • Avoid expensive overdrafts for bill payments.
  • Secure long-term loans at lower interest rates.
80
Q

What are some influences on the choice of sources of finance?

A
  • type of business
  • business’s profitability
  • risk associated with the business
  • assets owned by the business
  • business’s past history
  • amount of finance needed
81
Q

Explain what are influences on the choice of sources of finance? (7)

A
  • Type of business: Companies sell shares; sole traders rely on loans, often from friends and family.
  • Business profitability: Profitable businesses find it easier to secure loans or use retained profits.
  • Risk level: High-risk businesses may struggle to get bank loans or mortgages.
  • Owned assets: Assets can be sold or used in sale and leaseback deals for financing.
  • Friends and family funds: Wealthy family members can provide financing.
  • Business history: Successful trading history boosts chances of bank loans or share sales.
  • Finance needed: Bank loans and shares for large sums, overdrafts for smaller, short-term needs.

AQA GCSE Business (8 decks)

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