Topic 6: Finance Flashcards
What is a receipt?
Money coming into a business
What is a receipt also known as?
Cash inflow
What is a payment?
Money going out of the business
What is a payment also known as?
A cash outflow
What is a cash flow statement?
A document showing how much money has gone in and out of a business
What is opening balance in a cash flow statement?
Money at the start of a term
How is net cash flow calculated?
Net cash flow = receipts - payments
How is closing balance of a term calculated?
Closing balance of a term = net cash flow + opening balance
What is a cash flow problem?
When a business has more payments (outflows) than receipts (inflows)
How is a cash flow statement structured?
- Cash inflows - find the total of them
- Cash outflows - find the total of them
- Calculate net cash flow
- State of the opening balance
- State/calculate the closing balance
What is cash flow?
Money coming in and out of a business
What is profit?
Money left over after all expenses are paid
What are the 2 main ways a cash flow problem can be solved? Gives examples on how to do this.
- Decrease outflows - e.g. find a cheaper supplier, relocating to a cheaper area, redundancies
- Increase inflows - e.g. increase prices of products, sell assets, increase advertising
What can a cash flow statement show you?
If a business is meeting its financial obligations
What can a cash flow statement do?
Can help set targets
Can show where the business needs to be improved
Shows if majority losses have been how to made and on what
Why would a business want to invest into another business?
If it makes profit
If it has a good reputation
If there are any benefits that come with it
How does a business know what business to invest in to?
Using their forecast and statements
How can profit be calculated?
Profit = total revenue - total cost
What is profit?
Money made after expenses
Why is profit and revenue important?
Provides a measure of success
May motivate
Helps investors invest
Provides targets and goals
How to calculate total costs?
Total costs = fixed costs + variable costs
How to calculate total revenue?
Total revenue = selling price per unit x units sold
What is revenue?
The money that comes into the business based on sales
What are running costs? Example?
Money regularly spent to uphold the business - e.g. rent and heating
What are start up costs?
Non recurring costs involved in setting up a business
What is a fixed cost? Example?
Costs that stay the same regardless of output - e.g. rent and salaries
What are variable costs? Examples?
Costs that change depending on units sold - e.g. packaging, stock and commission
What is break even?
When total revenue is equal to total costs - no profit nor loss is made
What point on the break even graph represents when the business actually breaks even?
The point where total costs and total revenue lines cross
How to calculate margin of safety?
Margin of safety = sales made - break even
How to calculate total variable costs?
Total variable costs = variable cost per unit x units sold
How is ARR calculated?
ARR = average annual profit/initial cost of investment x 100
If you’re given the profit made in all of the years of an investment, how do you find the average annual profit?
Average annual profit = total profit made/years of the investment
What do statements of financial performance help do?
Make decisions - so that the business doesn’t run into any problems
Compare the business to its competitors
Help get investors or support from banks
How to calculate net assets from a statement of financial position?
Net assets = net current assets + non current assets - non current liabilities
What is a non current asset?
Something owned for more than a year
What is a non current liability?
Something owed in over a year
What is a current asset?
Something that’s owned for under a year
What is a current liability?
Something owed in less than a year
How to calculate net current assets from a statement of financial position?
Net current assets = current assets - current liabilities
How to calculate net profit margin?
Net profit margin = net profit/revenue x 100
How to calculate net profit from an income statement?
Net profit = gross profit - overheads - rent
How to calculate gross profit from an income statement?
Gross profit = sales turnover - cost of sales
How to calculate gross profit margin?
Gross profit margin = gross profit/revenue x 100
How to calculate retained profit from an income statement?
Retained profit = net profit - tax - dividends
What is the order of net profit, gross profit and retained profit in an income statement?
- Gross profit
- Net profit
- Retained profit
What is the purpose of an income statement?
It shows the profits made over time - reads business success
What does an income statement demonstrate?
How finance changes in a business over time
What is the purpose of a statement of financial position?
Assesses the businesses position in terms of financial stability and risk
What are the 2 types of statements that analyse financial performance?
- Income statement
- Statement of financial position
What are the 8 components of income statements (in order)?
- Sales turnover
- Cost of sales
- Gross profit
- Overheads and rent
- Net profit
- Tax
- Dividends
- Retained profit
What are the 7 components of a statement of financial position (in order)?
- Total non current assets
- Total current assets
- Total current liabilities
- Net current assets
- Total non current liabilities
- Net assets
- Total equity
Why will stakeholders analyse statements of financial performance differently?
To make sure that what they’re interested in ok
What might a supplier check a statement of financial performance for?
May check profits - to see if they can for certain quantities
What may the government check a statement of financial performance for?
Everything in both statements - to make sure that they’re being taxed correctly and are being legal
4 reasons why business’s need finance?
- If they have a poor cash flow, they may want to improve it
- They may need money to start the business up
- They may need money to expand the business
- They may need finance to cover day to day running costs
What are the 4 internal sources of finance?
- Retained profit
- Trade credit
- Sales of unwanted assets
- Owners funds or savings
What is retained profit?
Profit kept after sales and put back into the business
Advantages of retained profit as a source of finance?
Cheap
Quick
Easy to access the money
Disadvantages of retained profit as a source of finance?
Once the money is gone, it’s gone and not available anymore
May not provide a large amount of finance
What is trade credit?
Allows a business to buy something but pay it back at a later date
Advantages of trade credit as a source of finance?
Helps to start up a business
Easy to arrange
Disadvantages of trade credit as a source of finance?
There are penalties if you don’t pay it back in time
What is the sale of unwanted assets?
Selling assets that a business owns to earn finance
Advantages of sale of unwanted assets as a source of finance?
Convenient
Can increase space in store
Sometimes can be quick
Disadvantages of sale of unwanted assets as a source of finance?
May not get full market value for the assets
What are owners funds/saving?
The business owner using their own savings to finance something
Advantages of owners funds/savings as a source of finance?
Cheap
Quick
Convenient
Disadvantages of owners funds/savings as a source of finance?
The owner may not have a lot of savings
What are the 4 external sources of finance?
- Bank loan
- Government grant
- Share issue
- Overdraft
What is a bank loan?
Money that must be repaid to a bank overtime with interest
Advantages of a bank loan as a source of finance?
Easy and quick
Can get a business a lot of money
Disadvantages of a bank loan as a source of finance?
It’s got an interest
Difficult for a small business to access
What is a government grant?
Money given by the government that doesn’t have to be repaid
Advantages of a government grant as a source of finance?
Doesn’t have to be repaid
Small businesses can get one
Disadvantages of a government grant as a source of finance?
Businesses must meet a certain criteria to have one
Time consuming
What is share issue?
When more shares can be issued (only in an Ltd) to finance something
Advantages of share issue as a source of finance?
Can gain a lot of money
No interest
Disadvantages of share issue as a source of finance?
Gives away a chunk of the business
What is an overdraft?
When more money can be withdrawn from a bank account than what is actually on the account
Advantages of overdraft as a source of finance?
Quick to access
Disadvantages of overdraft as a source of finance?
It’s got a high interest rate
It’s only a short term solution
What are the factors that affect the choice of finance a business chooses?
Size and type of company
Amount of money needed
Cost of the finance
The length of time it’s needed for e.g. overdraft for short term and loans for long term
What is a loss?
When costs are greater than the revenue the business makes
Advantages of a break even analysis chart?
Quick and easy to work out
Allows a business to predict sales and how they’ll affect costs, profit and revenue
Can be used to persuade a bank to give a business a loan
Disadvantages of a break even analysis chart?
If the data is wrong, the results of the analysis will be wrong
Shows how much a business needs to seek not how much it’ll actually sell
It assumes that all of the products will be sold without any waste
What are the main reasons why a business may have a cash flow problem?
Poor sales
Poor business decisions
Over trading
What is a financial investment?
A business invests resources and money in the hopes of a return
What are the factors to consider when investing in other businesses?
Reputation of the business
How long it’ll take to make money from the investment
The risks and benefits of investing into it
Advantages of calculating an ARR?
Focuses on profitably - key issue for shareholders
Provides something that can be compared to targets
Disadvantages of calculating an ARR?
It’s only a prediction
What is finance?
The capital needed to start up and run a business
How to calculate break even?
Break even point = fixed costs/(selling price-variable cost per unit)
What does a straight line on the break even chart show?
The fixed costs
