Topic Four, Part 1 - Finance Flashcards
What are the three main objectives businesses go through?
survive, break even, make profit
Why is it important for businesses to have financial objectives?
- Compare with competitors
- Measure performance
When comparing financial comparisons what needs to be taken care into account?
- Comparisons made the same way
- assets are valued the same
- Allowances made for depreciation or appreciation
Why do businesses need finance for starting up?
Assets
Why do businesses need finance for working capital?
Everyday payments
What unforeseen events do businesses need finance for?
- Decline in sales
- Customers fails to pay on time
The factors you should note when setting objectives?
- Budget
- Economic state
- Competition
What will setting clear objectives allow businesses or stakeholders to do?
- Have targets
- Monitor progress
- Assess impacts of economy changes
Why does “window dressing take place” (showing figures more favourably)?
- Encourage investment
- Prevent employee concern
What are the two sources of finance?
Internal and external
What are internal sources of finance?
Finance which is raised internally, do not increase business debts
What are some examples of internal finance?
Retained profit
Personal savings
Sale of unwanted assets
What are external sources of finance?
Finance provided by people outside the business
What are some examples of external finance?
Loans
Overdraft
Shares
What is short term finance?
Needed for the day-to-day business operation up to 3 years
What are outflows?
Refers to money paid out by the business
What are examples of outflows?
- Purchases
- Rent
- Wages
What are inflows?
refers to money received by the business
What are examples of inflows?
- Sales revenue
- Share Capital
- Loans
What methods of short term finance are offered by banks?
- Overdraft
- Short-term Loan
What other methods of short term finance are there?
- hire purchase
- trade credit
What is an overdraft?
The bank allows the business to draw more money from their bank account than they actually have in it.
What is are the advantages of overdraft?
- Quick to arrange
- Only pay interest on amount overdrawn
- Short term solution to cash flow problem
What is are the disadvantages of overdraft?
- Only suitable for small amounts
- Has to be repaid within a short amount of time
- Interest or charges are paid
What is a short term loan?
A loan for less than a year
When are short term loans used?
To buy equipment or purchase raw materials to fulfil a contract
What are the advantages of short term loans?
- Easy and quick to set up
- varying amounts of money can be borrowed
- Structured repayment term
What are the disadvantages of short term loans?
- Pay interest
- Consequences if repayments not made
What factors influence a banks decision to lend?
- Financial projections
- Purpose of finance
What is security?
If a business fails to repay a loan, the bank can sell their assets for loan money.
What is hire purchase?
Pay for an item in instalments, to a hire company, over a set period of time
What are the advantages of hire purchase?
- Spread payment over time
- Improve cash flow
What are the disadvantages of hire purchase?
- Item doesn’t belong to the business until the end of the term
- Charge high interest
What is trade credit?
Items bought from suppliers on a ‘buy now pay later’ basis.
What are the advantages of trade credit?
- Saves money short term
- No interest charges
What are the disadvantages of trade credit?
Bills usually have to be settled within 1-3 months
How can financial objectives and data be used by board of directors?
Make important decision
How can financial objectives and data be used by investors?
Decide whether they should invest
How can financial objectives and data be used by banks?
Check if business can repay on loans
How can financial objectives and data be used by suppliers?
Judge whether they are safe to trade with
How can financial objectives and data be used by competitors?
Compare the success of that business
What is medium term finance?
Normally between 3 – 10 years.
What is the common use of medium term finance?
- Expensive equipment
- Expansion
What are the sources of medium term finance?
- Medium-term Loan
- Hire purchase
- Leasing
What is variable rate?
interest varies on Bank of England interest rate decisions
What are the advantages of variable rate?
When the rate falls, they pay the lower rate
What are the disadvantages of variable rate?
- Cannot predict repayment costs
What are the advantages of fixed rate?
- Know what repayment costs are
- Financial planning is easier
What are the disadvantages of fixed rate?
When Interests fall, they dont pay the lower rate
What is leasing?
Pay instalments to rent an item – business never actually owns the item
What are the advantages of leasing?
- Spread payment over time
- Improved cash flow
- Leasing company responsible for maintenance
What are the disadvantages of leasing?
- high interest
- item not owned by business
What is long term finance?
Periods in excess of 10 years
What is the common use of long term finance?
Securing resources for long-term growth.
What are the sources of long term finance?
- Long-term loans
- Debentures
- Issue of shares
What is a long term loan?
Money borrowed from the bank, repaid over 10+ years
What is the common use of a long term loan?
- Expensive machinery
- Mortgages
Whats different about a fixed rate long term loan?
Fixed Rates aren’t fixed for whole length of the loan
What are debentures?
Businesses sell them to investors to raise money
How does a debenture work?
debenture holders are paid yearly with interest until paid back
What is meant by an issue of shares?
A share in the business is sold
What is meant by a rights issue?
A company issues more shares
What is the difference with private limited company’s trading shares on the stock market?
- Trade restrictions
- Share value not readily available
How are shares available to public limited company’s?
Traded on the stock market
What is the stock market?
Market where shares and debentures are traded
What are the advantages of issuing shares?
- Money isn’t repayed
- Share capital
What are the disadvantages of issuing shares?
- Dividends
- Subject to takeover
- Risky for shareholder
What is sale and leaseback?
Asset is sold but then leased back
What are the advantages of sale and leaseback?
- Brings money
- Leasing company responsible for maintenance
- Business can still use asset
What are the disadvantages of sale and leaseback?
- High interest
- Item no longer belongs to business
- Lease may not be renewed
What is retained profit?
Profit retained for future use
What are the advantages of retained profit?
No need to pay interest on the money
What are the disadvantages of retained profit?
- Money could of been invested
- Can mean less dividend payment
What are some other sources of finance?
Government Assistance
Venture Capital
Business Angels
What is the small firms loan guarantee scheme?
Enable small firms with little security to get finance
What is the Regional Development Assistance?
Government provides financial assistance to businesses in certain UK locations
Why is Regional Development Assistance in place?
Boost an areas economy
What are some examples of incentives?
- Tax incentives
- discounted property
- Reduced rent
What are some examples of grants?
- Asset investment
- Training
- R&D
What is venture capital?
Money lent by Individuals or firms
What do the lenders benefit from a venture capital?
Provide a certain amount of finance in exchange for company’s shares
What are business angels?
Individuals offering management advice
What factors decide a business’s source of finance depends?
- The amount of control desired
- Levels of debt
- Current methods of finance being used
What are fixed costs?
Interest is the same for the duration of the loan
