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OCR Business > Topic Four, Part 1 - Finance > Flashcards

Topic Four, Part 1 - Finance Flashcards

1
Q

What are the three main objectives businesses go through?

A

survive, break even, make profit

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2
Q

Why is it important for businesses to have financial objectives?

A
  • Compare with competitors

- Measure performance

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3
Q

When comparing financial comparisons what needs to be taken care into account?

A
  • Comparisons made the same way
  • assets are valued the same
  • Allowances made for depreciation or appreciation
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4
Q

Why do businesses need finance for starting up?

A

Assets

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5
Q

Why do businesses need finance for working capital?

A

Everyday payments

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6
Q

What unforeseen events do businesses need finance for?

A
  • Decline in sales

- Customers fails to pay on time

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7
Q

The factors you should note when setting objectives?

A
  • Budget
  • Economic state
  • Competition
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8
Q

What will setting clear objectives allow businesses or stakeholders to do?

A
  • Have targets
  • Monitor progress
  • Assess impacts of economy changes
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9
Q

Why does “window dressing take place” (showing figures more favourably)?

A
  • Encourage investment

- Prevent employee concern

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10
Q

What are the two sources of finance?

A

Internal and external

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11
Q

What are internal sources of finance?

A

Finance which is raised internally, do not increase business debts

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12
Q

What are some examples of internal finance?

A

Retained profit
Personal savings
Sale of unwanted assets

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13
Q

What are external sources of finance?

A

Finance provided by people outside the business

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14
Q

What are some examples of external finance?

A

Loans
Overdraft
Shares

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15
Q

What is short term finance?

A

Needed for the day-to-day business operation up to 3 years

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16
Q

What are outflows?

A

Refers to money paid out by the business

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17
Q

What are examples of outflows?

A
  • Purchases
  • Rent
  • Wages
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18
Q

What are inflows?

A

refers to money received by the business

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19
Q

What are examples of inflows?

A
  • Sales revenue
  • Share Capital
  • Loans
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20
Q

What methods of short term finance are offered by banks?

A
  • Overdraft

- Short-term Loan

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21
Q

What other methods of short term finance are there?

A
  • hire purchase

- trade credit

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22
Q

What is an overdraft?

A

The bank allows the business to draw more money from their bank account than they actually have in it.

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23
Q

What is are the advantages of overdraft?

A
  • Quick to arrange
  • Only pay interest on amount overdrawn
  • Short term solution to cash flow problem
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24
Q

What is are the disadvantages of overdraft?

A
  • Only suitable for small amounts
  • Has to be repaid within a short amount of time
  • Interest or charges are paid
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25
Q

What is a short term loan?

A

A loan for less than a year

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26
Q

When are short term loans used?

A

To buy equipment or purchase raw materials to fulfil a contract

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27
Q

What are the advantages of short term loans?

A
  • Easy and quick to set up
  • varying amounts of money can be borrowed
  • Structured repayment term
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28
Q

What are the disadvantages of short term loans?

A
  • Pay interest

- Consequences if repayments not made

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29
Q

What factors influence a banks decision to lend?

A
  • Financial projections

- Purpose of finance

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30
Q

What is security?

A

If a business fails to repay a loan, the bank can sell their assets for loan money.

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31
Q

What is hire purchase?

A

Pay for an item in instalments, to a hire company, over a set period of time

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32
Q

What are the advantages of hire purchase?

A
  • Spread payment over time

- Improve cash flow

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33
Q

What are the disadvantages of hire purchase?

A
  • Item doesn’t belong to the business until the end of the term
  • Charge high interest
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34
Q

What is trade credit?

A

Items bought from suppliers on a ‘buy now pay later’ basis.

35
Q

What are the advantages of trade credit?

A
  • Saves money short term

- No interest charges

36
Q

What are the disadvantages of trade credit?

A

Bills usually have to be settled within 1-3 months

37
Q

How can financial objectives and data be used by board of directors?

A

Make important decision

38
Q

How can financial objectives and data be used by investors?

A

Decide whether they should invest

39
Q

How can financial objectives and data be used by banks?

A

Check if business can repay on loans

40
Q

How can financial objectives and data be used by suppliers?

A

Judge whether they are safe to trade with

41
Q

How can financial objectives and data be used by competitors?

A

Compare the success of that business

42
Q

What is medium term finance?

A

Normally between 3 – 10 years.

43
Q

What is the common use of medium term finance?

A
  • Expensive equipment

- Expansion

44
Q

What are the sources of medium term finance?

A
  • Medium-term Loan
  • Hire purchase
  • Leasing
45
Q

What is variable rate?

A

interest varies on Bank of England interest rate decisions

46
Q

What are the advantages of variable rate?

A

When the rate falls, they pay the lower rate

47
Q

What are the disadvantages of variable rate?

A
  • Cannot predict repayment costs
48
Q

What are the advantages of fixed rate?

A
  • Know what repayment costs are

- Financial planning is easier

49
Q

What are the disadvantages of fixed rate?

A

When Interests fall, they dont pay the lower rate

50
Q

What is leasing?

A

Pay instalments to rent an item – business never actually owns the item

51
Q

What are the advantages of leasing?

A
  • Spread payment over time
  • Improved cash flow
  • Leasing company responsible for maintenance
52
Q

What are the disadvantages of leasing?

A
  • high interest

- item not owned by business

53
Q

What is long term finance?

A

Periods in excess of 10 years

54
Q

What is the common use of long term finance?

A

Securing resources for long-term growth.

55
Q

What are the sources of long term finance?

A
  • Long-term loans
  • Debentures
  • Issue of shares
56
Q

What is a long term loan?

A

Money borrowed from the bank, repaid over 10+ years

57
Q

What is the common use of a long term loan?

A
  • Expensive machinery

- Mortgages

58
Q

Whats different about a fixed rate long term loan?

A

Fixed Rates aren’t fixed for whole length of the loan

59
Q

What are debentures?

A

Businesses sell them to investors to raise money

60
Q

How does a debenture work?

A

debenture holders are paid yearly with interest until paid back

61
Q

What is meant by an issue of shares?

A

A share in the business is sold

62
Q

What is meant by a rights issue?

A

A company issues more shares

63
Q

What is the difference with private limited company’s trading shares on the stock market?

A
  • Trade restrictions

- Share value not readily available

64
Q

How are shares available to public limited company’s?

A

Traded on the stock market

65
Q

What is the stock market?

A

Market where shares and debentures are traded

66
Q

What are the advantages of issuing shares?

A
  • Money isn’t repayed

- Share capital

67
Q

What are the disadvantages of issuing shares?

A
  • Dividends
  • Subject to takeover
  • Risky for shareholder
68
Q

What is sale and leaseback?

A

Asset is sold but then leased back

69
Q

What are the advantages of sale and leaseback?

A
  • Brings money
  • Leasing company responsible for maintenance
  • Business can still use asset
70
Q

What are the disadvantages of sale and leaseback?

A
  • High interest
  • Item no longer belongs to business
  • Lease may not be renewed
71
Q

What is retained profit?

A

Profit retained for future use

72
Q

What are the advantages of retained profit?

A

No need to pay interest on the money

73
Q

What are the disadvantages of retained profit?

A
  • Money could of been invested

- Can mean less dividend payment

74
Q

What are some other sources of finance?

A

Government Assistance
Venture Capital
Business Angels

75
Q

What is the small firms loan guarantee scheme?

A

Enable small firms with little security to get finance

76
Q

What is the Regional Development Assistance?

A

Government provides financial assistance to businesses in certain UK locations

77
Q

Why is Regional Development Assistance in place?

A

Boost an areas economy

78
Q

What are some examples of incentives?

A
  • Tax incentives
  • discounted property
  • Reduced rent
79
Q

What are some examples of grants?

A
  • Asset investment
  • Training
  • R&D
80
Q

What is venture capital?

A

Money lent by Individuals or firms

81
Q

What do the lenders benefit from a venture capital?

A

Provide a certain amount of finance in exchange for company’s shares

82
Q

What are business angels?

A

Individuals offering management advice

83
Q

What factors decide a business’s source of finance depends?

A
  • The amount of control desired
  • Levels of debt
  • Current methods of finance being used
84
Q

What are fixed costs?

A

Interest is the same for the duration of the loan

OCR Business (72 decks)

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