Topics 26-36 (Finance) Flashcards
Methods of internal finance
- Retained profit
- Sale of assets
- Owners capital
Advantages of internal finance
- Capital is available immediately
- Cheap. No interest
- Not subject to credit checks
- No third parties
Drawbacks of internal finance
- Limited in terms of amount of capital
- Cannot be tax-deductable
- Can be inflexible
- No inflationary benefits
- High opportunity cost
Sources of external finance
- Family and freinds
- Banks
- Peer-to-peer lending
- Business angels
- Crowdfunding
- Other businesses
What are the four methods of finance that can be sourced from a bank?
- Bank loans
- Mortgages
- Debentures
- Overdraft
What does it mean to be an unlimited liability business?
There is no legal difference between owners and the business. Everything is carried out in the name of the owner.
Factors influencing choosing appropriate method of finance
- Length of time which finance is required
- Financial position of the business
- Purpose of the money needed
What is a business plan?
A plan for the development of the business, giving details such as the products to be made, resources needed, and forcasts such as costs, revenues and cash flow.
Contents of a business plan
- An executive summary
- The business opportunity
- Buying & production
- Financial forcasts
- The business and objectives
- The market
- Personnel
- Permits & equipment
- Finances
Uses of cash-flow forecasts
- Identifying the timing of cash shortages and surpluses.
- Supporting applications of finance
- Enhancing the planning process
- Monitoring cash flow
Limitations of cash-flow forecasts
- All information based on estimates
- Business activity subject to external forces
- Uses resources to make
- Only focusses on cash
What is time series analysis?
Involves using past data to try and predict future levels. If trading conditions are stable, this can be a good option.
4 components of time series analysis
- The trend - pattern or repetitie behaviour
- Seasonal fluctuations (over a year)
- Cyclical fluctuations (over many years)
- Random fluctuations
Benefits of sales forecasting
- Helps businesses avoid suprises
- Makes finances easier to manage
- Enables business to ensure it has the correct staffing levels, capacity and to plan its orders of supplies.
Factors affecting sales forecasting
- Consumer trends
- Seasonal variations
- Economic variables
- Actions of competitors
What are fixed costs?
These costs stay the same at all levels of output. Examples are rent, insurance etc.
What are variable costs?
These costs increase directy as output rises. Examples are raw materials, fuel, packaging and salaries.
What is a zero-based budget?
They are used when costs are hard to quantify. It is appropriate for new businessses
What is favorable variance?
What is adverse variance?
Favorable = underspending
Adverse = overspending
What is a statement of comprehensive income (profit and loss account)?
A document to show key information relating to the financial performance of the business. They always show the figures of the current trading year and the previous year, allowing comparison.
What is a statement of financial position (balance sheet)?
Document provided by a business at the end of the financial year. Provides a summary of assets, liabilities and capital.
What are assets?
Assets are resources owned by a business that are used to make products or provide services.
What are liabilities?
Liabilities are the debts of a business.
What are current assets / liabilities?
Current assets will be changed into cash within 12 months. They are liquid assets. Current liabilities will be repaid within 12 months.
What is working capital?
The amount of money needed to cover day-to-day tading of a business. It is the amount left over after all current debts have been paid.
Ways to improve liquidity
- Use of overdrafts
- Negotiating additional loans
- Encourage sales and sell off stocks
- Only make essential purchases
- Extending trade credit with suppliers
Internal causes of business failure
- Lack of planning
- Cash-flow problems
- Relying on a narrow customer base
External causes of business failure
- Competition
- Changes in legislation
- Changes in consumer tastes
- Economic conditions
- Overtrading
