Unit 3 - Business Finance Flashcards
Need for funds
- Short-term needs - e.g. day-to-day costs, wages, bills, components
- Long-term needs - e.g. property, machinery
- Start-up capital - funs needed to start the business - often ‘one-off’ purchases
- Expansion - need finance to expand to meet more orders, make new products, branch into other markets & diversify
Internal sources of funding
- Finances raised from inside the business
- Personal savings - Owner contributes to finances from personal means
- Retained profit - profit that is not returned to the owners - cheap source with no interest, dividends or administration, relatively flexible but profit can’t be returned to the owners and owners might object
- Selling assets - can sell unwanted assets to raise finances
External sources of funding
- Finances raised from outside the business
- Bank Overdraft - Business can spend more money than it has with a limit from the bank - simple & flexible but has interest and can call in owed money at any time
- Trade payables - business can buy resources and pay back at a later date - can raise money in between but can be bad because supplier encourage early payment with discounts, cost of goods is often higher with credit, delayed payment can upset suppliers
- Credit cards - convenient, flexible, can avoid interest, high interest rated if money is not paid back
- Loan capital - fixed agreement between a business and a bank - amount borrowed and interest must be paid back in regular installments - it is known what has to be paid every month
- Unsecured bank loans - bank lends money without the security of having a claim on your assets if you don’t pay it back - higher interest rates than secured loans and are harder to find
- Mortgages - a long-term loan where the borrower has to use land or property as security - lower interest rates and can be taken out up to 25 years
- Debenture - debenture holders are creditors of a company, debenture holders entitled to a fixed rate of return but no voting rights and must be repaid on a set date
- Hire purchase - business makes a down payment, remaining fee paid in monthly installments, goods bought don’t legally belong to buyer until very last installment paid, goods can be repossessed if buyer fails, can be short or long term - usually more expensive than a bank loan
- Share capital - sale of shares - can raise a lot of money - rights issue can occur - discount to existing shareholders - interest avoided but shareholders expect dividends - cost of administration in selling shares
- Venture capital - getting investments from investors - usually take a stake and hence profit, hard to find a suitable investor with similar views, sharing profits
- Crowd funding - Businesses seeking finance online from the public to invest
Importance of cash
- To pay suppliers, overheads & employees
- To prevent business failure
Difference in cash and profit
- Amount of cash at the end of a period is different to profit since cash balance at the start of the year was not likely zero
- Purchases on fixed assets reduce cash balances but no profit
- Owners can put cash into the business which doesn’t affect profit
- Profit can be greater than cash with trade credit if money is owned but receiving cash at the beginning of a trading period can increase cash but not profit
Cash inflows
- Money entering the business
Cash outflows
Money going out of the business
Net cash flow
Difference in cash inflows and cash outflows
Cash flow forecast
Financial document that shows the expected cash inflows and outflows over a future period
Importance of cash flow forecasts
- Identifying cash shortages
- Supporting applications for funding
- Help when planning the business
- Monitoring the cash flow
How production generates costs
- Fixed costs - costs that remain the same regardless of the level of output e.g. rent, advertising
- Variable costs = production costs that change when the level of output changed - more production = more cost
Total cost equation
Fixed costs + Variable costs
Average cost equation
Total cost ÷ Quantity produced
Total revenue def
Money generated from the sale of output
Total revenue equation
Price x Quantity
Profit equation
Total revenue - Total cost
Break-even point def
The level of output where total costs and total revenue are exactly the same - neither a profit nor a loss is made
Break-even point equation
Fixed costs ÷ (Selling price - Variable cost per unit)
Margin of safety
The amount of output available to be sold above the break-even point where the business makes a profit
Break-even chart
A gray that shows total cost and total revenue - the break-even point is where the total cost and total revenue intersect
