Unit 3 (Finance) Flashcards
What is the role of finance?
All businesses need money to finance activities. Need to spend money on capital expenditure and revenue expenditure.
What is capital expenditure?
Finance spent on non current assets used to generate sales revenue.
What is revenue expenditure?
Finance spent on the daily operations of the business.
What are owner’s savings?
Key sources of funds when business starts up, owners may introduce savings for business finances. Owners invest as business grows as it requires specific needs for businesses.
What are retained profits?
Profit generated in previous years not used for dividends and reinvested back into business. Used as cheap source of finance with no borrowing or interest fees. However, opportunity costs of investing money back into business as shareholders do not receive extra dividends as well as not having large capital.
What are sales of assets?
Selling business assets no longer required to generate finance, sale / leaseback arrangement used if business wants to continue using asset but needs cash.
What are adv of internal sources of finance?
Often free and arranged quickly and doesn’t involve 3rd parties who influence business decisions?
Dis of sources of finance
Significant opportunity cost once used, not available for other purposes. May not be significant to meet business’s needs.
What is share capital?
Finance raised from sales of shares in limited company through issues of shares usually entitled to share or profits when dividends declared. Also have wrote to vote in composition of BOD’s.
What are loans?
Likely available for larger businesses and repaid over 5-20 years, interest rates vary over amount of loan and can be negotiated. Failure to pay often means non current assets need to be sold and loans paid back by cash.
What are overdrafts?
Arrangement between business and bank to spend over money that has in account, limited usage and interest charge when business overdrawn. Often short term form that offers flexibility to fix cash flow issues.
What are trade credits?
Agreement between suppliers for raw materials to be paid back at later date, usually short term that is interest free and used by larger businesses.
What is leasing?
Assets made available to business in return payments, business doesn’t own business during lease periods so not responsible for maintenance and also more expensive in long term rather than buying straight up.
What is crowdfunding?
Allows business to provide large number of small investors on online platforms. Businesses need to provide persuasive business plan to convince individuals to invest in products due to heavy competition. Usually attracted by incentives like samples, discounts, memberships, early assess and shares.
What is micro finance?
Small lenders make finance directly available to businesses unable to assess finance elsewhere. Few formalities in applying for finance but amount often limited.
What are business angels?
Some businesses specialise in making investment in expanding businesses and tends to be more risk taking than banks. However relies on knowing right people so networking vital to secure deals with business angels. Angels can stake in business and directly involved in decision making and receives shares of business profits.
What is business expenditure?
Businesses need to spend money to earn money, referred to costs and the expenditure in producing good or service
What are fixed costs?
Costs that the business must pay regardless of how much it produces or sells. Must be paid even if no output.
What is variable costs?
Cost of production that changes in proportion to level of output. If output is zero then total variable costs are also zero.
What is total costs?
Total amount of costs found through the total variable costs plus the total fixed costs.
What are direct costs?
Costs that are specifically related to individual project or output of particular good or service, typically is also variable costs
What are overhead costs?
Costs that cannot be traced to production or sale of any single product, typically fixed costs however overheads difficult to identify with business activity
What is total revenue?
Money coming into the business from selling goods or services, known as sales revenue.
Fórmula for total revenue?
Price x Quantity
What are revenue streams?
Money received into the firm other than the sales revenue:
Example:
Advertising
Transportation fees
Sponsorships
Merchandise
Franchise Sales
What is contribution?
Refers to sum of money that remains after variable and direct costs have been taken away from sales revenue?
What is contribution unit formula?
Selling price - variable cost per unit
What is Break even point formula
Fixed costs / Selling price - variable cost per unit
What is unit contribution?
Proportion of selling price per each unit of output that goes towards paying of the fixed costs
What is total contribution?
Refers to quantity of output needed towards paying off total fixed costs
What is total contribution formula?
Unit contribution x output
What are purposes of break even analysis?
- Pricing strategies
- Prioritise products in portfolio
- Decide on whether to make or buy in products
- Make special order decisions
What is break even analysis?
Exists when a firm makes neither a profit or loss. Helps to determine the level of sales that must be generated for firm to earn a profit.
Benefits of break even analysis?
- Identify whether product financially worth to produce
- Determine how much profit can be generated if business idea goes to plan
What is margin of safety formula?
Actual sales / Forecast sales - BEP
What are 3 pieces of info businesses need for sales forecasting?
Just knowing BEP not enough when deciding whether to sell a product, needs to know:
- How much profit they might make
- How much unit of output needed to produce
- How much to charge for selling price
What is total profit quantity formula?
Fixed costs + Target profit / Price - Variable cost
What are assumptions of break even point?
Costs are linear
Sales revenue is linear
Assumes all output will be sold
What are limitations of break even?
Not useful to dynamic business environment due to static nature
Bad data will lead to bad information
Ignores quantitative / qualitative factors
Only suitable for single product firms.
What are final accounts?
Comprises of profit and loss acounts and balance sheets as business needs to keep records of financial statements. Also a legal requiremetn
Why are stakeholders interested in final accounts?
Legally obliged to produce final accounts which can ensure transparency in use of company funds when reporting to stakeholders
What are profit and loss accounts?
Shows net profit or loss of a business over a trading period, usually a year
Difference between profit and surplus?
Profit after expenses taken away, distributed to rewards stakeholders through dividends or retained profits. Surplus is profit business earns after expenses paid for but non profit interest so all profit goes back into business operations
What are methods to improve gross profit or surplus?
- Increase sales revenue )Increase selling price or sell greater quantity by marketing strategies)
- Reducing cost of sales (Use cheaper supiliers, buy in bulk discount)
- Increase funcing (Seek corporate sponsors / funding strategies) - only for non profit