Unit 3: Finance Flashcards
Definition: Finance
Money raised by an entrepreneur so that they can operate.
Startup costs?
- Property.
- Raw materials.
- Vehicles.
- Equiptment.
Running costs?
- Advertising.
- Transport.
- Raw materials.
- Property (rent, bills).
- Employees.
Sources of finance?
- Bank loan.
- Savings.
- Family.
- Friends.
- Overdraft (very short term).
- Mortgage (only for property).
- Trade credit.
- Government grant (social enterprise).
- Investors.
How to choose what source of finance to use?
- What you’re buying.
- How much you need.
- How quickly the money needs to be repayed.
- How long money is needed for.
Source of finance, advantages of bank loan?
- Large amounts.
- Get all the money at once.
- Pay monthly,
- easy to manage.
Source of finance, disadvantages of bank loan?
- Long time to repay.
- Interest rates.
Source of finance, advantages of shares?
- Quick source of income.
- Don’t pay it back.
Source of finance, disadvantages of shares?
- Lose part of business.
- Could lose control of business.
- Pay dividends to share holders.
Source of finance, advantages of family/friends?
- More flexible.
Source of finance, disadvantages of family/friends?
- Might not be able to get all the money you want.
Source of finance, advantages of overdraft?
- Use it however you want and whenever.
Source of finance, disadvantages of overdraft?
- High interest rates.
Source of finance, advantages of mortgage?
- Pay monthly,
- easy to manage.
- Buy rather than rent.
Source of finance, disadvantages of morrtgage?
- Long repayment time.
Source of finance, advantages of trade credit?
- Have 30/60 days to repay.
- Sell stock you haven’t payed for,
- helps with cash flow.
Source of finance, disadvantages of trade credit?
- Penalty if not payed back in time.
Source of finance, advantages of government grant?
- Don’t repay.
- Free.
Source of finance, disadvantages of government grant?
- Can’t generate money fast enough.
- Many businesses don’t qualify.
Why new/small businesses find it difficult to raise funds?
- Lender doesn’t know how reliable entrepreneur is.
- High startup costs.
- Business plan only contains estimated figures.
Sources of help for entrepreneurs?
- Government run support centres.
- Small business advisors.
- Prince’s trust (charity).
Why does the government support entrepreneurs?
- Reduce unemployment.
- Increase reputation of the country.
What support might entrepreneurs need, apart from finance?
- Advice, Providing expertise through employees at regional development agency.
- Contacts, helping new entrepreneurs make contact with potential suppliers.
- Planning, helping inexpirienced entrepreneurs apply for loans and create business plans.
- Funding, provide grants for selected new/small businesses.
Definition: Sales Revenue
The amount of money a business recieves from selling its products. This is sometimes called turnover.
Definition: Costs
The outgoings a business has to pay in order to operate.
Definition: Profit
The money left over after costs have been deducted from sales revenue.
Formula for profit?
Profit = Revenue - Costs
Definition: Loss
When sales revenue is less than costs.
Formula for revenue?
Revenue = Price x Quantity Sold
How can businesses increase their sales revenue?
- Increase or decrease the price (depends on the product, and competition) in order to increase demand.
- Incrase quantity sold,
- Promotion.
- Change location.
- Alter the product.
Why might new businesses value sales more than profits?
- Gather information about what customers want.
- Survival could be their objective.
- Building customer relations,
- Increases reputation.
- Establish the business.
- Increase market share.
Formula for profit?
Profit = Sales Revenue - Total Costs
How can a business try to decrease its costs?
- Buy cheaper raw materials, but:
- Poor quality = less sales.
- Find a new supplier.
- Reduce wages, however:
- People might quit.
- Low morale.
- Poor motivation.
- Poor reputation.
- Find cheaper location.
- Cheaper advertising.
How can a business try to increase its profits?
By increasing its sales revenue and decreasing its costs.
Definition: Cash
Money that the business has available to it straight away, such as money in its bank account.
Definition: Cash Flow Problems
When a business doesn’t have enough cash to pay their bills.
Why is cash so important to businesses?
- Contingency planning.
- Buy stock and raw materials.
- Pay bills.
- Pay staff.
- Pay expenses.
Definition: Forecast
A prediction of the future.
Definition: Cash Flow Forecast
A prediction of the cash that will come into a business and leave a business over a period of time.
Definition: Receipts (Cash In)
The cash predicted to enter a business each month.
Definition: Payments (Cash Out)
The cash an entrepreneur predicts they’ll spend each month.
Definition: Net Cash Flow
The difference between the cash predicted to enter and leave a business.
Definition: Opening Balance
A prediction of money a business has at the start of each month.
Definition: Closing Balance
The money an entrepreneur predicts that they’ll have at the end of each month.
What’s shown in a cash flow forecast?
- Receipts (cash in).
- Payments (cash out).
- Net cash flow.
- Opening balance.
- Closing balance.
How do cash flow forecasts help entrepreneurs?
It allows entrepreneurs to check if they’ll have enough cash during the next month to keep their business going. Other reasons include:
- Help set targets.
- Plan for a source of finance (e.g. overdraft).
- Show when they should buy stock.
- Help persuade banks to lend a business money.
What are the consequences of runnig out of cash?
- Can’t pay bills (e.g. wages),
- Staff leave, low morale.
- Can’t buy stock.
- Find new source of income,
- Interest.
- Additional costs.
Why might a business run out of cash?
- Overspent.
- Offer too much trade credit.
- Not sell enough stock, poor sales revenue.
- Used money to pay debts.
Cash flow problem solution: Make payments to supplier at a later date, Drawbacks?
- Supplier might not be keen as it may be detrimental to their cash flow.
- May have to oay more to pay later.
Cash flow problem solution: Encourage receipts to be paid earlier, Drawbacks?
- May have to offer customer a discount deal,
- lose out on profit in the long run.
Cash flow problem solution: Use a source of finance, Drawbacks?
- Creates additional costs (interest rates),
- Cost the business more in the long run.
Cash flow problem solution: Reduce costs, Drawbacks?
- Upset workers (due to lower wages),
- Low morale.
- Less sales due to poor quality (cheaper manufacturing).
