unit 5 Flashcards
finance
why do businesses need finance?
- start up capital: funds needed to purchase essentials
- Working capital: finance needed to run the day to day operations
- growth
- special situations: finance just in case for survival
state internal sources of finance
- Owners’ saving:
- Sale of assets
- Working capital
- Retained profits
state advantages and disadvantages of each internal source of finance
page 138
state 2 methods of SHORT TERM EXTERNAL sources of finance
- bank overdraft: credit borrowed by a business up to an agreed upon limit
- debt factoring: selling of claims over trade receivables to a org for immediate liquidity
advantages & disadvantages of bank overdraft
- advantages:
a- quick
b- flexible - disadvantages:
a- high interest
b- business has to pay immediately
advantages & disadvantages of debt factoring
- advantages:
a- removes bad risk
b- quick
idk the disadvantages
state and explain different types of LONG TERM EXTERNAL FINANCING sources
- Hire purchase
- mortgages
- share capital
- venture capital
- bonds
- bank loans
- leasing
- government grants
- crowd funding
advantages & disadvantages of some of the long term financial external sources
page 141
Finance for unincorporated and new businesses
- Loans from family and friends
- Owner’s investment
- Introducing new partners with capital to invest
- Crowd funding
- Bank overdrafts and bank loans,
what is microfinance
providing financial services for poor and low-income entrepreneurs who do not have access to the banking services
advantages of microfinance
- Small amounts could be raised
- Available when traditional banks are not willing
- no security collateral needed
disadvantages of microfinance
- Repayment is expected
- Interests are involved
- some restrictive terms that the business should fulfil before receiving the finance
list the factors that effect choice of finance used
- use
- cost
- amount required
- legal structure
- size of existing borrowing
- flexibility
what is an Income
statement
Final account
that shows the profitability of the business
by showing the revenues made and costs incurred
what is a Statement of financial position
Final account
that shows the value of a business’
assets and liabilities at a particular point in time
Why is profit important?
- Reward for risk taking
- Measurement of business success
- Acts as a source of finance and capital
- Attracts investors
List the current and none current assets
1- current:
a. cash
b. trade receivables
c. inventory
2. none current: (there are more but they are similar to the first 2)
a. land
b. machinery
c. Fixtures and fittings
What are assets
Are those items of value which are owned by the business to benefit from.
What are non-current assets
items owned by the business for
more than one-year
Benefits of financial position data
- Examine value of the business over time
- figure out how expansion is being financed
- know the liquidity
- calculate financial ratios
list the three profitability measures
- net profit margin
- gross profit margin
- return on capital employed
How the business can improve its profit margins?
- Increase price
- Reduce variable and fixed costs
list and explain the liquidity ratios
- current ratio: relationship between current assets and liabilities
- acid test ratio: (current assets - inventory)/current liabilities
state the uses of ratio analysis
- financial support
- judge performance over time
- compare to other business
users of final accounts
- managers
- shareholders
- banks
- other businesses
- governments
- trade unions
- creditors
what is cashflow?
amount of money entering and leaving the business
examples of cashflow in
- cash sales
- sale of assets
- settlements on credit
- loans
- back overdraft
- capital invested
examples of cashflow out
- rent
- wages
- utilities
- advertising
- settlements for materials bought on credit
- cash purchases
why is cashflow important?
- Avoid illiquidity: inability to pay the short-term financial obligations
- Avoid liquidation: selling assets to raise cash to pay for day-to-day operations
- Avoid bad reputation among suppliers, banks and tenants
what is cashflow forecast?
estimation of future cashflow
what is opening balance?
amount of cash held in business at the start of trading period
uses of cashflow forecasts
- start up the business
- manage an existing business
- set targets
- predict and plan for variations in cashflow ( these are 2 separate points)
- show to potential lenders
what cause cashflow problems
- over trading
- rapid growth
- cash out > cash in
- time of receiving is after paying
How to improve cash flow problems?
- Bank overdraft
- Debt factoring
- Bank loan
- Ask debtors to pay earlier
- Delay payments to suppliers
- Cut overheads
- Delay or cancel capital expenditure
what is working capital?
The capital required by the business to pay its short-term day-to-day expenses and all of the liquid assets of the business–
