Unit 5 - Decision making to improve financial performance Flashcards
Short-term finance?
Borrowing that is normally repaid within 12 months.
Long-term finance?
Borrowing which is normally repaid after 12 months or more.
Internal source of finance (short-term)?
- Retained profits
Internal source of finance (long-term)?
- Sale of assets
External source of finance (short-term)?
- Overdrafts
- Debt factoring
External source of finance (long-term)?
- Share capital
- Venture capital
- Crowdfunding
- Bank loans
- Grants
What are retained profits?
Profit from the previous years, not distributed to shareholders.
ADV of retained profits?
- cheapest source of finance, as there is no interest.
- doesn’t need to be repaid
- no loss of control (no shares sold)
DVNTG of retained profits?
- shareholders may want to receive dividends and instead refuse to leave the profits in the business for expenditure.
What is a bank overdraft?
An agreement with a bank to take out more money from an account than a business has, but only up to an agreed limit.
ADV of a bank overdraft?
- Flexible way of borrowing money whenever necessary (take as much out as needed and pay as much back in when available).
-Useful for businesses with yo-yoing cash inflows (unpredictable or varying cash inflows).
DVNTG of bank overdraft?
- high-interest rates.
- no set interest rates– rates can alter throughout periods.
- hard to measure the real cost of service as interest rates may not remain the same.
- Bank can cancel this facility at any time ( be prepared to pay everything back).
What is a bank loan?
A set amount of money borrowed from a bank with a fixed interest rate, and set repayment dates.
ADV of a bank loan?
- The cost of borrowing is fixed and thus clear and measurable.
- No loss of business control.
DVNTG of a bank loan?
- Repayment must be done on time, whether the business has cash or not.
- If the business fails to repay within time then you may be faced with a court case, where the business may have to be liquidated to recuperate the funds needed for repayment.
- Collateral, which equates to the funds in question, may have to be provided to secure the loan.
What is venture capital?
Finance is obtained from the sale of shares to wealthy individuals also called venture capitalists, business angels, or private investors.
ADV of venture capital?
- No interest charged
- Venture capitalists can offer advice, guidance and contacts that can be helpful in teaching how to use the funds more effectively.
- Venture capitalists are more inclined to invest in risky businesses with potential negative or positive outcomes ( because they feel more entitled to, co-owning the business)
DVNTG of venture capital?
- Loss of control/leadership/business ethos
- Fewer profits for you and the business exclusively.
- Venture capitalists may sell their shares however they like to however they like.
What is share capital or share issue?
Finance obtained from the sale of shares either privately for an LTD or via the stock exchange for a PLC.
ADV of share capital?
- Large amounts of capital can be raised.
- No interest charged.
- No set repayments.
DVNTG of share capital?
- Loss of control.
- Shareholders have voting rights for key decisions (AGM).
- Shareholders who have ventured into the business via the stock exchange may be anonymous to you and may have opposing ideologies, which clash with the way you want to run the business.
- Getting listed on the stock exchange can be time-consuming and costly for some businesses.
What is debt factoring?
Debt factoring is a financial practice in which a company sells its customer’s invoices to a third-party company, known as a factor, at a discount in exchange for immediate cash.
And then this company will take it upon itself to chase customers for what they now owe them.
ADV of debt factoring?
- cash is received upfront
- a possible solution to the cash flow problem due to late payers.
- Relieves the business from having to chase customers.
-can provide credit checks on customers.
DVNTG of debt factoring?
- debt factoring businesses will charge a fee.
- customers may not want to deal with factoring businesses, which may damage the customer <> business relationship.
Meaning of variance?
Difference between budgeted figure and an actual figure.
Meaning of Favourable variance?
Positive impact caused by the difference between budgeted and actual figure.
In relation to:
- sales
- costs
Meaning of Adverse variance?
Negative impact caused by the difference between budgeted and actual figure.
In relation to:
- sales
- costs
How to respond to adverse sales variance?
- Increase promotion
- Improve the product (product life extension)
reduce the price (if -1 < PED) - Look for new markets or segments
change distribution - Train staff (customer service)
How to respond to adverse cost variance?
- Find cheaper suppliers
- Change production method
Invest in better machinery - Become more capital-intensive & reduce
number of staff employed - Increase size of orders (bulk buying)
Solution to adverse variance in labour costs?
- Become more capital-intensive ( lowering wage costs in the long run).
- Workforce management system, where staff are only working during periods of time when demand is high.
- Increased training to boost productivity <> efficiency.
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