Unit 5 - Finance Flashcards
What is the role of the finance department?
To control costs and expenses
To monitor cash flow into/out of the business
Forecast the future
Monitor performance
Provide information for decision making
What are some cash flow problems and their solutions?
Too much cash tied up in stock = introduce a JIT approach
Too much time being given to customers to pay credit = offer cash discounts
Not enough money being generated from sales = increasing advertising/offer promotions
What are retained profits?
Profits that are not distributed to shareholders or taken as drawings by the owner(s). They are reinvested back into the business.
What are the advantages and disadvantages of retained profits?
Advantages -
- can help with expansion
- no interest
- can be spent in any way
Disadvantages -
- Shareholders may be unhappy that they are not receiving a higher return
- if all profits are spent, business may be unable to pay for unexpected costs
What is sale of assets?
When a business sells off its unused assets - usually machinery.
The money is then reinvested into the business.
What are the advantages and disadvantages of sale of assets?
Advantages
- can help with expansion
- no interest
- can be spent in any way
- frees up cash
Disadvantages
-expensive to repurchase machinery if it’s needed again
What is a bank loan?
When a large sum of money is borrowed by a business from a bank. It is then paid back over a number of years (long term).
What are the advantages and disadvantages of a bank loan?
Advantages -
- Loans are quick and easy to arrange
- the business can spend it however they wish but it is usually used for expansion
Disadvantages -
-Interest is charged with each monthly repayment
What is a mortgage?
A long term source of finance, borrowed from the bank - purely for the purchase of land or property.
Advantages and disadvantages of a mortgage?
Advantages -
- large amounts of finance can be raised quickly
- given for a long period of time
Disadvantages -
- interest is charged
- property can be lost to the lenders if payments are missed
What are grants?
A fixed amount of money usually awarded by the government or charity.
Usually given it a business meets criteria’s such as providing jobs in high unemployment areas.
What are the advantages and disadvantages of grants?
Advantages -
- no repayments needed
- good image generated
Disadvantages -
- criteria needs to be met
- applications are time consuming
What is the difference between hire purchase and leasing?
They both involve paying a deposit then paying in monthly instalments.
Leasing equipment = not owned by the firm
Hire purchase = owned by the firm
What is share issue?
It is available to limited companies only.
Where they invite new shareholders to invest in the business by issuing extra shares.
Advantages and disadvantages of share issue?
Advantages -
- large amounts of capital can be raised without interest
- shareholders have limited liability
Disadvantages -
-loss of control as shareholders become part owners
What sources of finance are short term?
Overdraft
Grant
Retained profits
What are medium term sources of finance?
Bank loan
Leasing
Hire purchase
What are long term sources of finance?
Mortgage
Owners personal finance
Share issue
What are some reasons for cash-flow problems?
Too much money tied up in inventory
Customers are given too long to pay
Sales revenue is not enough
Sudden increase in expenses
What are solutions for cash-flow problems?
Offer discounts for cash purchases
Sell any unused assets
Advertise more
Use a cheaper supplier
Why do businesses use cash budgets?
To compare predicted spending with actual spending
To measure the performance of different departments and set targets
To show to potential lenders and investors
What is gross profit?
The profit that is made on making and selling the product
What is profit for the year?
The actual profit the business receives
What are current liabilities?
Short term debts
What are fixed assets?
Items owned that last longer than a year
What are current assets?
Items owned that last less than a year
How do you calculated capital employed?
Current Assets - Current Liabilities
How is technology used in the finance department?
Spreadsheets
- record and edit numerical data
- can undertake lots of calculations using formulae
- graphs can be made
- edit easily
EFTPOS (electronic funds transfer point of sale)
-contactless, Apple Pay, credit/debit cards etc
What is a liability?
Money that the business is due
What is an asset?
Something owned by the company ~ an item of property
What is the purpose of ratio analysis?
Used to measure the performance of an organisation.
Can be compared with the business’ past performance or a competitors.
What are the 3 category’s of ratio?
Profitability (3)
Liquidity (2)
Efficiency (1)
What do profitability ratios measure?
How profitable an organisation is
What do liquidity ratios measure?
How able the business is to pay off its short term debts.
What so efficiency ratios measure?
Measures how well the equity invested is being used.
How is gross profit % calculated?
GP/sales x 100
Describe gross profit %
Shows the profit made from buying and selling stock
The higher the % the better
Shows how much gross profit is generated from every £1 sales
How is profit for the year % calculated?
NP/sales x 100
Describe profit for the year %
Used to measure the % of profit after expenses have been deducted
Low percentage means expenses are too high
Shows how much net profit has been generated from every £1 of sales
How is return on equity employed % calculated?
NP/equity employed x 100
Describe return on equity employed %
Shows investors what % return they receive if they invest
High percentage is better
How is current ratio calculated?
Current Assets/Current Liabilities : 1
Describe current ratio
Shows how able an organisation is to pay its short term debts
Ideal ratio = 2:1
Any less the business will struggle
How is acid test ratio calculated?
(Current assets - inventory)/current liabilities : 1
How is rate of inventory turnover calculated?
Cost of sales/average inventory = times
*avg inventory = (closing inventory + opening inventory) / 2
Describe rate of inventory turnover
Measures the number of times inventory has to be replaced within a year
High figure means that inventory is sold rapidly
