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Higher Business Management > Unit 5 - Finance > Flashcards

Unit 5 - Finance Flashcards

1
Q

What is the role of the finance department?

A

To control costs and expenses

To monitor cash flow into/out of the business

Forecast the future

Monitor performance

Provide information for decision making

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2
Q

What are some cash flow problems and their solutions?

A

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

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3
Q

What are retained profits?

A

Profits that are not distributed to shareholders or taken as drawings by the owner(s). They are reinvested back into the business.

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4
Q

What are the advantages and disadvantages of retained profits?

A

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
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5
Q

What is sale of assets?

A

When a business sells off its unused assets - usually machinery.
The money is then reinvested into the business.

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6
Q

What are the advantages and disadvantages of sale of assets?

A

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

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7
Q

What is a bank loan?

A

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).

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8
Q

What are the advantages and disadvantages of a bank loan?

A

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

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9
Q

What is a mortgage?

A

A long term source of finance, borrowed from the bank - purely for the purchase of land or property.

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10
Q

Advantages and disadvantages of a mortgage?

A

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
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11
Q

What are grants?

A

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.

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12
Q

What are the advantages and disadvantages of grants?

A

Advantages -

  • no repayments needed
  • good image generated

Disadvantages -

  • criteria needs to be met
  • applications are time consuming
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13
Q

What is the difference between hire purchase and leasing?

A

They both involve paying a deposit then paying in monthly instalments.

Leasing equipment = not owned by the firm

Hire purchase = owned by the firm

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14
Q

What is share issue?

A

It is available to limited companies only.

Where they invite new shareholders to invest in the business by issuing extra shares.

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15
Q

Advantages and disadvantages of share issue?

A

Advantages -

  • large amounts of capital can be raised without interest
  • shareholders have limited liability

Disadvantages -
-loss of control as shareholders become part owners

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16
Q

What sources of finance are short term?

A

Overdraft
Grant
Retained profits

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17
Q

What are medium term sources of finance?

A

Bank loan
Leasing
Hire purchase

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18
Q

What are long term sources of finance?

A

Mortgage
Owners personal finance
Share issue

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19
Q

What are some reasons for cash-flow problems?

A

Too much money tied up in inventory
Customers are given too long to pay
Sales revenue is not enough
Sudden increase in expenses

20
Q

What are solutions for cash-flow problems?

A

Offer discounts for cash purchases
Sell any unused assets
Advertise more
Use a cheaper supplier

21
Q

Why do businesses use cash budgets?

A

To compare predicted spending with actual spending
To measure the performance of different departments and set targets
To show to potential lenders and investors

22
Q

What is gross profit?

A

The profit that is made on making and selling the product

23
Q

What is profit for the year?

A

The actual profit the business receives

24
Q

What are current liabilities?

A

Short term debts

25
Q

What are fixed assets?

A

Items owned that last longer than a year

26
Q

What are current assets?

A

Items owned that last less than a year

27
Q

How do you calculated capital employed?

A

Current Assets - Current Liabilities

28
Q

How is technology used in the finance department?

A

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

29
Q

What is a liability?

A

Money that the business is due

30
Q

What is an asset?

A

Something owned by the company ~ an item of property

31
Q

What is the purpose of ratio analysis?

A

Used to measure the performance of an organisation.

Can be compared with the business’ past performance or a competitors.

32
Q

What are the 3 category’s of ratio?

A

Profitability (3)
Liquidity (2)
Efficiency (1)

33
Q

What do profitability ratios measure?

A

How profitable an organisation is

34
Q

What do liquidity ratios measure?

A

How able the business is to pay off its short term debts.

35
Q

What so efficiency ratios measure?

A

Measures how well the equity invested is being used.

36
Q

How is gross profit % calculated?

A

GP/sales x 100

37
Q

Describe gross profit %

A

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

38
Q

How is profit for the year % calculated?

A

NP/sales x 100

39
Q

Describe profit for the year %

A

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

40
Q

How is return on equity employed % calculated?

A

NP/equity employed x 100

41
Q

Describe return on equity employed %

A

Shows investors what % return they receive if they invest

High percentage is better

42
Q

How is current ratio calculated?

A

Current Assets/Current Liabilities : 1

43
Q

Describe current ratio

A

Shows how able an organisation is to pay its short term debts

Ideal ratio = 2:1

Any less the business will struggle

44
Q

How is acid test ratio calculated?

A

(Current assets - inventory)/current liabilities : 1

45
Q

How is rate of inventory turnover calculated?

A

Cost of sales/average inventory = times

*avg inventory = (closing inventory + opening inventory) / 2

46
Q

Describe rate of inventory turnover

A

Measures the number of times inventory has to be replaced within a year

High figure means that inventory is sold rapidly

Higher Business Management (6 decks)

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