Unit 5- finance Flashcards
Name three reasons why businesses need cash
.Pay off debts .Satisfy shareholders .Enough to pay staff members .To buy stock .Up keep of premises
Name the two purposes of the financial functional area.
.Purpose 1- provide financial information to management
.Purpose 2-To support business planning and decision making
How does finance affect a businesses decision making?
.The finance department will double check to see if the business has enough funds or if the decision is financially viable.
What is retained profit?
Capital kept by a business from profit made the previous year.
Name an advantage of retained profit to the business
.It is their own money so there is no interest or any future repayments on the capital
How can retained profit be a disadvantage to the business?
It is usually in small amounts in relation to what they need, this could lead to the business still needing external sources of finance.
When may retained profit be used by a business?
This could be used to expand the business or help run it on a day-to-day business
Why might the use of the Owners funds be an advantage to the business?
.No need to repay the money
.No interest has to be paid
.No cost to raise the finance
Why might using owners funds be a disadvantage to the business?
.If the owner(s) do not have enough savings they will have to use another source of finance as well.
When might the use of Owners funds be used by a business?
.Used for start up costs, expansion or replacing capital
.Can be used for day to day running expenses
Why might sale of assets be an advantage to the business?
.Good if the asset is of no use to the business
Why might sale of assets be a disadvantage to the business?
.Can take time to sell the asset
.May not be possible to find a buyer
What is overdraft?
An arrangement with a bank that the business can spend more money than it has in the account.
Why might the use of overdraft be useful to a business?
.Can meet short term cash flow problems
.The business can continue trading in the short term
.the size of the overdraft varies monthly and interest is paid only on the amount borrowed
Why might an overdraft be a disadvantage to the business?
.Can be high interest fees and charges
.Can be penalties if you go over the limit
When may a business use an overdraft?
.If a business is making a big purchase
What is a Share Issue?
.When new shares are sold, raising money for the business
Why might share issue be an advantage to the business?
.A lot of finance can be raised from many investors
.Money does not have to be paid back
.No interest is payable
When might share issue be a disadvantage to the business?
.Dividends may have to be paid to the shareholders
.Shareholders are entitled to have a say in the running of the company
When might share issue be used by a business?
When opening a new branch/store
Name an advantage to a business when they take on a new partner
.A new partner may bring new skills to the business
Name a disadvantage to a business when a new partner has been taken on
.Losses will be shared even if the new partner has incurred them
.May not get on with new partner
When may taking on a new partner be useful to a business?
.Can also bring new skills when launching a new product
How can taking a loan be an advantage to the business?
This is suitable for the purchase of fixed assets as businesses can access large sums of money
What is a disadvantage caused by taking out a loan?
.It can be difficult to obtain
.May be time consuming
.If the debt cannot be repaid they may be able to take fixed assets.
When may a loan be used by a business?
.If the business is expanding
.If the business needs to buy new machinery
.If the business needs to buy new property.
What is trade Credit?
.This is when the business does not need to pay the supplier for the goods
.Usually over a period of 30 days however longer terms can be agreed
Why might trade credit be an advantage to the business
.Allows the business to buy the goods to sell them onto a customer
.Helps businesses that may have a temporary shortage of funds
.
Why might trade credit be a disadvantage to the business?
The goods must be paid for even if they do not sell
Interest is charged if the credit is not repaid within the time limit
When might trade credit be useful to a business?
.If the business is struggling financially yet have orders this allows them to meet the demands of the customer
Name a short term internal source of finance
.Owners capital
.Sale of Assets
Name a short term external source of finance
.Overdraft
.Trade Credit
Name a medium term internal source of finance
.Retained profit
.Sale of assets
.Owners Capital
Name a medium term external source of finance
.Bank Loan
.Crowdfunding
Name a long term internal source of finance
.Retained profits
.Sale of Assets
.Owners capital
Name a long term internal source of finance
.Retained profits
.Sale of Assets
.Owners capital
Name an external source of finance that is long term
.Bank Loan
.Taking on new partner
.Share Issue
.Crowdfunding
What is the equation to calculate revenue?
Quantity sold x selling price
What do profit and loss accounts show?
They show how much profit or loss a business has made over the course of 1 year
What is the equation for gross profit?
Sales-Cost of sales
What is the equation for percentage change?
Final Value-Initial Value
Initial Value
How do you calculate gross profit margin?
Gross profit x 100
Sales revenue
How do you calculate the Net Profit margin?
Net profit x 100
Sales Revenue.
What are variable costs?
These are costs that change depending on the number of items produced
List two benefits of a break even chart
.Helps set prices and choose pricing strategies
.Knowing the margin of safety helps manager assess the impact of external factors
.Shows how much profit or loss will be made at a given output
.Can work out how many products need to be sold to cover costs
Name a drawback of a breakeven chart
.Assumptions are made on the fact that all of the stock is going to be sold at the same price
.Businesses could be unrealistic in their calculations
.Variable costs could change regularly
Name two benefits of cash flow forecasting
.They help anticipate cash shortages
.Help to remedy/fix cash shortages
.They help businesses plan
.Help protect the business when they are holding too much cash
