Unit 5 Finance Flashcards
5.2
What is a loan?
A business borrow a sum of money from a bank or another lender
5.2
What is an overdraft?
A bank allows a business to spend more money than there is in its current account.
5.2
What is crowdfunding?
Money raised by a business by nviting sponsors to contribute money, provide a loan, or buy equity in the business
5.2
What is share issue?
Money raised by selling shares of the business
5.2
What is Trade credit?
Goods are obtained from another business without immediate payment being made
5.2
What is Retained profit?
Money is earned by the business but not paid to the owners
5.2
What is sale of assets?
Money is received following the sale of capital items owned by the business
5.2
What is owners’ capital?
The owner or owners use their own savings to provide capital for the business
5.2
Owners capital -
advantage + disadvantage
Advantage:
-No need to repay the money
-No interest has to be paid
Disadvantage:
-If the owner(s) don’t have enough savings, they will need to use another source of finance
5.2
Retained profit -
advantage + disadvantage
Advantages:
-No interest has to be paid
-No cost to raise the finance
Disadvantages:
-Only available to businesses who have profit
-Can be limited amount
5.2
Sale of assets -
advantage + disadvantage
Advantages:
-Good if the asset is no longer of use to the business
Disadvantages:
-Can take time to sell asset
-May not be possible to find buyer
5.2
Overdraft -
advantage + disadvantage
Advantages:
-Can meet short term cash flow problems
-The size of the overdraft varies monthly and interest is paid only on the amount borrowed
Disadvantages:
-Interest is charged on the daily amount of money the business owns the bank. Can be expensive
5.2
Trade credit -
advantage + disadvantage
Advantages:
-Allows the business buying goods to sell to the customer before payment is made to supplier
-The period of credit usually interest free
Disadvantages:
-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
5.2
Taking a new partner -
advantage + disadvantage
Advantages:
-A new partner could bring new skills to the business
-No cost to raise finance
Disadvantages:
-The new partner will have a say in how the business is run
-The new partner will be entitled to a share of profits
5.2
Loan -
advantage + disadvantage
Advantages:
-Repayment is spread over time
-Business knows the amount to be paid in instalments, helping with budgeting
Disadvantages:
-Interest has to be paid
-Business may need to risk an asset as colateral
5.2
Share issue -
advantage + disadvantage
Advantages:
-Money does not have to be paid back
-A lot of finance cna be raised from many investors
Disadvantages:
-Dividends may have to be paid to shareholders
-Shareholders are entitled to have a say in running of the company
5.2
Crowdfunding -
advantage + disadvantage
Advantages:
-A lot of money can be raised from contributors
-No security needed for loans
Disadvantages:
-There is no guarantee the business will raise the amount of money it needs
-It takes time and effort to promote the crowdfunding.
5.3
What is revenue?
-Income that comes into a business from the sale of products and services
-Calculated by quantity sold x selling price
What is the importance of revenue to a business?
If a business wanted to increase revenue they could:
-Increase price of product
-Reduce price to increase sales
-Increase sales by increasing advertising, selling a wider range of products etc.
Why does a business want to minimise its costs?
-Increase profits
-Reduce prices to become more competitive without cutting profits
-Save money in order to expand or update machinery
How does a business reduce costs?
-Employing new technology instead of workers
-Finding cheaper supplies of materials or goods to sell (have to maintain quality and reliability though)
-Asking a supplier to reduce its prices or asking workers to take a pay cut.
Total cost calculation
Total fixed cost + Total variable cost = Total cost
Gross profit calculation
Sales (total revenue) - cost of sales = Gross profit
Net profit calculation
Gross profit - expenses = net profit
Gross profit margin calculation
(Gross profit x 100) ÷ Total revenue = gross profit margin
Net profit calculation
(Net profit x 100) ÷ Total revenue = net profit margin
If gross profit margin rises…
-Total revenue rose faster than cost of sales
-Total revenue fell but cost of sales fell more
-Total revenue rose and cost of sales fell
If net profit margin rises…
-Gross profit rose faster than expenses
-Gross profit has fallen but expenses fell more
-Gross profit rose and expenses fell
If gross profit margin falls…
-A fall in total revenue and a rise in the cost of sales
-A rise in total revenue but a bigger rise in cost of sales
-A fall in total revenue but a smaller fall in cost of sales
If net profit margin falls…
-A fall in gross profit and a rise in expenses
-A rise in gross profit but a bigger rise in expenses
-A fall in gross profit but a smaller fall in expenses
Calculating ARR
1) Total revenue from investment - cost of the investment = profit over the life of investment
2) Total profit ÷ Life of the investment (years) = Average annual profit
3) (Annual average profit ÷ cost of investment) x 100 = Annual rate of return (ARR)
Why do most businesses prepare Profit and Loss accounts?
-The law (legally obliged)
-To help the business managers/owners
-To gain investors
-For employees job security (knowing they won’t be made redundant)
What is revenue?
The income received by a business from selling its goods and services
What is cost of sales?
These are the costs involved directly with supplying the good or service - also known as variable costs
What is gross profit?
This is when you subtract the cost of the sales from the sales revenue
What is overhead?
These are the general costs of running a business and are sometimes called expenses
Advantages of ARR
-provides a percentage return which can be compared with a target return
-looks at the whole profitability of the project, key issue for shareholders
How do you calculate break even from a table of output, revenue and cost figures?
-Look down the total cost and total revenue columns to see which are equal
-This will show you the break-even output
How to calculate break even from a graph?
-look where the total revenue line crosses the total cost line
-this will show you the break even output
Disadvantage of Cash flow
Doesn’t take into account external factors that can affect the business (e.g inflation)
What is cash flow?
The movement of cash in and out of the business
What is cash inflow?
Any money received by a business including:
-Revenue
-Income
-Receipts
-Sales
What is cash outflow?
Any money spent by the business
How to calculate break even
Fixed costs / selling price - variable cost unit = break even
What is contribution price?
The gross profit made when taking away the cost of making a product from the selling price
What is the margin of safety?
The amount of units you are selling above the break-even point.
