Unit 5 - Finance Flashcards
What size busssiness will have a finance department ?
What will small businesses do?
Medium- large businesses will have a finance department
Owners of small business do it themselves or hire an accountant
What does the finance function do?
-deal with purchases / payments (paying salaries / suppliers)
-create financial accounts (such as profit / loss accounts)
-inform other departments of funds available
-analyse performance of the bussiness
Why does a business need finance initially ?
To fund start up costs and running costs
Why does a business need finance in the long term?
-fund expansion
-replace worn out assets
-fund new product development
What’s internal sources of finance ?adv disadv
Examples
Raising funds from within the business
Adv-business keeps control, interest not high
Disadvantages -internal sources limited
-owners capital, retained profit , selling unwanted assets
What’s external sources of finance?
Examples
Raising funds from outside the business
-loan ( banks)
-bank overdraft
-crowd funding
-new share issue
What’s retained profit as an internal method of raising finance ? Adv.. disadvantages…
-Business works out profits and reinvests some back into the business
Benefits…
-cheap form of finance , no interest must be paid
-don’t reduce ownership of organisation unlike selling shares
Disadvantages …
-If business is facing difficulties then it’s unlikely to have profit it can use
-growth can be slow if it’s reliant on retained profit as profits may not be high enough to finance growth quickly
-uosey shareholders who think they’re dividends are low
What’s owners capital as an internal method of raising finance? Advantages .. disadvanatges…
-entrepreneur invests personal savings such as inheritance money.
Advantages…
-interest free
-no need to repay money
-maximises control
Disadvantages..
-amount available may be limited —> entrepreneur having to use other sources of finance to fund business
What’s selling unwanted assets as an internal method of raising finance ?
-selling unwanted assets such as land, buildings or equipment that are no longer needed by the business to raise finance
Benefits- no finance needed to be repaid and owners will keep full control
How do loans from banks act as an external method of raising finance ?
Advantages-
Disadvantages-
-bank loan is a borrowed amount of money from the bank with a set repayment schedule .
Benefits …
- no need to provide a bank with a share in the business therefore no control is lost
-repayments are spread over time
Drawbacks …
- business needs to risk an asset as security, bank will have this if business fails
-interest must be paid on the full loan amount , this increases costs of the business
How does a bank overdraft act as an internal method of raising finance ?
Advantages
Disadvantages
Allows business to withdraw funds that aren’t there. Business goes into -
Advanatages
-suitable if business has a short term cash shortage
-awarded quickly
-doesn’t always require security
Disadvantages
-repayable to the bank
-will incur an interest charge (high)
What’s crowdfunding as an external method of raising ?
Advantages
Disadvantages
Owner or bussiness attracts a crowd of investors who contribute online .
Advantage
-investors have experience or skills that they can offer instead of money
Disadvantage
-investors need to be offered a return (eg- free use of product or share in profits)
-risk that there’s a limit to the amount of money invested are willing to invest.
-bussiness idea may not be of interest —> time and money spend in campaign lost
What’s share issue as an external method of raising finance for a bussiness?
Advantages
Disadvantages
Small / new bussiness set up as limited companies to to raise finance by selling shares
Advantages
-large sums raised
-there’s no interest and dividend payments can be missed if profits are low
Disadvantages
-possible loss of control if original owners sell more than 50 %of shares
-need to satisfy share holders with dividends and share growth
What’s trade credit as an external method for a bussiness to raise finance ?
Advantages
Disadvantages
-provided by firms suppliers , allows bussiness to have goods now and pay later
Advantages
-Helps bussiness with temporary shortage in funds
-usually interest free
Disadvantages
-danger of loosing future credit arrangements with supplier if bills aren’t paid on time
-goods must be paid for even if the products don’t sell
-interest is charged if credit isn’t repaid in time limit
-difficult for new bussiness to negotiate with suppliers as there’s a risk they may not pay
What’s trade credit as an external method for a bussiness to raise finance ?
Advantages
Disadvantages
-provided by firms suppliers , allows bussiness to have goods now and pay later
Advantages
-Helps bussiness with temporary shortage in funds
-usually interest free
Disadvantages
-danger of loosing future credit arrangements with supplier if bills aren’t paid on time
-goods must be paid for even if the products don’t sell
-interest is charged if credit isn’t repaid in time limit
-difficult for new bussiness to negotiate with suppliers as there’s a risk they may not pay
What’s revenue?
How do you calculate it?
Revenue is the money from sales
Revenue = units sold X selling price
What are the costs of a bussiness?
Spending that occurs to set up and run a bussiness
What are the two types of costs ?
indirect costs (fixed) - cost that doesn’t change with output. ( insurance , rent , salaries not linked to output)
Direct costs (Variable) - costs that change with output ( raw materials , wages linked to output , electricity )
How do you calculate total costs?
Total fixed costs + total variable costs
What’s profit? What can be done with it?
Difference between revenue and total costs
Can be reinvested back into the bussiness, given to owners as a reward
3 ways to increase bussiness profitability…
-increase revenue by increasing price of product
-sell more by advertising
-reduce costs ( use a different supplier)
What does breaking even mean?
Costs are the same as revenue
What’s a businesses turnover ?
It’s revenue
What’s gross profit?
Amount of money a bussiness makes after the direct costs of making / selling its products
What’s net profit ?
Net profit is the profit a bussiness generate after all other expenses .
How do you calculate gross profit?
Gross profit = revenue - variable costs ( direct)
How do you calculate net profit ?
Net profit = gross profit - other expenses ( indirect)
How do you calculate gross profit margin?
Gross profit / sales revenue X 100%
2 ways a business can increase their gross profit margin?
Increase sales revenue
Lower cost of sales
How can a business increase sales revenue ?
-lower selling price will increase demand
-increasing price may generate more revenue
-increase awareness of product
How can a business lower cost of sales ?
-get a cheaper supplier
-renegotiate with current supplier for cheaper prices
How do you find net profit margin
Net profit / sales revenue X 100%
How do you calculate gross profit margin ?
Gross profit / sales revenue X 100%
How do you find ARR ( average rate of return )
What’s it used for ?
- find weather an investment is worth while
What’s break even ?
What’s it measured in and how do you calculate it
-Point at which sales revenue is exactly the same as total costs
-units
Fixed costs / sales price per unit - variable cost per unit
What are cash inflows and outflows ?
Inflows- cash coming into the business
Outflows - cash leaving the business
Net cash flow - difference between cash inflows and cash outflows
What’s a cash flow forecast .
Importance of cash flow forecasting …
Financial document showing the expected flow of money into and out of a business over a period of time
-help business prevent insolvency
-help businesses predict if they can pay employees and suppliers
Solution to cash flow problems …
Overdraft
Rescheduling payments
Finding new sources of finance
Advantages of completing a cash flow forecast …
Can be shown to banks
Identifies potential shortages of cash in advance
Enables things to be put in place for shortfalls of cash
Disadvantages of cash flow forecasts …
Sales lower than expected
Customers don’t pay up on time
Cost of production proves higher than expected
