Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business > UNIT 5 - FINANCE > Flashcards

UNIT 5 - FINANCE Flashcards

1
Q

What is the finance function?

A

Can sometimes be referred to as the finance department and is only really found in larger businesses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the roles of the Finance Function?

A
  • Prepare and create financial accounts (profit and loss).
  • Keep and maintain financial records (sales).
  • Make payments (salaries)
  • Provide financial information to aid decision making.
  • Analyse the financial performance of the business to produce data.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Financial information?

A

Includes details of profit, loss, cash flow, break- even, profit margin and average rate of return which can all be very helpful for the business when making decisions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are examples of short term reasons for finance?

A
  • When cash flow is poor
  • Bridge gaps when large customers delay payments
  • Produce a sudden rush order from an important customer
  • Marketing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are examples of long term reasons for finance?

A
  • Start up costs and running costs
  • Finance asset purchases
  • Expansion
  • Fund new product development
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the two main methods of raising finance?

A
  • Internal
  • External
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are examples of internal sources of finance?

A

Involves raising funds from within the business.
- Retained profit
- Personal savings
- Sale of unwanted assets
- Sale and leaseback

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is retained profit?

A

Profit that is not distributed to the shareholders and it is put back into the business.
Medium/ long term source of finance for more established businesses.
Pros:
- No interest so flexible
- No need to repay the money
- Doesn’t dilute the business.
Cons:
-Smaller businesses don’t have it yet.
-Shareholders may not be happy that the profit is not going to them.
- If a business is facing difficulties it is unlikely for them to have profits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is Owner’s capital?

A

Money put into the business by the owner.
Sole traders and partnerships only. Suitable for all sorts of finance.
Pros:
- No repaying
- No interest
- No cost at all
Cons:
- Dependent on owners savings.
- Owner is placing their money at risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is sales of assets?

A

Items of value that the business owns that are sold to raise finance.
Used for all sorts of finance but businesses must be established.
Pros:
- Good way to get rid of useless assets and make money.
- Finance made belongs to the business.
Cons:
- Once the asset is sold it is no longer available to be used.
- The business cant sell the asset for its original value due to depreciation.
- One off situation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are examples of external sources of finance?

A

Involves raising funds from outside the business.
- Overdraft
- Trade credit
- Loans
- Share issue
- Crowdfunding

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is an Overdraft?

A

An arrangement with a bank that a business can spend more money than is in its account.
Used by all businesses, only short term finance.
Pros:
- Good for short term payments to avoid bankruptcy.
- Available as and when so flexible
Cons:
- Daily charged interest
- If the bank suspects the business struggling it can demand the overdraft back at any time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is Trade Credit?

A

An arrangement whereby a supplier allows the business to receive goods but pay at a later date. (Usually in within 28 days).
Available for all but start-ups may struggle requesting. Short term.
Pros:
- Allows them to use supplies and sell the goods before paying suppliers which will improve cash flow position.
- Usually no interest
Cons:
- Must be paid at an agreed time if not relationship could be broken.
- Sometimes interest is charged if the business doesn’t pay on time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is Crowdfunding?

A

Money raised through a business pitching a product for the public to contribute small bits of money.
Medium/ long term source of finance and start-up businesses.
Pros:
- Provides finance where other methods may be hard.
- Builds awareness and acts as market research.
- Opportunity to start with limited resources.
Cons:
- Lose all money if target is not met.
- Has to be an innovative idea.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What account is used to show Profit and Loss?

A

The profit and loss account.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How do you calculate Revenue (sales)?

A

Revenue = Price x Number sold.
How many units of the product have been sold.
You can get it by:
- selling products/ services
- Interest in savings from bank
- Investments such as shares
- Leasing - renting out property

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does the term “costs of sales” mean and how do you calculate it?

A

Costs of sales = add up all the costs related to the products.
The costs that are directly related to production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What does the term “gross profit” mean and how do you calculate it?

A

Gross profit = Revenue - cost of sales.
Shows the level of profit earned from buying and selling goods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What does the term “net profit” mean and how do you calculate it?

A

Net profit = Gross profit - Fixed costs
The money that is left after all the costs are taken away from the sales,

20
Q

What are the two main types of costs?

A
  • Start up costs: these are the costs when the business begins.
    e.g Computer or till
  • Running costs: (operating costs) these are day-to-day costs. e.g fuel for vehicle and electricity.
21
Q

What are the different types of running costs?

A

Fixed costs: (overheads) These have to be paid no matter sales or customers.
Variable costs: these are directly related to the number of products sold and produced.
Total costs: Variable and Fixed combined.

22
Q

How do you calculate Total costs?

A

Total costs= Fixed costs + variable costs.

23
Q

What does the term “Expenditure” mean?

A

All the money going out of the business.

24
Q

What is profit or Loss and how do you calculate it?

A

Profit- means the revenue is greater than the expenditures.
Loss- means that the revenue is less than expenditures.
Profit/ Loss = Revenue - Expenditure

25
Q

What are the two key profitability ratios and how do you calculate them?

A
  • Gross profit margin: % of sales revenue that is gross profit.
    =Gross profit/ Sales revenue x 100
  • Net profit margin
    = Net profit/Sales revenue x 100
26
Q

What are ways to improve the gross/ net profit margin?

A

Increase the sales revenue:
- Lowering the selling price might boost demand so much that the business gets an increase in revenue.
- Increasing the price
- Increase product awareness
Lower the cost of sales:
- Negotiate with suppliers
- Cheaper supplies
Reduce expenses:
- Delayer the organizational structure
- Review salaries/ bonuses
- Freeze recruitment

27
Q

Which out of the two profitability ratios is best?

A

The net profit margin is a better indication of a businesses financial performance as the ratio takes into account all the expenses. Whereas the gross profit margin only takes into account the cost of sales.

28
Q

What is the average rate of return and how do you calculate it?

A

The ARR is a way of comparing the profitability of different choices over the expected life of an investment.
= Average annual profit x
( Total profit/ number of years) / cost of investment x 100

29
Q

Who might be interested in the profit and loss accounts?

A

Shareholders - dividends?
Managers - Job role security?
Employees - Wage?
Suppliers - Trade credit?
Customers - Prices may fluctuate and dips in quality?
Government - Tax received?
Competitors - market lead or competing well?

30
Q

What is break even and how do you calculate it?

A

The moment when total revenue is equal to total costs; it is the point where the business is not in a profit or a loss.
Money in = Money out
BE = Fixed costs/ (Selling price - variable cost per unit (contribution))

31
Q

What are the formulas needed for a break even chart?

A

Total costs = Fixed + Variable
Variable = VC per unit x output
Revenue = Selling price x output
Profit/loss = Revenue - expenditures (total costs)

32
Q

What is the margin of safety and how do you calculate it?

A

The amount of sales that can fall before break-even and the business no longer makes a profit. Also telling a business how many sales above break even point it is.
MOS = Actual sales - Break even sales

33
Q

Why must a business know its break- even point?

A
  • Because the contribution from every unit sold above it adds to profit.
  • Provides a focus for the business.
  • Works out if the forecast sales will be enough to make a profit.
  • Helps a business know whether future investment is worthwhile.
34
Q

What are the limitations of break- even charts?

A
  • Assumes all stock is sold.
  • Does not include market fluctuations.
  • Does not allow changes in selling price.
35
Q

What is contribution and how do you calculate it?

A

Selling price - Variable costs per unit.

36
Q

What are the pros of using break- even to aid choices?

A
  • New products:Predicts how many units need to be sold, realistic?
  • Pricing: experiment with pricing strategies.
  • Costs: Helps decide to change VC e.g suppliers.
  • Can help a business plan production levels.
37
Q

What are the cons of using break even to aid choices?

A
  • Changes in external factors.
  • Changes in costs
  • Doesn’t work well for services only goods as services can differ between services.
38
Q

What is the difference between cash and profit?

A

Cash is all the money that comes into the company. Profit is the cash minus all the costs.

39
Q

What is the importance of cash to a business?

A
  • Providing liquidity: This means a business meets its short term debts with short term cash.
  • To pay suppliers, overheads and employees.
  • To prevent business failure.
40
Q

What is cash flow?

A

Cash flow is the process of cash flowing in and out of the business.

41
Q

What is net cash flow and how do you calculate it?

A

Net cash flow is the difference between cash inflows and outflows over a trading period.
= Cash inflows - Cash outflows

42
Q

What is a cash flow forecast and what are the calculations needed?

A

A table showing the predicted opening balances, cash inflows/ outflows, Net cash flows and closing balances over a trading period. (The amount of cash at the end of a trading period).
->Closing balance = Opening balance + net cash flow
->Opening balance = Previous closing balance

43
Q

What are the problems with cash flow forecasts?

A
  • Sales prove lower than expected; bad market research
  • Customers don’t pay on time
  • Cost of production proves more expensive
  • Certain costs are missed
44
Q

What are the solutions to cash flow problems?

A

->Overdraft - Immediate and flexible but interest is high and bank can demand at any time.
-> Re- scheduling payments: Reducing TC period = faster inflows but can lead to disagreements.
-> Reducing cash flow outflows
-> Finding new sources of finance but could dilute ownership and high interest.

45
Q

Why is a cash flow forecast important?

A
  • Helps sport problems with customer payments.
  • Important part of financial planning.
  • Identifies potential shortfalls of cash in advance so a business can imply remedies.
  • Helps set targets.

Business (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions