UNIT 5 - Finance and accounting Flashcards
What are the 3 internal sources of finance?
- Selling of assets
- Profits retained
- Reductions in working capital
2 ways of unincorporated business finance
- Microfinance
- crowd funding
External sources of finance: Long term (2)
- long term bank loans
- debentures/bonds
external sources of finance: medium term (2)
- Hire purchase
- Leasing
External sources of finance: Short term (3)
- Trade credit
- Bank overdrafts
- debt factoring
Other sources of long-term finance (2)
- grants
- Venture capital
What is the break even equation?
fixed cost / contribution per unit (selling price - variable cost)
What is the margin of safety?
The amount by which a company’s sales exceed the break-even level of output
What are 5 causes of cash-flow problems?
- lack of planning
- Unexpected events
- Poor credit control
- allowing customers too long to pay debts
- expanding too rapidly
What are the two profit margin ratios?
- Gross profit margin
- Operating profit margin
What are the two liquidity ratios?
- Current ratio
- Acid-test ratio
How do you calculate the gross profit margin?
Gross profit/revenue x 100
How do you calculate the operating profit margin?
operating profit/revenue x 100
How do you calculate a current ratio
Current assets / current liabilities
How do you calculate an acid-test ratio?
(Current assets - inventories) / current liabilities
What are some methods to increase profit margins?
- reducing direct costs with cheaper materials and wages
- Increasing prices (passing it onto a customer
- Reducing overheads (rent etc.)
What are some ways to increase acid-test-ratio?
- Selling fixed assets
- selling inventories for cash
- Increase loans to increase working capital
cash vs profit: What is cash?
- cash is king, it is responsible for the day-to-day workings of the business
cash vs profit: what is profit?
- Profit is what is retained after all expenses are paid. It is the reward to the business
cash vs profit: what is profit?
- Profit is what is retained after all expenses are paid. It is the reward to the business
What do profit margin ratios tell us?
- Gross profit tells us how effectively managers have “added value” to cost of sales
- operating profit tells us how well management have converted revenue into profit
management
What do liquidity ratios tell us?
- the ability of a firm to pay its short-term debts
