UNIT 5 - Finance and accounting Flashcards
Chapter 28 - Business finance
Start-up capital
The capital needed by an entrepeneur to start up a business
chapter 28 - Business finance
Working capital
The captial needed to pay for raw materials, day-to-day running costs and credit offered to customers. The life-blood.
Current assets - current liabilities
chapter 28 - Business finance
Capital expenditure
The purchase of assets that are expected to last for more than one year, such as building and machinery
Chapter 28 - Business Finance
Revenue expenditure
Spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock
Chapter 28 - Business finance
Liquidity
The ability of a firm to be able to pay its short-term debts
Chapter 28 - Business finance
liquidation
When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
Chapter 28 - Business Finance
What can happen as a result of too much working capital?
Opportunity cost
Chapter 28 - Business finance
What is the working capital cycle, and explain
Cash -> materials & stock -> production -> sell on credit (repeat)
The longer each process takes, the more working capital that will be required (eg. the longer creditors take to pay, the more capital is needed before materials and stock can be paid for)
Chapter 28 - Business finance
What are internal sources of finance? (3)
- profits retained within the business
- Selling of assets
- Reductions in working captial
Chapter 28 - Business finance
What are the short-term external sourcs of finance
- Bank overdrafts
- Trade-credit
- Debt-factoring
Chapter 28 - Business finance
Overdraft
Bank agrees to a business borrowing up to an agrees limit as and when required
Different to a loan, as a loan is a fixed amount
Chapter 28 - Business finance
Debt factoring
Selling of claims over trade recievables to a debt factor in exchange for immediate liquidity - only a proportion of the value of the debts will be recieved as cash
often has a % loss of credit
Chapter 28 - Business Finance
What is the time frame for short-term finance methods?
less than one year
Chapter 28 - Business Finance
What are the medium-term external sources of finance
- Hire purchase
- Leasing
Expensive options, but free up cash for the business
Chapter 28 - Business Finance
Hire purchase
An asset is sold to a company that agrees to pay fixed repayments over an agreed time period - the asset belongs to the company
Chapter 28 - Business Finance
Leasing
Obtaining the use of equipment or vehicles and paying a rental charge over a fixed period, this avoids the need for the business to raise long-term capital to buy an asset; ownership remains with the leasing company
Chapter 28 - Business Finance
What is the time period for medium-term finance?
3-5 years
Chapter 28 - Business Finance
What are the 2 long-term external sources of finance
- Long term bank loans (don’t have to be repaid for at-least one year
- Debentures
Chapter 28 - Business Finance
What are bonds/debentures?
an agreed time period for investors to get interest on a bond, and eventually money back
Chapter 28 - Business finance
Equity finance
permanent finance raised by a company through the sale of shares
Chapter 28 - Business Finance
rights issue
Existing shareholders are given the right to buy additional shares at a discounted price
Chapter 28 - Business finance
Advantages to debt finance
- No change in ownership of the company without shares
- loans will be repaid eventually so no permanent increase to liabilities
- Banks remain external to the operation of the business
Chapter 28 - Business finance
Advantages to Equity finance
- Permanent - never has to be repaid
Chapter 28 - business finance
Other sources of long-term finance
- Grants
- venture capital
Chapter 28 - business finance
Venture capital
Risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources
Often from wealthy individuals
Chapter 28 - Business finance
Finance for unincorporated businesses
- Microfinance
- crowd funding
Chapter 28 - Business finance
Microfinance
Providing financial services for poor and low-income customers who do not have access to traditional sources of finance by traditional banks
Chapter 28 - Business finance
Crowd funding
The use of small amounts of capital from a large umber of individuals to finance a new business venture
Chapter 28 - Business Finance
Business plan
A detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business
Chapter 29 - Costs
What are the 5 different cost categories?
- fixed costs
- Variable costs
- Direct costs
- indirect costs
- Marginal costs
Chapter 29 - Costs
Direct costs
These costs can be clearly identified with each unit of production and can be allocated to a cost centre
Chapter 29 - Costs
Indirect costs
Costs that cannot be idetified with a unit of production or allocated accurately to a cost centre
Chapter 29 - Costs
Fixed costs
Costs that do not vary with output in the short run
Chapter 29 - Costs
Variable costs
Costs that vary with output
Chapter 29 - Costs
Marginal costs
The extra cost of producing one more unit of output
Chapter 29 - Costs
Break-even point of production
The level of output at which total costs equal total revenue, neither a profit nor a loss is made.
Chapter 29 - costs
Margin of safety
The amount by which the sales level exceeds the break-even level of output
Chapter 29 - Costs
What is the break-even equation?
Fixed costs / contribution per unit
Chapter 29 - Costs
Contribution per unit
Selling price - variable costs per unit
Chapter 29 - costs
Why a break-even analysis is useful (3)
- charts are easy to costruct
- decisions can be made on pricing, location and which product would be most useful to engage in - can make comparisons
- Provides useful guidelines for management
Chapter 29 - costs
limitations of a break-even analysis
- not all costs can be represented in a straight line
- No allowance is made for inventory levels
- not all costs can be conveniently organised into fixed and variable costs
Chapter 30 - Accounting fundamentals
income statement
records the revenue, costs and profit (or loss) of a busiess over a given period of time
Chapter 30 - Costs
Gross profit
sales revenue - cost of sales
Chapter 30 - Costs
Revenue
Selling price x quantity sold = total value of sales made during the trading period
Chapter 30 - Costs
Cost of sales
(or cost of goods sold) - the direct cost of the goods sold that financial year
Chapter 30 - Costs
operating profit
Gross profit - overheads
Chapter 30 - costs
Profit for the year
Operating profit - taxes and interest costs
Chapter 30 - Costs
Divedends
The share of the profits paid to shareholders as a return for investing in the company
Chapter 30 - Costs
Retained earnings
The profit left after all deductions, including dividends, have been made.
This can be taken back into the company as an internal source of finance
Chapter 30 - costs
Low quality profit
one-off profit that cannot be easily repeated or sustained
Chapter 30 - costs
High-quality profit
Profit that can be repeated and sustained
Chapter 30 - costs
Statement of financial position
an accounting statement that records the values of a business’s assets, liabilities and shareholder’s equity at one point in time
Chapter 30 - Costs
shareholders’ equity
total value of assets - total value of liabilities
chapter 30 - Costs
Asset
An item of monetary value that is owned by the business
Chapter 30 - Costs
liability
A financial obligation of a business that is required to pay in the future
Chapter 30 - Costs
liability
A financial obligation of a business that is required to pay in the future
Chapter 30 - costs
Share capital
The total value of capital that is raised from shareholders by the issue of shares
Chapter 30 - costs
non-current assets
Assets to be kept and used by the business for more than 1 year
Chapter 30 - Costs
Current assets
Assets that are likely to be turned into cash before the next balance-sheet date
Chapter 30 - Costs
Intangible assets
Items of value that do not have a physical presence, such as trademarks and current assets.
Chapter 30 - costs
Inventories
Stocks held by the business in the form of materials, work in progress, and finsihed goods
Chapter 30 - Costs
Trade recievables (debtors)
The value of payments to be recieved from customers who have bought goods on credit
Chapter 30 - costs
Accounts payable (creditors)
Value of debts for goods bought on credit payable to suppliers; also known as trade payables
Chapter 30 - costs
Current liabilities
Debts of the business that will usually have to be paid within one year
Chapter 30 - Costs
non-current liabilities
Value of debts of the business that will be payable after more than one year
Chapter 30 - Costs
Intellectual capital or property
The amount by which the market value of a firm exceeds its tangible assets less liabilities - an intangible asset
Chapter 30 - costs
goodwill
arises when a business is valued at or sold for more than the balance-sheet value of its assets
Chapter 30 - Costs
Cash-flow statement
record of the cash received by a business over a period of time and the cash outflows from the business
Chapter 30 - costs
What are the 2 profit margin ratios?
- gross profit margin
- operating profit margin
Chapter 30 - costs
Gross profit margin
Gross profit / revenue X 100
good indicator to how a manager has added value to the cost of sales
Chapter 30 - Costs
Operating profit
Operating profit / revenue X 100
Chapter 30 - costs
What are the two liquidity ratios, and what do they tell us?
- Current ratio
- Acid-rest ratio
Tell us the ability of a business to pay its short-term depts
Chapter 30 - costs
Current ratio
Current assets / current liabilities
Chapter 30 - costs
Acid-test ratio
Liquid assets / Current liabilitites
Chapter 30 - costs
Liquid assets
Current assets - inventories
Chapter 30 - costs
Window dressing
presenting the company accounts in a favourable light - to flatter the business performance
Chapter 30 - costs
Limitations to ratio analysis (4)
- Can only highlight a potential problem
- Must be compared with other businesses to be able to be looked at properly, and this should be done with caution
- The four ratios give an incomplete overview of a business’s financial position
- Financial statements and ratios can only measure qauntitative factors
chapter 30 - costs
3 ways to increase profit margins
- reducing direct costs
- increasing price
- reducing overheads
Chapter 30 - costs
3 ways to increase liquidity (ratios)
- sell off fixed assets
- sell off inventories
- Increase loans
Chapter 31 - forecasting and managing cash flows
Cash flow
The sum of cash paymets to a business (inflows) - The sum of cash payments (outflows)
Chapter 31 - forecasting and managing cash flows
Insolvent
When a business cannot pay its short term debts
Chapter 31 - forecasting and managing cash flows
Cash inflows
Payments in cash recieved by a business, such as those from customers (trade recievables) or from the bank eg. by loan
Chapter 31 - forecasting and managing cash flows
cash outflows
Payments in cash made by a business, such as those to suppliers and workers
Chapter 31 - forecasting and managing cash flows
What is profit?
The reward to business owners after taking the risk of investing their capital into the business
Chapter 31 - forecasting and managing cash flows
Cash vs profit - explain
Having enough cash in the short term is important - as cash payments are always being made. Profit can wait and is more of a long term reward
Chapter 31 - forecasting and managing cash flows
Cash-flow forecast
Estimate of a firm’s future cash inflows and outflows
Chapter 31 - forecasting and managing cash flows
Net monthly cash flow
estimated difference between monthly cash inflows and cash outflows
Chapter 31 - forecasting and managing cash flows
Opening cash balance
cash held by the business at the* end of the month*
Chapter 31 - forecasting and managing cash flows
Opening cash balance
cash held by the business at the* beginning of the month*
Chapter 31 - forecasting and managing cash flows
Closing cash balance
Cash held at the end of the month becomes next month’s opening balance
Chapter 31 - forecasting and managing cash flows
Closing cash balance
Cash held at the end of the month becomes next month’s opening balance
Chapter 31 - forecasting and managing cash flows
Causes of cash-flow problems (4)
- lack of planning
- Poor credit control
- Expanding too rapidly
- unexpected events
Chapter 31 - forecasting and managing cash flows
Credit control
monotoring debts to ensure credit periods are not exceeded
Chapter 31 - forecasting and managing cash flows
Bad debt
Unpaid customers’ bills that are now very unlikely to ever be paid
Chapter 31 - forecasting and managing cash flows
Over-trading
Expanding a business rapidly wihtout obtaining all necessary finance so that a cash-flow shortage develops.
Chapter 31 - forecasting and managing cash flows
Creditors
Suppliers who have agreed to supply products on credit and who have not yet been paid.
Chapter 31 - forecasting and managing cash flows
2 ways to improve cash-flow
- increase inflow
Trade recievables (credit control), sale of assets, debt-factoring, overdrafts - decrease outflows
Delay spending on equipment, use leasing
