Unit 5 - Management of Finance Flashcards
What is a bank overdraft?
A bank overdraft is a facility that will allow you to withdraw more money from your account than is available.
Advantage - Can be arranged quickly
Disadvantage - Expensive as a high rate of daily interest is charged. Usually only available for a small amount of money
What is a bank loan?
It is a fixed amount of money that is given to a business by the bank that has to be repaid over time with
interest, usually in monthly instalments.
Advantage - Can be arranged quickly. Loan can be repaid over a long period of time
Disadvantage - Interest has to be paid
What is a mortgage?
It is a sum of money borrowed from the bank that is secured against a property and paid back in instalments, usually over a long period of time.
Advantages - Mortgage is given for a long period of time. Large amounts of finance can be raised quickly.
Disadvantage - Interest is charged on the loan. Property can be lost to the mortgage lender if repayments are missed
What is hire purchase?
Hire purchase is used to purchase an
asset, such as a delivery van or piece of equipment. A deposit is paid and the remaining amount for the asset is paid in monthly instalments over a set period of time. The business does not own the item until all payments are made
Advantage - Expensive assets can be purchased and paid back over time
Disadvantage - Interest is charged on hire purchase items. Equipment is not owned until the final payment is made
What is leasing?
Leasing is a way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.
Advantage - Large amounts of money are not required up front to lease machinery. The leasing company are responsible for repairs and maintenance
Disadvantage - Over time it can be a more expensive way to obtain assets. Assets are never owned by the business
What is a loan from family or friends?
Businesses can obtain a loan from family or friends that may not need to be paid back or are paid back with little or no interest charges.
Advantage -May not need to be paid back
Disadvantage - Money may be lost if business is not successful. Arguments may occur between family members
What is a grant?
A grant is a fixed amount of money usually awarded by the government or charitable organisations. Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment.
Advantage - Does not need to be paid back
Disadvantage - Business needs to meet certain criteria. It is time-consuming to apply for grants and to complete the paperwork
What is a share issue?
Share issues are a source of finance that is only available to private or public limited companies. Such businesses can decide to issue more shares in the company and obtain finance from their sale.
Advantage - Finance raised does not need to be paid back. Large amounts of finance can be raised
Disadvantage - Shareholders need to be paid a dividend each year. Shareholders become part owners of the business
What is crowd funding?
Crowd funding involves getting small amounts of finance from a large amount of people. This is usually done through social media or crowd funding websites. Crowd funding investors may:
-Donate money
-Get rewards for their investments
-Receive a share of the profits
Advantages - Access to a large number of investors. Fast way to raise finance
Disadvantage - A public request for investment risks your project being copied by competitors. If the targeted amount isn’t reached the money is returned to investors and the business gets nothing
What is venture capital?
Venture capital is money that investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an element of risk with the business.
Advantage - Available for more risky investment
Disadvantage - Venture capitalists may want a share of the business meaning some control may be lost. A larger return may be required due to the high risk nature of the investment
What is break even?
Break-even is when a business is making neither a profit nor a loss.
What are some of the costs a business has to pay?
-Raw materials
-Salaries
-Energy
-Advertising
-Rent
-Storage
-Tax
What is the definition of a fixed cost?
-Costs that do not vary with the amount produced
What are types of fixed costs?
-Rent
-Advertising
-Council tax
-Salary
What is the definition of a variable cost?
Costs that vary with the output
What are types of variable costs?
-Raw materials
-Electricity
What are the total costs of a business?
Total costs of a business are the fixed costs added to the variable costs. A business needs to be able to pay the total costs of a business before it starts to make a profit.
How do you calculate total profit?
To calculate the company’s total profit or loss you subtract the total costs from the sales revenue
Why do cash flow problems arise?
-Purchasing capital equipment
-High expenses
-Low sales
-Debtors not paying on time
-Allowing customers too long to pay
-Too much money is tied up in stock
-Too much borrowing
-High drawings
How to solve cash flow problems?
-Find a cheaper supplier
-Offer discounts and promotions to encourage cash sales and reduce stock levels
-Sell any unnecessary assets
-Encourage overdue customers to pay their bills
-Apply for a loan or overdraft from the bank
-Lease machinery or equipment
-Arrange credit with suppliers
What are some factors affecting source of finance?
-The purpose of finance, (Starting a new business or expanding an existing one)
-Objectives of the organisation
-Amount of finance required
-The type of business
-Length of time the finance is available for
What is a cash budget used for?
-Predict a negative cash balance (Not enough cash)
-Predict a positive cash balance (Enough cash to cover expenses)
-Help us know when we need to arrange extra finance
What are some reasons why a company would produce an income statement?
-To calculate total costs of expenses
-To calculate the profit/loss made for the year
-Legal reasons (All limited companies are required to produce an income statement)
-Tax reasons (Profit needs to be calculated so businesses can accurately calculate their tax payments)
-To calculate cost of sales
-To compare with previous years or other companies
What are the sales?
The total value of the goods sold to customers
What are the cost of sales?
The direct cost of the goods that have been sold for example the raw materials used to make the profit
What is the gross profit?
The difference between the sales and cost of sales
What are the expenses?
Indirect costs of running a business (Rent, wages, electricity)
What is the profit for the year?
The actual profit made by the business after all expenses have been paid
How are spreadsheets used in finance?
-Create graphs to show sales figures in different stores/branches, trends over a period of time or comparison with competitors. They are easy to interpret and understand.
-Insert charts/graphs into financial reports
-Formulae can be used to help do calculations, reducing chance or error.
-Templates can be used and created to ensure standard layouts are used
-Info can be saved and edited at a future date
How are databases used in finance?
-Store records of customers
-Store records of suppliers
-Store records of employees
How is EPOS used in finance?
An electronic method of paying for goods exactly where you purchase them
-Debit card
-Credit card
-Contactless
-Apple and google pay
An advantage as there is less cash within the business
How is internet banking used in finance?
-Internet banking will save the company time as it reduces the need for employees to take trips to the bank
-Fund transfers can be made instantly and more conveniently as they are completed through phone apps or by using computers
-Can be accessed everywhere, anytime, info can be downloaded, shared, deposit cheques, immediate payment and saves travel time.
How can internet be used in finance?
Compare savings, interest rates and supplier costs
How can word processor be used in finance?
Type up company report including financial info
How can email be used in finance?
Send invoices to customers for prompt payment
How can presentation be used in finance?
Update shareholders on company profits
