Unit 6: Finance Flashcards
Why do Firms need Finance?
1) To start up a Business
2) To expand
3) If struggling; may need finance to meet its day-to-day costs
Sources of finance for a Start-Up?
1) Government Grants; [Pro: Don’t have to pay Back - Con: Strict Criteria to qualify for them]
2) Overdrafts; Taking out more money than you have from bank account [Pro: Make payments on time even if you don’t have the money - Con: High Interest Rate]
3) Loans; Being Lent Money over a long period of time and paying it back in regular instalments. [Pro: Help finance a start-up - Con: Take Assets if money isn’t paid back]
Sources of Finance for established Firms?
1) Profits Earned
2) Selling Assets
3) Issue More shares [Limited Company]
What is Internal Finance?
State a Pro and a Con.
Finance that comes from Inside the Business [Profits etc…]
(+) Quick and Easy, No interest must be paid
(-) May not have enough Internal finance
What is External Finance?
State a Pro and a Con.
Finance from Outside the Business [Bank Loans etc…]
(+) Can raise the amount you need
(-) High Interest rates
Factors that affect the Choice of Finance
- Size of Company [whether they are established or not]
- Amount Needed
What is an Investment?
Money put into a Business so that it can be improved, in order to make the business more profitable.
[Example; Purchasing New Machinery etc…]
What Average Rate of Return (ARR)?
State the Formula for ARR.
The amount of Profit you receive [Per Year] After your investment.
[Average Annual Profit/ Investment] x 100 = ARR
What is Break-Even Analysis?
- Look up Break even chart *
It is how Companies Work out at what point they will cover their costs
What is the Margin of Safety ?
The gap between current level of output and the break even output [where the total revenue = total costs]
Advantages of a Break-even Analysis?
- Easy to work out
- Allows businesses to predict how changes in sales affect profit earned
- Can help persuade investors to invest
Disadvantages of a Break-Even Analysis?
- Break even output point may be unrealistic depending on the product
- Assumes there wont be any sudden rises in cost etc
- Can become Complex if used by a business with a large Product Portfolio
What is Cash Flow?
The money that is coming into and going out of a business
What is Cash Inflow
Money that flows into a business [The selling of products etc…]
What is Cash Outflow
Money that flows out of the business [Buying Material etc…]
What is Net Cash Flow.
State what a Positive and Negative Cash Flow are.
The difference between the Cash Inflows and Cash Outflow.
Positive Cashflow: Cash Inflow > Cash Outflow [≠ High Profit]
Negative Cashflow: Cash Inflow < Cash Outflow
What is Liquidity
How easy an asset can be converted into money
What dos a Cashflow Forecast do?
Attempts to predict when a firm may a lack of cash
What do Credit Terms tell you?
Look at page 77 of CGP Business Book.
How long after buy a product does the customer have to pay
What is Poor Cash Flow and what does it mean for a Business
Poor Cashflow: When Cash Inflow is too little to meet the needs of the Business
- Staff may not get paid on time [lead to poor productivity]
- Creditors [people who loan money] may not get paid on time [Can lead to legal action taking place]
- Not enough cash in a business to meet its day-to-day expenses
3 Main reasons for Poor Cash Flow
1) Poor Sales; Hardly any revenue coming in [inflow]
2) Overtrading; Purchasing too many raw materials and Hiring too many staff to work
3) Poor Business Decisions
How can a Business Improve Cash Flow
- Increase Cash Inflow [Increase Price etc…]
- Reduce Cash outflow [JIC -> JIT]
- Find New Sources of Finance
What is an Income Statement
A financial Statement showing how income has changed overtime.
When looking at either an Income Statement or a Cash Flow Forecast , what does it mean if a number is in brackets?
Example: Expenses = (9,000)
Negative [Money Spent]
