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]
What are Assets
A valuable Item owned by a Business
What are Fixed Assets
Assets that are purchased for long-term use. [Factories, Land etc…]
What are Current Assets
Assets expected to be turned into Cash within a year [Stocks, Debtors; People who receive the product and pay later]
What are Current Liabilities
What a business owes in the short run
What are Net Current Assets
What a Firm is worth.
Current Assets - Current Liabilities = Net Current Assets
What is Share Capital
Money Put into the Business when shares where originally issued
What is Retain Profit
Profit that is put back into the business
What are Long term Liabilities
The money the business has borrowed for a period of more than a year [Bank Loan]
