unit 6 : finance Flashcards
definition start up capital
the finance needed by a new business to pay for essential non current (fixed) and current assets before it can start trading
definition working capital
the finance needed by a business to pay its day to day costs
definition of capital expenduiture
money spent on non current (fixed) assets which will last for more than one year
what is revenue expenditure
money spent on day-to-day expenses which do not involve the purchase of a long term asset (for examples wages or rent)
cash inflows
the amount of cash coming into a business as a result of its activites each month
cash outflows
the amount of cash flowing out of a company that the enteprrise pays out
variable costs
costs that vary in porportion with the level of output (e.g raw materials)
fixed costs
costs that do not change no matter the level of output
total costs
the entrie amount of money that must be spent
fixed costs + variable costs
contribution
the difference between the selling price per unit and the varible cost per unit
selling price - variable cost
revenue
the income earned from selling products
selling price x units sold
profit
the surplus amount after total costs have been deducted from sales
total revenue - total costs
budget
a plan agreeed in advance of income expenditure and profit for enteprise
cash flow forecast
a prediction of the total cash inflows and total cash outflow for an enterprise for a specific time
break even
the output required for total revenue to equal total cost
income statement
a finacial document which shows the revenue costs and profits of an enteprise
cash flow
total cash inflow - total cash outflow
gross profit
revenue - cost of sales
net profit
revenue - cost of sales - expenses
budget variance
budgetted figure - actual figure
examples of cash inflows
sales
borrowing from finacial institutes
investment from shareholders
examples of cash outflows
supplies
salaires + bonuses(employees)
training
marketing expenses
new macheinery
what are cash flow forecasts used for
to decide whether to expand or reduce exisiting activites
identity and potential deficits and allow the business to plan ahead for them
identify any potential surpluses so that the business can use this money for their benefit
factors when decided on the source of finance
how much finance is required
when is it needed
how long is it needed for
what security can be provided (paying back)
is the entrepreneur prepared to give up any ownership and conrol of the business
internal sources of finance
obtained from within the business itself
external sources of finance
obtained from sources outside of and serparate from the business
examples of internal sources
personal savings
retained profit
examples of external sources of finance
bank loan
family and friends
trade credit
selling shares
leasing
income statement lines/steps
revenue
cost of sales
=GROSS PROFIT
overheads
= OPERATING PROFITS
tax
interest
=NET PROFIT
cash flow forecast steps
cash inflows
total cash inflows
cash outflows
total cash outflows
opening balance
net cash flow
closing balance
creditor
a person or organisation that is owed money (eg a supplier)
debtor
a person or organisation that owes money
trade credit
is a form of short term financing that allows businesses to purchase good or services from supplier and pay for the at a later date
advantages of trade credit
improves cash flow
encourages business growth
no interest costs
helpes in managing seasonal demands
disadvantages of trade credit
potential penalties for late payment
risk to reputation
limited to established relationships
short payment terms
over reliance risk
