unit.5 Flashcards
current liabilities
debts the business owes that need to be paid within a year
non-current liabilities
debts the business owes that can be paid in more than a year
current assets
items owned by the business for less than a year
non-current assets
items owned by the business for more than a year
profitability
the measurement of profit made relative to: the values of sales achieved, the capital invested in the business
importance of profitability
- investors deciding wether to invest
- directors and managers to assess wether the business is becoming more or less successful
importance of profit
- reward for risk
- source of finance
- indicator of success
profit
the money made after all costs have been paid, used for dividends and retained profit
cash
the money used and needed for day to day expenses. if the business has not enough cash it will not survive
income statement
shows business owner and managers wether the business has made a profit or a loss
key features of an income statement
revenue, costs of sales, gross profit, expenses, net profit, retained profit
revenue
money made from sales (price x quantity)
costs of sales
costs to make the product (made from variable costs) adding all the variable costs, (opening inventory+purchases-closin inventory)xcost per unit
gross profit
revenue-costs of sales
expenses
all the expenses of the business
net profit
gross profit-expenses
total shareholder equity
total assets-total liabilities=always shareholders funds/equity
is the total sum of money invested into the business by the owner of the company: invested in 2 ways, share capital and retained profit.
gross profit margins
gross profit/revenue x 100
net profit margins
net profit/revenue x 100
return on capital employed
net profit/capital employed x 100
liquidity
the ability of a business to pay back its short term debts
current ratio
current assets/current liabilities
a safe current ratio: 1.5-2
if current ratio is less than one then the business would have cashflow problem
if current ratio is above 2 it is too high : cash could be better spent elsewhere
acid test ratio
current assets-inventories/ current liabilities
more realistic than the current ratio as it doesn’t count inventories as a current asset
1+
stakeholders interest in the accounts of the business
- managers
- shareholders
- creditors (suppliers)
- banks
- government
- employees
managers (stakeholder interest)
help a manger assess wether is business is profitable and has strong liquidity
shareholders (stakeholder interest)
shareholders will want to see gross profit margin, net profit margin and return on capital employed, want to see if they will get a good return on their investement
creditors (stakeholder interest)
will want to see the business liquidity ratios, they want to see if a business is able to pay back debts
banks (stakeholder interest)
will want to see the liquidity ratios, they will not lend to a business who is illiquid
government (stakeholder interest)
will want to see the business income statement as they will want to see how much corporate tax they are receiving
employees (stakeholder interest)
may want to see a business income statement to see if the business is profitable if so then they could try negotiate a pay rise
statement of financial position
The SOFP shows the value of a ‘business’ assets and liabilities at a particular time
why is finance needed for a business
- for start up capital
- capital for expansion
- additional working capital
capital expenditure
the money used for long term finance needs
revenue expenditure
money needed for day-to-day expenses
internal finance
money raised from within the business
external finance
money raised from sources outside the business
sources of finance (internal)
- retained profit
- sale of existing assets
- sale of inventory to reduce inventory levels
- owners savings
sources of finance (external)
- bank loans
- selling shares
- grants from gov
- crowd funding
- debt factoring
- micro-finance
debt factoring
a business selling of their debts to a debt factoring company. The business receives direct cash.
crowd funding
raising money for a project/venture via the internet from a large number of people
debentures
long term loans issued by limited companies
leasing
leasing an asset allows a business to use an asset without purchasing it
trade credit
business can pay their supplier after receiving raw material
overdraft
the bank gives the business the right to overdraw from their bank account
importance of cash
pay its employees
pay its suppliers
cash flow forecast
a prediction of a firms cash inflows and outflow
cash inflow
cash received by the business
cash outflow
money paid out by the business
net casflow
cash inflow- cash outflow
closing balance
net cashflow + opening balance
importance of CFF
- useful to obtain a loan
- important when starting a new business (all the payments)
- managing cashflow
how to solve cashflow problems
- increase overdraft and or bank loans
- delay payment to suppliers
- ask debtors (customers) to pay quicker
- cancel purchasing equipment
working capital
current assets-current liabilities
breakeven point
fixed costs/ revenue per unit - vc per unit
liquidity
ability of a business to pay their short term debts
why do businesses remove inventories when calculating acid test ration?
inventories will not always be sold so there is no guarantee that it will be turned into cash
