Sources of Finance Flashcards
What are the 3 main sources of finance?
-External sources
-Working capital management
-Retained earnings (internal)
What are external sources?
Examples include Bank loans and share capital
What are retained earnings?
Money saved from previous profit/income
What is working capital management?
Chasing debt/money that people owe you
Working capital management and liquidity can be used to…
See if a business is doing okay, by looking at current assets compared to current liabilities, then assessing liquidity
What is liquidity?
Liquidity is how much cash (current assets) a business has compared to their liabilities
Current ratio equation
Current assets / Current liabilities
It is a measure of a businesses ability to meet short-term obligations/payments as they fall due.
Quick ratio (Acid test)
(Current assets - inventory)/Current liabilities
A measure of how effective a business is at collecting its debts
Creditor payment period
[(Accounts payable)/(Credit purchases)] x 365
A measure of how quickly a business pays its suppliers
Why is cash not profit?
Cash flow is cash that flows in and out to/from a business throughout a certain period of time.
Profit is defined as revenue less all the expenses of a company in a certain period.
Because of a few reasons, think about:
-Depreciation
-Loans
