3.6 - Finance Flashcards by Sam Folarin

What is meant by sources of business?

The capital needed to start up, run and grow the business

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What is an internal source of finance?

Capital found within the business

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What is a external source of finance?

Capital found outside the business

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What are some examples of internal sources of finance?

Selling assets
Retained profit
Personal savings

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What are some examples of external sources of finance?

Share capital 
Trade credits 
Hire purchases 
Loans from family and friends
Government grants
Bank loans or mortgages

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What is meant by selling assets?

A business can sell its assets to raise cash. They are usually a cheap source of finance because the business does not have to pay interest

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What is meant by retained profits?

This is profit that the business has effectively saved whilst it has been operating (running)

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What is meant by personal savings?

This is personal money that is invested by the owner of a company. It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund their business venture

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What is meant by hire purchases?

This is when a business buys something and instead of paying for it upfront pays for it in instalments

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What is meant by loans from friends and family?

Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment

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What is meant by trade credit?

Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later

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What is meant by government grants?

A government may give grants (money) to companies to research things that the government is interested in

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What is meant by bank loans or mortgages?

Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed

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What is meant by share capital?

A firm can sell share capital (some of its shares) to other people or companies. They give away a percentage of the company in return for getting finance invested in the business

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What is cash flow?

The amount of money moving in and out of a business on a day to day basis

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Money in to a business = ?

Receipts

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Money moving out of a business = ?

Payments

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Why is cash flow important?

Helps the business to survive
Helps them to pay bills, and pay staff
Helps identify problems and find solutions

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Why might inflows in cash flow change?

Seasonal changes affect demand
New competitors affect sales
Trends changing
Something could damage the brand image

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Why might outflows in a cash flow change?

Find cheaper suppliers
Business expands means more payments need to be made e.g bills
Staff retention —> more training, recruitment

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What is opening balance?

Money you have at the start of the month

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What is closing balance?

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Money you have at the end of the month

Net cash flow = ?

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Receipts - payments

Closing balance = ?

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Net cash flow + opening balance

What is a liquidity problem?

If a business experiences problems where they do not have enough cash to cover their payments

What is a cash flow problem?

When a business doesn’t have any cash

Causes of cash flow problems

* Economic changes * Suppliers could increase their price * Seasonal changes * Competition * Stock - too much / not managing stock well

Resolutions to cash flow problems

* Discounting prices * JIT - don’t hold any useless stock * Offer new products / USP - diversification * Sell assets * Shut for periods of the year - seasonal * Source of finance * Trade credit - ask suppliers

What is the difference between cash flow and profit?

Cash flow = sales, short term | Profit = other forms of income, long term

What is meant by the term ‘breakeven’?

Where a business does not make a profit or loss | Total revenue = total costs

What is the meaning of equity?

A share of the business

Why are external sources of finance more expensive?

External financing tends to be more expensive than internal financing because a business normally has to pay interest on the money they acquire

Examples of major businesses investments

* New machinery * New buildings * Vehicles

What is average rate of return (ARR) used for?

Average rate of return (ARR) is a way of measuring how good an investment project is for a business

What are financial statements?

Financial statements are a formal record of the financial activities and the financial position of a business

What are the three finanical statements?

* Income statement * Cash flow statement * Statement of financial position/balance sheet

What is a statement of financial position?

This reports the assets, liabilities and equity of a company on a given date. It essentially shows what a business owns and what it owes

What is an income statement?

* An income statement shows a business’ financial performance over a period of time. It shows the revenue, costs and profits of a firm * An income statement shows how much a business is profitable

What is a cash flow statement?

The cash flow statement gives an overview of the cash that has come in and out of the business in the past year. It also gives the net cash flow, opening cash balance and closing cash balance.

What are the 3 most importnat things in a balance sheet?

* Liabilities * Assets * Equity

What are the 3 most importnat things in an income statement?

* Profit * Revenue * Costs

Why is it important to measure financial position?

* Measure profit * See if they’ve met their objectives * Share prices rises * Sales revenue increasing

How do income statements help a business?

* If a business is making a loss it shows the directors what is causing it * Important as you can make comparisons to other firms * Identify which costs need to be reduced

How do businesses use financial information to analyse performance?

* Compare all 3 types of profit - to see what your business is spending on the most * Compare to competitors * Compare to your targets * Compare to previous years

Assets = ?

Resources a business owns

Liabilities = ?

Resources a business owes

What are non current assets?

Resources used often that are difficult to turn into cash. Usually owned for a long period of time

What are current assets?

Short term assets that can be turned into cash within 12 months

What are non current liabilities?

Debts due to be repaid after more than 12 months e.g mortgage, loan

What are current liabilities?

Debts due to be repaid within one year e.g overdraft, suppliers, dividends

What is a creditor?

Someone a business owes money to

What is a fixed cost?

A cost that stays the same as output changes

What is variable costs?

Costs that change as output changes

3.6 - Finance Flashcards

(53 cards)