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business > 3.6 Finance > Flashcards

3.6 Finance Flashcards

1
Q

1 pros and cons of using family and friends for cash

A

pros
-easy to arrange
-money free of interest

cons
-money might not be enough
-could fall out with friends

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2
Q

1 what is retained profit

A

profit spent but kept within the business

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3
Q

1 pros and cons of retained profit for cash

A

pros
-no interest payments
-can be arranged immediately

cons
-only available to profitable businesses
-shareholders may oppose the decisions

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4
Q

1 what is selling assets

A

when a business sells items they no longer need

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5
Q

1 pros and cons of selling assets for cash

A

pros
-no interest payments
-may keep assets

cons
-dont have suitable assets
-leasing assets back means regular payments

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6
Q

1 what is bank loans

what is a mortgage

A

money obtained from a bank that is paid back over a period of time

a loan used to buy a property

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7
Q

1 pros and cons of bank loans and mortgages

A

pros
-arranged quickly
-allows repayment over a long time period

cons
-interest has to be paid
-banks may require assets as collateral

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8
Q

1 what is selling shares for cash

A

inviting people to buy a part of the business

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9
Q

1 pros and cons of selling shares

A

pros
-no interest payments

cons
-owners may lose control
-only available to companies

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10
Q

1 pros and cons of government grants

A

pros
-dont have to be repaid

cons
-meet strict conditions
-invest money along side the grant

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11
Q

1 what is an over draft

A

when a bank allows a business to spend more than whats in their accout

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12
Q

1 pros and cons of an overdraft

A

pros
-easily arranged
-only interest if you use it

cons
-interest paid
-fee charged

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13
Q

1 what is trade credit

A

when a business gets a time period to pay for their items

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14
Q

1 pros and cons of trade credit

A

pros
-no interest

cons
-if payment is delayed the supplier may stop supplying

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15
Q

1 what influences a new business on choosing a source of finance

A

amount of personal finance available
legal structure
how risky the business is judged to be

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16
Q

1 what influences an established business on choosing a source of finance

A

profitability of the business
assets owned
past history
future prospects
legal structure
amount of finance needed

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17
Q

2 what is cash

A

notes, coins and bank deposits that provide firms with spending power to pay their bills and expenses

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18
Q

2 what is cash flow

A

the money that flows in and out of a business ona day to day basis

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19
Q

2 what are the elements of cash flow

A

cash flow INTO the business as receipts
-from cash received from selling products
cash flow OUT as payments
-pay wages, suppliers etc

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20
Q

2 what is net cash flow

A

difference between money in and money out

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21
Q

2 what is the difference between profit and cash flow

A

the challenge for managers to make sure there is always enough cash to pay expenses when they are due
running out of cash threatens the survival of the business

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22
Q

2 what happens if a business runs out of money

A

they become insolvent
must raise extra finance or cease trading
planning is important, drawing up a cash flow forecast
may need an overdraft

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23
Q

2 what is cash inflows

A

payments into a firm made by customers

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24
Q

2 what is net cash flow

A

cash inflow - cash outflow

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24
Q

2 what is cash outflows

A

payments made by a business

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25
Q

2 what does a cash flow forecast show

A

cash inflows (receipts)
cash outflow (payments)
net cash flow
opening balance
closing balance

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26
Q

2 what is the closing balance

A

opening balance + net cash flow

27
Q

2 what is opening balance

A

closing balance from previous month

28
Q

2 why is it important to forecast cashflow

A

identify periods of cash short fall
identify periods of cash surplus
secure additional funding

29
Q

2 consequences of cash flow problems

A

relationships with suppliers may deteriorate
workers leave
cease trading

30
Q

2 causes of cash flow problems

A

poor planning
external factors
inadequate credit control
excessive stock hold
heavy investing
over trading

31
Q

2 how to improve cash flow problems

A

increasing cash inflows
-over drafts
-sale of assets
-short credit terms
decreasing cash outflows
-delay paying creditors
-lease not buy
-reduce spending

32
Q

2 what is debt factoring

A

when a company sells money that is owed to them to a factoring company so that they can get the money owed sooner

33
Q

2 what is credit crunch

A

when banks are unwilling to lend money to business because they fear the business may not be able to pay it back

34
Q

3 what is the two profit equations

A

total revenue - cost = profit
total revenue = cost + profit

35
Q

3 what is total revenue equation

A

selling price x quantity = total revenue

36
Q

3 what is total cost euqation

A

total fixed cost + total variable costs = total cost
total cost = total revenue - profit

37
Q

3 what are total fixed costs

A

always stay the same, no matter the quantity sold

38
Q

3 what are total variable costs equations

A

unit cost x quantity sold/made = variable costs

39
Q

3 why should you include financial calculations about revenue, cost and profit in a business plan

A

see how much it will cost to run the business
see if it is viable
to show to investors
produce financial targets and objectives
plan and monitor finances

40
Q

3 what is share issue

A

selling a share or part ownership of a company

41
Q

4 what is an income statement

A

shows the trading and profits or losses of a business over a given period of time

42
Q

4 why is an income statement neccessary

A

its a legal requirement to provide one
to publish accounts
ensure the right amount of tax is paid

43
Q

4 why is an income statement helpful

A

allows shareholders to see how much profit has been made and if it is maintainable
can compare with other business in relations to previous years to see how well a company has performed

44
Q

4 why is an income statement helpful to banks

A

allows them to see if they are likely to get back any money that they chose to lend

45
Q

4 equation for gross profit margin

A

gross profit / revenue x 100

46
Q

4 equation for net profit margin

A

operating profit (net profit) / revenue x 100

47
Q

4 what is a statement of financial position

A

a snapshot of what a business owns
what a business owes on a given day
usually last day of financial year
aka balance sheet

48
Q

4 what is an asset

A

something a business owns

49
Q

4 what is a liability

A

something a business owes

50
Q

4 why do business use financial documents

A

to monitor and record what is is doing
helpful and necessary

51
Q

4 if net profit is 2700 in 2016 (revenue = 5400)
and gross profit is 3900 in 2016

what is net profit margin and gross profit margin

A

NPM = 27000/5400 x100 = 50%

GPM = 3900/5400 x100 = 72.2%

52
Q

4 name some assets

A

stocks
cash
debtors
buildings

53
Q

4 name some liabilities

A

mortgage
loans

54
Q

4 what do businesses invest in

A

need assets to use to produce goods and services
land and buildings
machinery and vehicles
new products
training staff
research and development

55
Q

4 what is average rate of return

A

method of deciding whether an investment is worth it
compares average yearly profit from an investment through its life with the cost of it initially
given as a percentage
higher % is better

56
Q

4 how do you calculate average rate of return

A

get total profit
subtract cost of investment from total profit
divide (profit - cost of investment) by number of years
this gets average yearly profit
then..

ARoR = average yearly profit / cost of investment x 100

57
Q

4 if total profit is 185,000
years is 3
cost of investment is 125,000
what is average rate of return

A

185000/3=61666.67
61666.67/125000 x100 = 49.33%

58
Q

4 what is break even point

A

volume of sales needed to ensure total revenue = total costs
no profit or loss is made

59
Q

4 what is margin of safety

A

how much current level of production exceeds the break even level of output

60
Q

4 what is a financial statement

A

the records of the financial dealings of the business of their day to day transactions
net assets always equals total equity
also called a balance sheet

61
Q

4 what are non-current assets

A

things that a business needs to operate and that have a value but which are hard to convert into cash
eg, land, buildings,cars, machinery

62
Q

4 what are current assets

A

things that can be easily converted into cash
LIQUID
eg, inventory, cash

63
Q

4 what are current liabilities

A

debts that a business has to pay in the next 12 months
eg, raw material suppliers, overdrafts

64
Q

4 what are non-current liabilities

A

debts the business owes that have more than 12 months pay back time
eg, long-term loans, mortgages

65
Q

4 what is total equity

A

where the money for the investment has come from
eg, shareholder funds

66
Q

4 what is GPM if
sales revenue = 178
cost of sales = 99

A

gross profit = 178-99 = 79
GPM = 79/178 x100 = 44%

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