6. Finance

Question 1

Things an entrepreneur will need to spend money on in order to start a business?

Answer 1

Renting or buying a building, Vehicles, Advertising the business, Equipment and machinery for the business, Inventories of raw materials

Question 2

Reasons why an established business would need to raise finance

Answer 2

To expand, improve effciency, develop new products

Question 3

Internal source of finance

Answer 3

Money that is available from within the business, for example, retained profits from previous years

Question 4

Owners’ funds

Answer 4

money put into a business by its owner or owners

Question 5

Trade credit

Answer 5

A period of time which suppliers allow customers before payment for supplies must be made

Question 6

External source of finance

Answer 6

Refers to money that comes from outside the business, for example, a loan from a bank

Question 7

Collateral

Answer 7

An asset that a bank holds as security for the repayment of a loan

Question 8

Mortgages

Answer 8

Loans from banks and building societies that are used to buy land and buildings, such as offices and shops

Question 9

Overdraft

Answer 9

A flexible loan whixh business can use, whenever necessary, up to an agreed limit

Question 10

Sources of finance

Answer 10

Retained profits, selling assets, bank loans and mortgages, selling shares, goverment grants

Question 11

Grant

Answer 11

A sum of money given to an entrepreneur or a business for a specific reason.

Question 12

Cash flow

Answer 12

The money that flows into and out of a business on a day-to-day basis

Question 13

Government grants

Answer 13

The goverment encourages people to start to expand businesses because this creates jobs. They can offer a range of grants. The garnts will only cover part of the money needed. Most grants do not have to be repaid

Question 14

Cash inflow

Answer 14

Money flows into a business and becomes available to it

Question 15

Reasons why a business might receive cash inflows

Answer 15

Income from sales, loans from banks, money invested by the business’s owners

Question 16

Cash outflow

Answer 16

When a business makes a payment, it causes an outdlow of cash

Question 17

What are some actions that can lead to a cash outflow

Answer 17

Buying raw materials, wages, rent or mortgage, interest on loans, tax

Question 18

Benefits of having a positive cash flow position?

Answer 18

avoids periods in which it has a negative cash balance
does not need to borrow and can avoid paying interest charges
will be more able to arrange long-term loans helps to reduce the risk of a business failing

Question 19

Cash flow forecast

Answer 19

A plan of the expected inflows and outflows to and from a business over a period of time

Question 20

Cash flow statement

Answer 20

A record of the cash inflows and outflows that took place over an earlier period of time

Question 21

Causes of cash flow problems

Answer 21

Poor management, The business making a loss, Offereing customers too long to pay

Question 22

Profit

Answer 22

Measures the difference between the values of a business’s revenue (sales) and its total costs

Question 23

Revenue

Answer 23

The income that a firm receives from selling its goods or services. It is also referred to as ‘turnover’. It is measured by the number of units sold multiplied by the price

Question 24

How to find out revenue

Answer 24

Revenue = number of units sold x price

Question 25

Sales

Answer 25

The number of products sold by a business

Question 26

Costs

Answer 26

The spending that is necessary to set up and run a business

Question 27

Fixed costs

Answer 27

Those costs that do not change when a business changes its output

Question 28

Variable costs

Answer 28

The costs that vary directly with the business's level of output

Question 29

Formula of total variable costs

Answer 29

Total variable costs = variable costs of a single unit x number of units Or Total costs - fixed costs

Question 30

What is Total costs

Answer 30

Fixed costs + variable costs

Question 31

Formula of total costs

Answer 31

Total costs = fixed costs + variable costs

Question 32

Loss

Answer 32

The amount by which a business's costs are larger than its revnue from all sales

Question 33

Formula to calculate profits (or losses)

Answer 33

Profits (or losses) = revenue - total costs

Question 34

Investment

Answer 34

Takes place when a business buys an asset, such as a factory, in the hope of making a profit from its use

Question 35

The average rate of return (ARR)

Answer 35

Compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage

Question 36

Formula for average rate of return (ARR)

Answer 36

ARR = average yearly profit x 100 divided by cost of investment

Question 37

Break-even

Answer 37

The level of production at which a business's total costs and revenue from sales are equal

Question 38

Break-even chart

Answer 38

Shows a business's costs and revenues and the level of production needed to break-even

Question 39

Margin of safety

Answer 39

Measures the amount by which a business's current level of production exceeds its break-even level of output

Question 40

Income statement

Answer 40

A financial statement showing a business's revenues and costs, and thus, its profit or loss over a period of time

Question 41

Balance sheet

Answer 41

Sets out the assets and liabilities that a business has on a perticular day

Question 42

Gross profit

Answer 42

A business's sales revenue minus its cost of sales over a period of time, normally a year

Question 43

How to figure out gross profit

Answer 43

Gross profit = revenue - cost of sales

Question 44

Net profit

Answer 44

A business's sales revenue minus its cost of sales, its overheads and other costs over a period of time, normally a year

Question 45

Overheads (expenses)

Answer 45

Costs that do not alter when the level of production changes e.g. salaries of managers, interest on loans

Question 46

Liability

Answer 46

A sum of money that is owed by a business to another business or an individual

Question 47

Total equity

Answer 47

The part of a company's money that belongs to shareholders

Question 48

Financial ratio

Answer 48

Compares two figures from a business's financial statements

Question 49

How to find gross profit margin

Answer 49

gross profit margin = gross profit/revenue x 100

Question 50

How to find net profit margin

Answer 50

net profit margin = net profit/revenue x 100

Question 51

Stakeholders

Answer 51

Individuals and organisations that are affected by, and affect, the business

Question 52

How to find out average annual profit

Answer 52

(Total profit - initial costs) / Number of Years

Question 53

Liquidity

Answer 53

How easy something can be converted

Question 54

Debt factorising

Answer 54

Method of finance selling of debt