6. Finance

Question 1

Entrepeneur

Answer 1

Someone who is willing to take the risks involved in starting a new business

Question 2

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

Answer 2

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

Question 3

Inventories

Answer 3

Raw materials that have not yet been used or products that have been made, but not sold. These are also called stocks.

Question 4

Reasons why an established business would need to raise finance

Answer 4

To expand, improve effciency, develop new products

Question 5

Internal source of finance

Answer 5

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

Question 6

Owners’ funds

Answer 6

money put into a business by its owner or owners

Question 7

Interest

Answer 7

A payment made in order to borrow money. It means a business pays back more than it borrows

Question 8

Shareholder

Answer 8

A person or organisation that owns part of a company. Each shareholder owns a ‘share’ of the business

Question 9

Assets

Answer 9

Something that is owned by a business. Examples include land, buildings, vehicles and machinery

Question 10

Trade Credit

Answer 10

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

Question 11

External source of finance

Answer 11

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

Question 12

Collateral

Answer 12

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

Question 13

Mortgages

Answer 13

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

Question 14

Building societies

Answer 14

Organisations that offer a range of financial services. However, their major business is providing savings accounts and lending money for the purpose of buying poverty

Question 15

Overdraft

Answer 15

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

Question 16

Sources of finance

Answer 16

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

Question 17

Grant

Answer 17

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

Question 18

Cash flow

Answer 18

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

Question 19

Government grants

Answer 19

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 20

Cash inflow

Answer 20

Money flows into a business and becomes available to it

Question 21

Reasons why a business might receive cash inflows

Answer 21

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

Question 22

Cash outflow

Answer 22

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

Question 23

What are some actions that can lead to a cash outflow

Answer 23

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

Question 24

Benefits of having a positive cash flow position?

Answer 24

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 25

Cash flow forecast

Answer 25

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

Question 26

Cash flow statement

Answer 26

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

Question 27

Causes of cash flow problems

Answer 27

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

Question 28

Profit

Answer 28

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

Question 29

Revenue

Answer 29

The income that a firm receives from selling its goods or services. It is also referred to as 'turnover'.

Question 30

Revenue formula

Answer 30

Revenue = number of units sold x price

Question 31

Sales

Answer 31

The number of products sold by a business

Question 32

Costs

Answer 32

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

Question 33

Fixed costs

Answer 33

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

Question 34

Variable costs

Answer 34

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

Question 35

Formula of total variable costs

Answer 35

Total variable costs = variable costs of a single unit x number of units

Question 36

Total costs

Answer 36

Fixed costs + variable costs

Question 37

Profit

Answer 37

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

Question 38

Loss

Answer 38

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

Question 39

Formula to calculate profits (or losses)

Answer 39

Profits (or losses) = revenue - total costs

Question 40

Investment

Answer 40

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

Question 41

The average rate of return

Answer 41

Compares the average yearly profit from

Question 42

Formula for average rate of return (ARR)

Answer 42

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

Question 43

Break-even

Answer 43

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

Question 44

Break-even chart

Answer 44

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

Question 45

Margin of safety

Answer 45

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

Question 46

Income statement

Answer 46

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

Question 47

Gross profit

Answer 47

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

Question 48

Net profit

Answer 48

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

Question 49

Overheads

Answer 49

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

Question 50

Liability

Answer 50

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

Question 51

Total equity

Answer 51

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

Question 52

Financial ratio

Answer 52

Compares two figures from a business's financial statements

Question 53

How to find gross profit margin

Answer 53

gross profit margin = gross profit/revenue x 100

Question 54

How to find net profit margin

Answer 54

net profit margin = net profit/revenue x 100

Question 55

Stakeholders

Answer 55

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