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Business > 6- Finance > Flashcards

6- Finance Flashcards

1
Q

What are the reasons small firms need finance?

A

-They need start up capital
-Poor initial cash flow
-Need money to expand

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1
Q

-What are the short term sources of finance for a small business?
-What are their advantages and disadvantages?

A

-Trade credit (business gives a firm 1/2 months to pay of its purchases but business may not be able to pay it off)
-Overdraft (business takes more money out of the bank than put into it so business can make payments on time without cash. However there is a higher interest rate and the bank can cancel the overdraft).

Government Grants-NOT A SHORT OR LONG TERM OF FINANCE

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2
Q

-What are the long term sources of finance for a small business?
-What are their advantages and disadvantages?

A

-Bank loans (quick and easy but pay interest)
-Loans from friends and family (money can go to business immediately but they may ask for share in profit/business)
-Mortgages (Low interest but if can’t pay then property is taken)

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3
Q

-What are the short term sources of finance for a established business?
-What are their advantages and disadvantages?

A

-Selling fixed assets (Raise cash but reduce profit)
-Issue new shares (Raises money but shareholders have less control over the business)

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4
Q

What are the 4 factors affecting the choice of finance?

A

-Size/Type of company
-Amount of money needed
-Length of time the finance is needed for
-Cost of Finance

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5
Q

What is cash?

A

Cash is the amount of money a business can spend immediately.

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6
Q

What is Profit?

A

Profit is the amount of money a business earns after costs are taken into account.

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7
Q

-What is cash inflow?
-What is cash outflow?

A
  • Cash inflow is the amount of money a business gets when it sells.
  • Cash outflow is the amount of money a business pays/buys.
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8
Q

Why are cash flow forecasts made?

A

-To predict when a firm may face a lack of cash.
-It lists all the inflows and outflows of cash.
-Business can see when it needs short-term finance

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9
Q

What is the formula for net cash flow?

A

Net cash flow = Inflow - Outflow

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10
Q

What is the formula for closing balance?

A

Opening balance + Net cash flow

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11
Q

-What is credit terms?
-Usually, how long is it?

A

-How long after agreeing to buy a product a customer has to pay.
-Usually pays 1 month after purchase

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12
Q

What are the 3 main reasons of poor cash flow?

A

-Poor sales
-Overtrading (too many orders)
-Poor business decisions

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13
Q

What are the ways to improve cash flow?

A

-Re schedule payments
-Reduce cash outflow
-Arrange overdraft with bank
-Find new sources of finance

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14
Q

What is Average Rate of Return (ARR)?

A

How much a business makes/loses as a percentage of original investment.

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14
Q

What is the formula for Average Rate of Return (ARR)?

A

ARR (%) = Average Annual Profit/ Initial Investment X 100

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15
Q

What is revenue?

A

Amount of money a business earns

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16
Q

-What are fixed costs?
-What is an example?

A

-They stay the same (don’t change with output costs)
-Example is rent

17
Q

What are variable costs?

A

They change as out put changes.

18
Q

When is break-even achieved?

A

When total revenue and total cost are equal.

19
Q

Why should new businesses do a break even analysis?

A

To find break even output

20
Q

How can we work out break even?

A

By making a break even chart.

21
Q

What are the x and y axis on the break even chart for?

A

X-axis= output
y-axis= cost and revenue

22
Q

How do you find the margin of safety?

A

Distance between the break even output and the current output.

23
Q

What are the advantages of break-even analysis?

A

-Easy to workout
-Allows business to work out if changes in price/sales affects businesses
-Can use break even analysis to persuade bank to give loans
-Stops businesses releasing products that might be difficult to sell in large quantities.

24
Q

What are the disadvantages of break-even analysis?

A

-Assumes firm can sell any quantity of product at any price
-If data is wrong, analysis is wrong
-Complicated if involves more than one product
-Shows how much a business needs to sell, not how much it will sell

25
Q

What is an income statement?

A

It’s a statement that shows how income has changed over time.

26
Q

What are the 3 parts of an income statement and what do they do?

A

-Trading account (records firm’s gross profit/loss-contains: revenue, gross profit, costs of sales [closing sales=opening stock + purchases - closing stock.
-Profit and loss accounts (record all indirect costs of running a business except buying machinery)
-The Appropriation account (records where profits have gone. Only limited companies have to do this)

27
Q

What is Gross Profit Margin?

A

Fraction of every pound a customer pays that doesn’t go directly to making the product.

28
Q

What is the formula for Gross Profit Margin?

A

Gross profit margin = gross profit / sales (revenue) X100

29
Q

What is the formula for Net Profit Margin?

A

Net Profit Margin= Net Profit/Sales X100

30
Q

What is Net Profit Margin?

A

Fraction of every pound spent by the customers that a company gets to keep after all costs are paid/

31
Q

How long do fixed assets generally last?

A

Fixed assets last more than 1 year.

32
Q

How long to current assets generally last?

A

Current assets last a few months.

33
Q

-What is the most liquid?
-What is the least liquid?

A

-Stock is the least liquid
-Cash is the most liquid

34
Q

What are current liabilities?

A

Bill business has to pay soon.

35
Q

What are net current assets?

A

Money available for day-to-day operating of the business.

36
Q

What is the formula for net current assets?

A

Net current Assets = Current Assets- Current Liabilities

37
Q

What is share capital?

A

Amount of money inside the business when shares were originally issued.

38
Q

What is Capital employed?

A

Total money put into a business by its shareholders.

39
Q

What does statements of Financial Position show?

A
  • It shows a business performance at a point in time.
    -It shows sources of capital
40
Q

What does statements of Financial Position work out?

A

It can work out liquidity of business

41
Q

When you compare statements for financial positions over years, what do you exactly compare in it?

A

You can compare:
-Fixed assets
-Retained Profits
-Liabilities

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