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Finance Flashcards

(67 cards)

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1
Q

Why do businesses need finance

A

• It is needed to meet short term and long term needs
• to set up and grow a business

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2
Q

Short term needs for finance

A

• day to day costs
• pay workers
• pay suppliers

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3
Q

long term needs for finance

A

• purchase property
• upgrade machinery

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4
Q

needs for finance : start up

A

• buy initial stock
• advertising
• equip stores / offices

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5
Q

needs for finance : growth

A

• extend property
• increase distribution
• expand workforce

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6
Q

Sources of internal finance

A

• personal savings
• retained profit
• sale of assets

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7
Q

define personal savings

A

money saved up by a business owner and invested into their own enterprise

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8
Q

define retained profit

A

profit made in previous years that is available to reinvest into a business

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9
Q

define sale of assets

A

money from selling equipment, vehicles, land, buildings, or reduced price inventory

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10
Q

Advantages of internal sources of finance

A

• cheap
• quick
• complete control
• no external influence
• less risk

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11
Q

Disadvantages of internal sources of finance

A

• limits funds
• slower growth
• loses potential for other opportunities

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12
Q

External sources of finance

A

• overdraft
• venture capital
• crowdfunding
• share capital
• loans
• trade credit

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13
Q

define overdrafts

A

a flexible arrangement with a bank to allow a business to spend more than it has in its account

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14
Q

define trade credit

A

An agreement with a supplier to receive goods now and pay at a later date

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15
Q

define loans

A

a sum of money borrowed and repaid (with interest) over a period of time

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16
Q

define share capital

A

money raised from the sale of shares

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17
Q

define venture capital

A

money received from investors (that specialize in high-risk enterprises) in return for a share of the business

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18
Q

define crowdfunding

A

• raising modest investments from many people to fund a business project
• usually using an online platform

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19
Q

short term sources of finance

A

• overdraft
• trade credit

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20
Q

long term sources of finance

A

• share capital
• bank loans
• retained profits
• crowdfunding

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21
Q

The importance of cash to a business

A

• to pay suppliers, overheads, and employees
• to prevent business failure

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22
Q

Difference between cash and profit

A

CASH
• the actual money a business has at any moment
• includes physical cash, money in bank and liquid assets

PROFIT
•The financial gain a business makes from its activities
• calculated as the difference between revenue and expenses

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23
Q

Define cash inflows

A

sums of money introduced to the business

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24
Q

How to calculate net cash flow

A

Cash inflows - cash out flows

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25
define cash outflows
sums of money leaving the business
26
Define net cash flow
the difference between cash inflows and cash outflows during a period of time
27
What is a cash flow forecast
a prediction of the anticipated cash inflows and cash outflows usually for a 6 to 12 month period
28
Uses of cash flow forecasts
• support an application for a loan • important part of decision-making • help identify where the business may experience cash shortfalls or cash surpluses
29
limitations of cash flow forecasts
• based on estimates, so may not always be accurate • require appropriate skills, insights, research and time to prepare and update • external factors that can impact inflows and outflows may not be reflected into the forecast
30
define opening and closing balance
opening balance = previous months' closing balances carried forward closing balance = adding net cash flow to opening balance
31
define revenue + formula
• value of units sold by a business over a period of time • revenue = quantity sold × selling price
32
define fixed costs
costs that do not change as the level of output changes
33
define variable costs
costs that vary directly with the output
34
define total costs
fixed costs + variable costs
35
formula for profit
profit = revenue - total costs
36
Define break even point
• The number of units that the business must sell so revenue is equal to total costs • at break even point, neither a loss or a profit is made
37
formula for break even
fixed costs / (selling price - variable cost)
38
limitations of break even charts
• some output may remain unsold • cost data is usually an estimate • revenue does not always increase in direct proportion to units sold • costs does not always increase in direct proportion to units sold
39
Define statement of comprehensive income
• financial focument that shows a firms income and expenditure over a period of time (usually 1 year) • also known as profit and loss statement
40
formula for gross profit
revenue - costs of sales
41
formula for operating profit
gross profit - expenses
42
Questions to ask when interpreting (statement of comprehensive income) if business is making a profit
• Is the profit higher or lower than last year ? • is the profit higher or lower than competitors
43
Questions to ask when interpreting (statement of comprehensive income) if business is making a loss
• is this a short-term or long-term problem? • are competitors making losses?
44
Define statement of financial position
• shows the financial health of a business at a specific point in time • also known as balance sheet
45
define assets
items owned by a business
46
define current assets
Cash and other properties owned by a business that can be converted into cash in one year
47
define non-current assets
assets that the company owns and needs more than one year to convert into cash
48
define current liabilities
• has to be repaid in 12 months e.g. overdraft, tax
49
define non-current liabilities
• long term debts e.g. mortgage, long term loans
50
Define capital employed
•how the business is funded •also known as equity
51
What are profit margins
• they measure how effectively a business converts revenue into profit • can be compared to previous years to understand business performance
52
formula for gross profit margin
( gross profit / revenue ) × 100
53
how to increase gross profit margin
• increases revenue • reduce direct costs
54
formula for operating profit margin
( operating profit / revenue ) × 100
55
How to improve operating profit margin
• reduce expenses • increase profit margin
56
define mark-up
a measure of profit made on each item sold
57
formula for markup
(profit per item / cost per item) × 100
58
Return on capital employed (RoCE)
measures how effectively a business uses the capital invested in the business to generate profit
59
formula for RoCE
(operating profit / capital employed) ×100
60
How to improve RoCE
(higher rate the better) • increase level of profit without new capital • maintain level of profit whilst reducing the amount of capital
61
Define liquidity
how easily assets can be converted into cash
62
Liquidity ratios
• current ratios • acid test ratio
63
formula for current ratio
current assets / current liabilities
64
formula for acid test ratio
(current assets - inventory) / current liabilities
65
Ways to improve liquidity
• manage the business better • reduce credit period offered to customers • ask suppliers for extended repayment period • use overdraft or short term loans • sell excess inventory • sell assets • introduce new capital and reduce drawing out of the business
66
How are financial documents used
stakeholders use them to assess business performance and inform decision making
67
Decisions using financial documents
• managing assets • improving profit • investment • financing

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