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Business Conponant 1 > Finance > Flashcards

Finance Flashcards

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1
Q

Give 3 examples of internal sources of finance?

A

Owners capital
Retained profit
Working capital
Sales of assets

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2
Q

What are the advantages and disadvantages of owners capital?

A

Advantages:
Source doesn’t need to reload and there will be no interest
Disadvantages:
Unlikely the source will be enough to finance the entire business and so high levels of the money being lost/ wasted

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3
Q

Define owners capital?

A

Money the person setting up the business already has saved

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4
Q

What is retained profit?

A

Profit that is kept after dividend is paid

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5
Q

What are some advantages and disadvantages of retained profit?

A

Advantages:
Cheap
Readily available
Does not have any interest as long as profit is made
Disadvantages:
There is an opportunity cost involved

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6
Q

Define working capital?

A

The money that is used to run the business day to day and can be increased by reducing their trade

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7
Q

Define sale of assets?

A

Get money from selling machinery assets etc.

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8
Q

What are some advantages and disadvantages of selling assets?

A

Advantages:
Will bring in lots of money very quickly
Will reduce the cost of running that asset
Disadvantages:
Business will have lost the asset
Smaller businesses are less likely to have unwanted assets

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9
Q

What are some advantages and disadvantages of working capital?

A

Advantages:
Short term source of finance
Can help the business manage its cash flow better
Disadvantages:
Can dent reputation

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10
Q

Name five external sources of finance?

A

Borrowing from family and friends
Bank loans
Overdraft
Trade credit
Factoring
Leasing
Commercial mortgage
Sale and lease back
Share capital
Venture capitalists
Government grants

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11
Q

Define borrowing from friends and family as a source of finance?

A

Where the business borrows money from friends and family- this tends to be informal

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12
Q

What are some advantages and disadvantages of borrowing money from friends and family as a source of finance?

A

Advantages:
Low rates of interest
Easy to negotiate and set up
Immediately available
Disadvantages:
People may fall out over it
If the business fails they will have lost their family and friends capital

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13
Q

Define the term bank loans in terms of sources of finance?

A

Borrowing a fixed amount for a fixed period

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14
Q

What are some advantages and disadvantages of using a bank loan as a source of finance?

A

Advantages:
Once agreed all the money is available immediately
Fixed repayments spread across a long period of time
Disadvantages:
Interest must be paid on top of the total
Banks require proof that the business can repay the debt
Hard for small/ start up businesses to acquire

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15
Q

Define the term overdraft?

A

Facility to withdraw from more than one account than is in an account resulting in a negative balance

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16
Q

What are some advantages and disadvantages of using an overdraft as a source of finance?

A

Advantages:
Flexible way of borrowing
Only pay interest when account is overdrawn
Disadvantages:
Expensive form of borrowing as interest is much higher
May be an arrangement fee

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17
Q

Define the term trade credit?

A

A business buys from its suppliers and pays at a later date

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18
Q

What are some advantages and disadvantages of trade credit?

A

Advantages:
A useful short term source of finance
Usually interest free
Disadvantages:
Suppliers may stop supplying if the business owes too much
Will not benefit from cash discounts
Limited to goods supplied

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19
Q

Define factoring?

A

Where a business sells customer accounts that have outstanding bills to a third party business who will recover this debt

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20
Q

What are some advantages and disadvantages of factoring as a source of finance?

A

Advantages:
The business receives a lesser amount that the original debt
Factoring firm will take responsibility for recovering the money owed to the business
Disadvantages:
The business will not receive the full amount which it was initially owed
Not suitable for a start up business

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21
Q

Define leasing?

A

Where a business pays for the use of assets/ equipment but will never own the asset

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22
Q

State two roles of the finance department?

A

Book keeping procedures
Creating published accounts
Providing management information
Management of wages
Raising capital

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23
Q

What are the advantages and disadvantages of leasing?

A

Advantages:
No large sums of money needed to but it
Likely to get a replacement machine if it breaks down
Useful in machinery is only needed occasionally

Disadvantages:
Will never own the machinery
More expensive over machine lifetime

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24
Q

Define the term commercial mortgage?

A

A business gets a long term loan in order to purchase a property

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25
What are the advantages and disadvantages of using commercial mortgage as a source of finance?
Advantages: Might run for 10-15 years and have predictable costs Disadvantages: Failure to make repayments may lead to the property being repossessed
26
Define the term sale and leaseback?
Where the business sells assets to a finance company and then lease the asset back
27
What are the advantages and disadvantages of using a sale and leaseback as a source of finance?
Advantages: Asset can be turned into capital for reinvestment in the business Capital produced can be reinvested Carries potential tax benefits Disadvantages: Business no longer owns the asset May not receive market rate for the asset
28
Define the term share capital?
Selling a share of the company to investors
29
What are the advantages and disadvantages of using share capitals as a source of finance?
Advantages: Business doesn’t have to pay interest Can sell more shares as and when the funds are needed for the business Disadvantages: Selling shares can dilute the control of the business owners Venerable to takeover in extreme situations
30
Define the term venture capitalist?
Selling shares to a business or individual that specialises in investing
31
What are the advantages and disadvantages of venture capitalists?
Advantages: The business won’t have to pay interest The business can benefit from the expertises of the venture capitalists Disadvantages: Venture capitalists will want a say in how the business is ran They get a share of the profit They only invest in businesses that are expected to grow quickly
32
Define the term government grant as a source of finance?
Offer finance to business start up schemes
33
What are the advantages and disadvantages of using government grants as a source of finance?
Advantages Money doesn’t need to be repaid Interest free Disadvantages: Administration requirements Tend to come with certain conditions that must be met Amount of available often small
34
What is the formula for total revenue?
Total revenue = selling price per unit X quantity sold
35
Define revenue:
Money made from sales
36
How can a business increase its revenue?
By increasing or decreasing its selling price
37
Define the term costs?
Costs are expenses incurred by a firm in producing goods and services
38
Define the term fixed costs?
Costs that do not vary directly with the level of output
39
Define the term variable cost?
Variable costs are costs that increase in proportion to the amount of output produced
40
What’s the formula for total variable costs?
Total variable costs= variable costs per unit X output/QS
41
How do you calculate total costs?
Total costs are fixed costs + total variable costs
42
What’s the formula for adverse total costs?
Average total costs= total costs/ no of units produced
43
Define the term semi variable cost?
Made up of a fixed and a variable aspect,
44
Define the term direct cost?
Costs that can be identified directly with the production of a good or service
45
Define the term indirect costs?
Costs that aren’t directly linked to the making of products or delivering of services
46
What is the formula for profit?
Profit= total revenue- total costs
47
What’s the formula for percentage change?
Change/ original x 100
48
How do you calculate break even?
Break even=fixed costs/ contribution per unit
49
What is the contribution per unit?
Contribution per unit is the difference between sales revenue and variable costs per unit
50
How do you calculate contribution per unit?
Contribution per unit= selling price per unit- variable cost per unit
51
Define the term break even?
Break even is the level of sales a firm must achieve to cover its costs
52
Define the term margin of safety?
Is the difference between the break even points and the level of activity designed to achieve the profit target
53
What are the advantages and disadvantages of break even analysis?
Advantages: Quick and easy to calculate Easy to interpret and understand Can be used to forecast the effect of changes to price Estimates future levels of sales Can be used in an application for a bank loan Disadvantages: Assumes cost increase gradually and doesn’t take into account factors such as bulk buying Assumes a constant selling price Assumes all output will be sold Cannot be used for firms which sell multiple products
54
What dies the effectiveness of break even analysis depend on?
The accuracy of the data The size and type of firm completing the analysis Isn’t as useful in the long term
55
What are the three types of budgets?
Production Market Financial
56
What is a budget?
Is a financial plan relating to the use of resources to achieve specific aims and objectives
57
How are budgets prepared (order)?
Establish the aims and objectives Set the production, marketing and financial budgets, Each budget should then be broken down further Procedures of monitoring the budgets should be set up Any variance from expected budgets should be identified and analysed The experience and knowledge gained should be used when setting up any budgets in the future
58
What is a production budget?
It’s an expenditure only budget and involves the costs of raw materials/ components, direct labour
59
What is a marketing budget?
Both revenues and costs are included, revenues are from predicted sales, costs are from operating the business’s marketing strategy
60
What is the financial budget?
It’s based upon the cash flow forecast
61
What is the purpose of a budget?
Control expenditure Identify variance between actual and budgeted figures Provide a means of monitoring different departments
62
Define variance analysis?
Variance analysis involves the calculating the difference between actual figures and budgeted figures
63
Define the term favourable variance?
When the actual revenues are HIGHER than expected When expenditure is LESS than expected When figures are BETTER than the figures that were budgeted and result in higher profit
64
Define the term adverse variance?
The actual revenue is LOWER than expected Expenditure is HIGHER than expected The figures are WORSE thane the figures that were budgeted
65
How do you calculate sales variance?
Sales variance= actual figures - budgeted figures
66
How to calculate expenditure variance?
Expenditure variance = budgeted figures- actual figures
67
Why might expenditure variance occur?
Materials may be purchased at a special discount price for a period of time A new lower priced supplier may be found A price war might break out between suppliers Cheaper inferior products may be purchased Poor stock control Changes of productivity
68
What should be done if an adverse expenditure variance occurs?
Look for less expensive suppliers Improve quality control systems Automate the production process Improve productivity and motivation
69
Why might sales variance occur?
Unplanned sales in new markets New competitors Discounts of bulk buying customers Special offers Changes in the state of the economy
70
What are the benefits and drawbacks of using budgets?
Benefits: Monitoring performance Identifying the factors affecting performance Improve plans in the future Improve accountability Drawbacks: Motivation Manipulation Rigidity Short termism
71
Define the term cash flow?
Cash flow is the movement of cash into and out of a business over a period of time
72
Define the term receipts?
Also known as cash inflow, sales revenue and turnover Refers to the money received through either cash sales or credit sales
73
Define the term payments?
Also known as cash outflow or expenditures and is the money leaving the business
74
Define the term net cash flow?
Is the difference between the cash inflows and outflows
75
What’s the formula for net cash flow ?
Net cash flow= total receipts- total payments
76
What’s are the factors that can cause poor cash flow in a business?
Sales are not at the expected level Increased costs Internal factors
77
What are the methods to improve cash flow?
Arrange a bank overdraft Increase selling price of products Spread payments equally over the year Delay purchases of expensive capital equipment Reduce fixed costs Buy cheaper raw materials Pay suppliers on trade credit Reduce trade credit terms offered Extra funding
78
What are the benefits of cash flow forecasting ?
An accurate one will allow the business to get a clear idea of how it is preforming Allows managers to recognise when the business may need addition funding Inconsistencies in future performance can be identified
79
What are the limitations of cash flow forecasts?
Takes up management time Need to be accurate in order to have value The longer the timescale the less accurate it is going to be Cash flow forecasts need to be monitored to have on going usefulness
80
What is the formula for gross profit?
Gross profit= revenue - cost of sales
81
What are the strengths and limitations of income statements?
Strengths: Can measure the success if the business compared with previous years or other businesses Assesses the actual performance of the business compared to expectations Allows the managers to plan ahead Provides information for stakeholders Limitations: The performance of the business cannot be judged on one year figures of an income statement There are many other facets the firm must take into account
82
What are the three measures of profitability?
The gross profit margin The net profit margin Return of capital employed
83
Define profitability?
It shows the profit as a percentage of sales revenue or capital invested into a business
84
How do you calculate gross profit margin?
Gross profit/ sales revenue X100
85
Define gross profit?
Is an indicator to how efficient the business is at making and selling its products
86
Define net profit?
Is an indicator of how profitable the business is overall
87
What’s the formula for net profit margin?
Net profit margin= net profit before tax and interest/ sales revenue X100
88
What are the NPM percentages for interpretation?
Good >18% Satisfactory 10-17% Poor <10%

Business Conponant 1 (9 decks)

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