finance Flashcards
(18 cards)
internal source of finance
retained profits
- the owner reinvests profits made back into the business as equity.
- retained profits are held within the organisation rather than paying them out to shareholders.
- does not need to be repaid and full control of the business is maintained by the owner.
internal sources of finance
share issue
- new shares can be issued to EXISTING shareholders
- does not need to be repaid and full control of the business is maintained by the owner.
- large sums of money can be raised by this method.
external sources of finance
bank loan
- a sum of money borrowed from the bank which is paid back in instalments.
- simple and fast way to increase finance in business.
- can be arranged quickly.
external sources of finance
bank overdraft
- allows a business to withdraw more money from its bank account than it has available.
- a short term source of finance.
- flexible and can be arranged quickly.
cash flow
cash flow is all the money that comes into and goes out of a business. If there is more money coming in than going out, the business has working capital and is solvent.
causes of cash flow issues
- low sales
- too much money tied up in inventory.
- customers taking too long to pay.
Suppliers not offering credit.
impact of cash flow problems
- unable to pay suppliers so inventory is not delivered and production stops.
- unable to pay wages.
- unable to pay expenses.
- may need to borrow at short notice.
overcoming cash flow problems
- arrange for an overdraft or bank loan to cover periods when it is known cash will be low.
- reduce or delay planned expenses until cash is available.
- offer special discounts on selling price.
income statement
- an income statement (profit statement) statement shows the profit or loss made by a company over a set period of time.
- income statements show both the gross profit and the profit for the year made by a company.
statement of financial position
a statement of financial position (also known as a balance sheet) shows.
- everything owned by the business > its assets
- everything owed by the business > its liabilities
- the value of the business at a particular date
features of a statement of financial position
fixed non-current assets
- fixed (non-current) assets
- this is the value of major items like premises, machinery, IT equipment and vehicles which are used to operate the business > fixed assets, by their nature, are used by the business for several years.
features of a statement of financial position
current liabilities
- this is the value of the organisation’s short-term debts – those that must be paid back within one year.
- this includes creditors such as suppliers of raw materials who have provided trade credit.
features of a statement of financial position
net assets
net assets show the value of the company once all the liabilities have been deducted from the assets.
who has interest in financial statements
- lenders, such as banks, will look at the solvency of the business to assess the risk of lending money.
- potential investors will use the information to determine the likelihood of a return on their investment.
- competitors will be interested in the financial performance of a rival business.
gross profit percentage ratio
this calculates the percentage of profit made from the buying and selling of goods before all other expenses are deducted.
profit of the year ratio
this calculates the percentage of overall (net) profit made from after all other expenses are deducted
current ratio
current assets divided by current liabilities
acid-test ratio
current assets (less closing inventory) divided by current liabilities
