Finance Flashcards
(37 cards)
1
Q
Reasons for business needing finance
A
- Start up or small businesses.
- Replacing old machinery, equipment and premises.
- Organic growth.
- External growth.
- Day to day expenses- dealing with cash flow problems.
- Development purposes- research and development.
2
Q
Internal sources of finance
A
- Owner’s capital
- Retained profit
- Selling unwanted assets
3
Q
External sources of finance
A
- Bank overdraft
- Trade credit
- Loans- friends/family, banks
- Mortgage
- New share issue
- Crowdfunding
- Taking on a new partner
4
Q
Advantages of retained profit for finance (internal)
A
- Cheap form of finance- no interest to be paid
- Retained profits do not dilute or reduce the ownership of the organisation
5
Q
Disadvantages of retained profit for finance (internal)
A
- If business is facing difficulties, then it is unlikely to have any profits it can use
- Growth me be slow if dependent on retained profits, profits may not be high enough to finance the growth quickly
Using to many profits in the business may upset shareholders as it will decrease dividends
6
Q
Advantages of owners’ capital for finance (internal)
A
- Interest free
- No need to repay the money
- Do not lose control
7
Q
Disadvantages of owners’ capital for finance (internal)
A
- The amount that is available is limited- means owner needs to use other finance
8
Q
Advantages of selling unwanted assets for finance (internal)
A
- Receive money and do not need to play interest
9
Q
Disadvantages of selling unwanted assets for finance (internal)
A
- Reduces value of business
- Unlikely to be a long term solution
10
Q
Advantages of a loan for finance (external)
A
- No need to provide the bank with a share in the business- no control lost
- Repayments are payed over time
- Paying back in instalments, helps with budgeting
11
Q
Disadvantages of loans for finance (external)
A
- Risk an asset as security, bank will have control over these assets if business fails
- Interest must be paid on the full loan amount, increases the costs of the business
12
Q
Advantages of bank overdraft for finance (external)
A
- Suitable if business has a short-term shortage of cash or unexpected costs to pay
- Can be awarded quickly
- Does not always require security
13
Q
Disadvantages of bank overdraft for finance (external)
A
- Repayable to the bank
- Will incur an interest charge
14
Q
Advantages on taking on a new partner for finance (external)
A
- They can invest additional finance into the business
15
Q
Disadvantages for taking on a new partner for finance (external)
A
- Lose full control of the business
16
Q
Advantages of crowdfunding for finance (external)
A
- Provides investment when other sources of finance may not be available
- Investors may have experience or skills they can offer in exchange for their business
17
Q
Disadvantages for crowdfunding for finance (external)
A
- Investors will need to be offered a return
- Risk to the limit of money investors are willing to invest
- Business idea may not be of interest- time and money spent organising the campaign may be lost
18
Q
Advantages of a new share issue for finance (external)
A
- Large sums of money can be raised
- Capital does not have to be repaid
- There is not interest and dividend payments can be missed if profits are low
19
Q
Disadvantages of a new share issue for finance (external)
A
- Possible loss of control if original owners sell more than 50% of the total shares
- Need to satisfy shareholders expectations of dividends and price growth
20
Q
Advantages of trade credit for finance (external)
A
- Allow the business to use the goods in the manufacturing process and/or sell the goods before it pays the suppliers
- Helps business with temporary shortage of funds
- Period of credit is usually interest free
21
Q
Disadvantages of trade credit for finance (external)
A
- Danger of losing future credit arrangements with the supplier if bills are not paid on time
- Difficult for new start- up businesses to negotiate trade credit with suppliers as there is a risk that the suppliers may not get paid
- Goods must be paid for even if they do not sell
- Interest charged if credit is not repaid within the time limit
22
Q
Examples of fixed costs
A
- Rent for premises
- Business rates
- Salaries
- Marketing costs
- Insurance
23
Q
Examples of variable costs
A
- Raw materials
- Wages
- Electricity/gas/water
24
Q
Best ways to measure financial performance
A
- Comparing actual figures or ratios with targets, previous years figures, competitors performance, business objectives
25
Advantages of using ARR (average rate of return)
- Easy to calculate and understand
- Allows you to compare investments
- Focuses on profit
26
Disadvantages of using ARR (average rate of return)
- Only a prediction
- Can be too optimistic
- Looks at % return rather than pure numbers
27
What is break even
The point at which sales revenue is the same as total costs
28
What is the margin of safety
Difference between the actual sales and break even point providing actual sales are greater
29
Ways to maximise the break even point
- Maximise the selling price per unit
- Negotiate to reduce the cost of raw materials and other inputs
- Lower fixed costs
30
Uses of break even forecast
- Quick, simple and aids decision making
- Predicts the level of risk and margin of safety
-Shows potential profitability
- Shows how many units need to be sold before profit is made
31
Limitations of break even forecast
- Costs can change
- Assumes that all products that are made are sold
- Not very good for services as prices vary enormously
32
What is cash flow
The movement of money into and out of a business bank account
33
What is inflow
The money that flows into the business bank account
34
Examples of inflow
- Sales revenue
- Loans
- The owner’s own savings
35
What are outflows
The money that flows out of the business bank account
36
Examples of outflows
- Rent
- Wages
- Electricity
37
Importance of cash flow
- Helps business to prevent insolvency
- Helps businesses to obtain external finance
- Helps businesses to predict if they can pay employees and suppliers
- Helps businesses to set targets to compare their actual income and expenses against forecast over time
