owner’s personal finance
short term
advantages- allows owner to keep control of business and can reduce amount to be borrowed from others.
disadvantage- it can be difficult to withdraw savings once they are invested in the business and there is risk that the owner could lose his savings if the business fail
retained profits
short term
advantages- can be used to make larger purchases such as bulk buying
disadvantages- can find it more difficult to grow if it regularly uses retained profits especially to solve short term cash flow problems
sale of assets
short term
advantages- money can be raised from the sale of an asset to boost cash flow and money does not need repaid
disadvantages- if the finance is required urgently the business may have to sell the asset for less than it is worth
sell and lease back
short term
advantages- money can be raised from the sale of an asset to boost cash flow and the business passes over responsibility for maintaining and renewing the equipment to the leasing company
disadvantages- leasing over a long period of time can be expensive
share issues
long term
advantages- large sums of money can be raised through the sales of shares and the money does not need repaid
disadvantages- dividends have to be paid to shareholders and it can be expensive to advertise and organise the sales of shares
debentures
long term
advantages- control of the business is retained and can be paid back over a long time
disadvantages- interest must be paid annually even if loss is made unlike with shares dividends are only paid out if profits are made
bank overdraft
short term
advantages- usually easy for a business to arrange and allows a business to continue to pay business expenses despite there being no money in its bank account
disadvantages- high interests rates are usually applied by the bank for borrowing money in this way and the overdraft can be withdrawn by the bank at any time and must be repaid
trade credit
short term
advantages- allows a business to sell stock at a high price and earn a profit before the bill needs to be paid and it helps the business to keep going when cash flow is poor
disadvantages- discount for prompt payment is lost and suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period
debt factoring
short term
advantages- responsibility of the debt is passed on to the factors saving the company time and effort. cash flow is improved by receiving an advanced payment of the debts from the factor.
disadvantages- business has to sell the customer debt for a reduced amount and factoring companies are usually only interested in large amounts of debt
grants
long term
advantages- often offered as an incentive and a ay to help a business get started. the money does not need to be repaid
disadvantages- they can be complicated to apply for and can require the business to meet certain requirements. grants are usually one-off payments that are not repeated
bank loan
long term
advantages- business can budget for the repayments. purchases of essential equipment can be made in advance and paid back over a number of years.
disadvantages- interest has to be repaid along with the loan amount. small businesses may find it more difficult to secure a loan and often need to pay higher interest rates as they are a greater risk
leasing
long term
advantages- business don’t need to spend large amounts of money to purchase equipment needed. leasing company is responsible for maintaining and renewing equipment
disadvantages- do not own the asses it is renting. rental costs can build up over a period of time.
hire purchase
long term
advantages- expensive equipment can be bought with only an initial deposit. the asses is owned by the business at the end of the payments
disadvantages- business do not own until the last payment. it can be an expensive form of borrowing if interest rates are high
mortgage
long term
advantages- can be aid back over a long period of time. interest rate is lower than a bank loan
disadvantages- interest has to be paid along with loan amount. mortgage provider owns the property until the last repayment is made
venture capitalists
long term
advantages- large amounts of investment can be gained by established businesses. venture capitalists are willing to take on more risky investments than banks.
disadvantages -venture capitalists have an equity stake which means control and a share of profits are given up
business angels
long term
advantages- business advice is often provided as well as finance. business angels are willing to take a risk on new businesses
disadvantages- business angels have an equity stake which means control and a share of profits are given up. only suitable for smaller amounts of investment for the new business
gross profit margin formula
gross profit divided by sales(turnover) multiply by 100
profit mark-up formula
gross profit divided by costs of goods sold multiply by 100
net profit margin formula
net profit divided by sales(turnover) multiply by 100
return on capital employed formula
net profit before interest and tax divided by capital employed multiply by 100
rate of stock turnover formula
costs of goods sold divided by average stock
average stock formula
opening stock plus closing stock divided by 2
current ratio formula
current assets divided by current liabilities
acid test formula
current assets subtract stock divided by current liabilities
3 types of ratio
profitability
efficiency
liquidity
types of profitability ratios
gross profit margin
profit mark up
net profit margin
types of efficiency ratios
return on capital employed
rate of stock turnover
types of liquidity ratios
current ratio (working capita ratio) acid test (quick ratio)
Describe factors affecting sources of finance
-short term finance required
-long term finance required
-interest rates
-payback term
Size and type of organisation
Name users of a financial statement
- owner
- employees
- inland revenue
- trade unions
- competitors
- investors
- lenders
Describe an income statement
Calculates the profit from buying and selling and the profit made after expenses are deducted from gross profit
Give the definition for revenue
The amount of money made from selling goods/services (sales)
Define the term costs of sales
The amount of money spent on selling goods. This is calculated by opening inventory plus purchases minus closing inventory
Define the term gross profit
The profit made from buying and selling. This is calculated by revenue minus cost of sales
Define the term expenses
The running costs incurred throughout the year
Define the term profit for the year
The profit made after the expenses are deducted from the gross profit
Describe a statement of financial position
The statement of financial shows the items a business own, the items they owe and the overall value of the business
Define the term non-current assets (fixed assets)
Items owned for a period of more than one year
Define the term current assets
Items owned for a period of less than one year
Define the term current liabilities
Items owed for a period of less than one year
Define the term working capital
The ability to pay short term debts. This is calculated by current assets minus current liabilities
Define the term total net assets
The overall value of the business. This calculated by non current assets plus working capital
Describe a cash budget
Need to be prepared to help organisation remain liquid. Liquidity refers to the cash flow situation in an organisation. Organisations need to remain liquid in order to have the fund to pay off their debts
Describe cash flow problems
- too much money tied up in stock
- too many credit sales
- too long a payment period for credit sales
- not enough credit purchases
- increasing expense costs
- to many drawings by owners
- not enough sales revenue
- too many unpaid debts
Describe why cash budgets are used
- to predict a positive cash flow situation (surplus)
- to predict a negative cash flow situation (deficit)
- to allow investment to be planned during a surplus
- to allow action to be taken to avoid deficit
- to be compared with actual figures and used to measure the performance of individual departments
Define the term opening balance
The amount of cash available at the start of the month
Define the term total receipts
The total cash received during the month
Define the term cash available
The amount of cash available to spend. This is calculated by the opening balance plus total receipts
Define the term total payments
The total amount of cash spent during the month
Define the term closing balance
The amount of cash available at the end of the month. This is calculated by cash available minus total payments
Describe why ratio analysis is used
- compare the performance of the business with previous years or to their competitors
- compare against industry averages
- highlight areas of the business that need attention
- highlight trends to aid future decision making
Describe the limitations of ratio analysis
- information is historical so is not relevant to the current or future position
- ratios do not take into account of external or internal factors
- ratios do not take into account product developments
- it is difficult to find competitions of the exact type and size to make valid comparisons
Describe gross profit percentage
This measures the percentage of profit made from buying and selling. The higher the percentage the better
Describe the profit for the year percentage
The measures the percentage of profit made once expenses are deducted from gross profit. The higher the percentage , the better
Describe the return on capital employed ratio
This measures the percentage of investment that is returned to investors such shareholders. The higher the percentage, the better
Describe the current ratio
Measures the ability of a business to pay back short term debts
Describe the acid test ratio
Measures the ability of a business to pay back short term debts in a crisis situation. By removing stock from the equation, the business can assess their cash flow without including the least liquid current asset
Describe the rate of stock turnover ratio
Measures the amount of times a business re-stocks during the year.
Describe uses of technology in finance
- spreadsheets can be used to prepare financial statements which allow accuracy and can save time
- presentation software can be used to engage audiences when presenting information
- email can circulate financial information quickly