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Flashcards in Finance Deck (36):
1

Name 3 internal sources of finance

-Owners personal finance
-Retained profits
-Sale of Assets

2

Name 9 external sources of finance

-Share issue
-Debentures
-Bank overdraft
-Trade credit
-Debt factoring
-Grants
-Bank loan
-Leasing
-Hire purchase
-Mortgage
-Venture capitalists

3

Advantages and Disadvantages of owners personal finance

-allows owner to retain control
-reduce amount borrowed from other sources

-can be difficult to withdraw savings once they're invested
-Risky for the owner

4

Advantages and Disadvantages of retained profit

-Can be used to make larger purchase such as assets or for bulk buying

-Makes if hard for the business to grow
-Not always generated

5

Advantages and Disadvantages of Sale of Assets

-Money can be raised to boost cash flow
-Money doesn't need to be repaid

-If money is required urgently, the asset may have to be sold for less than it is worth

6

Advantages and Disadvantages of Share Issue

-Large amounts of capital can be obtained
-Share holders have limited liability
-Finance raised does not have to be repaid

-Selling price of shares varies daily
-Can be expensive
-Only a certain amount can be issued
-Dividends have to be repaid

7

Advantages and Disadvantages of debentures

-Control of business is retained
-Paid back over a long time

-Interest must be paid back even if losses are made

8

Advantages and Disadvantages of a bank overdraft

-Easy to arrange
-Allows the business to continue to pay expenses

-High interest rates are usually applied by the bank
-Can be withdrawn by the bank at any time

9

Advantages and Disadvantages of trade credit

-Allows business to sell stock at a higher price and earn a profit
-keeps business going if cash flow is poor

-Discount for prompt credit is lost
-Supplies may be reluctant to offer credit

10

Advantages and Disadvantages of debt factoring

-Responsibility is passed on saving time and effort
-Cash flow is improved

-Has to be sold for reduced amount
-only can be done for large amounts

11

Advantages and Disadvantages of grants

-Usually given as an incentive to get started or expand
-Doesn't need to be repaid

-Can be complicated to apply for
-One off payments that aren't repaid

12

Advantages and disadvantages of bank loans

-Can budget for repayment
-Purchases for essential equipment can be paid back over many years

-Interest
-Hard to secure for small businesses

13

Advantages and disadvantages of leasing

-Saves on cost of purchase of paying outright
-Equipment can be easily kept up to date

-Can be more expensive over a long period of time
-Leased item is not owned by the business

14

Advantages and disadvantages of hire purchase

-Expensive equipment can be bought with only one deposit
-Owned by the business at the end of the repayment period

-Does not own the asset until last repayment
-Can be more expensive

15

Advantages and disadvantages of a mortgage

-Repaid over a long period of time
-Interest rate is often lower than that of a bank loan

-Interest is added
-The mortgage provider officially owns the property

16

Advantages and disadvantages of venture capitalists (business angels)

-Source of finance for companies with poor credit rating
-Large amounts retained

-Not suitable for small sums of money
-Part ownership may have to be provided in return

17

Factors for selecting source of finance

-Interest Rates
-Payback term
-Short term finance required
-Long term finance required
-Size and type of organisation

18

Why are cash budgets important to management?

POCCCDM
Plan
Organising
Command
Coordination
Control
Delegation
Motivation

19

Benefits of preparing a cash budget

-Shows whether the business will have a surplus or a deficit
-Shows whether additional finance is required
-Helps control expenses
-Helps to make decisions
-Measures the performance

20

Uses for cash budgets

-A target for the organisation to work towards
-Each department can have its own budget
-Management can compare actual spending to budgeted spending

21

Sources of cash flow problems

-Tying up to much cash in inventory
-Allowing customers too much credit
Customers not paying within agreed payment terms
-Low Saes
-Purchase of capital items

22

Resolving cash flow problems

-Do not buy too much inventory
-Cut credit limit
-Reduce the price or hold promotion to encourage sales
-Rent out equipment

23

Users of financial statements

Owners
Employees
Inland revenue (HMRC)
Trade unions
Competitors
Investors
Lenders

24

what does the statement of financial position show

Assets, Liabilities and Equity

25

What are the uses of ratio analysis

Compare the current years performance with previous years
Compare performance
Interpret information to identify why differences occur and how to improve perfomance
Assist in decision making process

26

Limitations of ratio analysis

-Information contained in accounts is out of date
-Like must be compared with like
-findings do not take into account external factors

27

What is the formula for the gross profit ratio

Gross profit
----------------- x 100
Net sales

28

Gross Profit Ratio purpose and improvements

PURPOSE: to measure the percentage of profit earned on the trading activities of the organisation
IMPROVEMENTS: To improve gross profit margin the organisation can purchase cheaper supplies or increase selling price

29

What is the formula for the profit mark up ratio

Gross Profit
----------------- x 100
Cost of Sales

30

Profit Mark-up Ratio purpose and improvements

PURPOSE: To measure how much has been added to the costs of good purchased as profit
IMPROVEMENTS: To improve the profit mark-up, the organisation can negotiate discounts with current suppliers, find cheaper suppliers, increase selling price

31

What is the formula for the return on capital employed

Profit for the year
----------------------------- x100
Opening Equity (share capital for companies)

32

Return on capital employed purpose and improvements

PURPOSE: To measure the percentage return on the capital invested in the business
IMPROVEMENTS: Increase net profit

33

What is the formula for the Current Ratios (Working capital ratio)?

Current Assets
------------------------
Current Liabilities

34

Working capital ratio purpose and improvements

PURPOSE: To measure whether the business has sufficient current assets to cover payment of current liabilities
IMPROVEMENTS: Increase current assets or decrease current liabilities.

35

What is the formula for the acid test ratio

Current Assets - Inventory
----------------------------------
Current Liabilties

36

Acid test ratio improvements and purpose

PURPOSE: To measure if the organisations liquid assets cover to payment of liabilities
IMPROVEMENTS: Use of efficient inventory control system