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Business Management > Finance > Flashcards

Finance Flashcards

1
Q

Name 3 internal sources of finance

A
  • Owners personal finance
  • Retained profits
  • Sale of Assets
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2
Q

Name 9 external sources of finance

A
  • Share issue
  • Debentures
  • Bank overdraft
  • Trade credit
  • Debt factoring
  • Grants
  • Bank loan
  • Leasing
  • Hire purchase
  • Mortgage
  • Venture capitalists
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3
Q

Advantages and Disadvantages of owners personal finance

A
  • 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
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4
Q

Advantages and Disadvantages of retained profit

A

-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
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5
Q

Advantages and Disadvantages of Sale of Assets

A
  • 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

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6
Q

Advantages and Disadvantages of Share Issue

A
  • 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
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7
Q

Advantages and Disadvantages of debentures

A
  • Control of business is retained
  • Paid back over a long time

-Interest must be paid back even if losses are made

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8
Q

Advantages and Disadvantages of a bank overdraft

A
  • 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  • Can be withdrawn by the bank at any time
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9
Q

Advantages and Disadvantages of trade credit

A
  • 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
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10
Q

Advantages and Disadvantages of debt factoring

A
  • 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
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11
Q

Advantages and Disadvantages of grants

A
  • 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
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12
Q

Advantages and disadvantages of bank loans

A
  • Can budget for repayment
  • Purchases for essential equipment can be paid back over many years
  • Interest
  • Hard to secure for small businesses
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13
Q

Advantages and disadvantages of leasing

A
  • 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
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14
Q

Advantages and disadvantages of hire purchase

A
  • 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
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15
Q

Advantages and disadvantages of a mortgage

A
  • 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
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16
Q

Advantages and disadvantages of venture capitalists (business angels)

A
  • 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
Q

Factors for selecting source of finance

A
  • Interest Rates
  • Payback term
  • Short term finance required
  • Long term finance required
  • Size and type of organisation
18
Q

Why are cash budgets important to management?

A 
POCCCDM
Plan
Organising
Command
Coordination
Control
Delegation
Motivation
19
Q

Benefits of preparing a cash budget

A
  • 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
Q

Uses for cash budgets

A
  • A target for the organisation to work towards
  • Each department can have its own budget
  • Management can compare actual spending to budgeted spending
21
Q

Sources of cash flow problems

A

-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
Q

Resolving cash flow problems

A
  • Do not buy too much inventory
  • Cut credit limit
  • Reduce the price or hold promotion to encourage sales
  • Rent out equipment
23
Q

Users of financial statements

A 
Owners
Employees
Inland revenue (HMRC)
Trade unions
Competitors
Investors
Lenders
24
Q

what does the statement of financial position show

A

Assets, Liabilities and Equity

25
Q

What are the uses of ratio analysis

A

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
Q

Limitations of ratio analysis

A
  • Information contained in accounts is out of date
  • Like must be compared with like
  • findings do not take into account external factors
27
Q

What is the formula for the gross profit ratio

A

Gross profit
—————– x 100
Net sales

28
Q

Gross Profit Ratio purpose and improvements

A

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
Q

What is the formula for the profit mark up ratio

A

Gross Profit
—————– x 100
Cost of Sales

30
Q

Profit Mark-up Ratio purpose and improvements

A

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
Q

What is the formula for the return on capital employed

A

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

32
Q

Return on capital employed purpose and improvements

A

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

33
Q

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

A

Current Liabilities

34
Q

Working capital ratio purpose and improvements

A

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
Q

What is the formula for the acid test ratio

A

Current Liabilties

36
Q

Acid test ratio improvements and purpose

A

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

Business Management (5 decks)

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