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Flashcards in Finance Deck (97)
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1

Things a new business needs to spend on.

Property-Their building
Vehicles-Van/Lorries to transport goods
Advertisement-Inform potential customers about their existence
Machinery and equipment-To manufacture your product
Raw materials-To be made into the products

2

Things established businesses need to spend on.

Expansion-Increase scale of enterprise or acquisitions
Improve efficiency-Training employees or purchasing new tech
Develop new products-Research and new production facilities.

3

Internal sources of finance

Owners funds-Money put into the business by its owner.(No interest).
Retained profits-Profit made in previous years. (Only available to successful companies).
Selling assets-A business sells assets like property to generate money.

4

Selling assets-A business sells assets like property to generate money.

Internal

5

Retained profits-Profit made in previous years. (Only available to successful companies).

Internal

6

Owners funds-Money put into the business by its owner.(No interest).

Internal

7

Expansion-Increase scale of enterprise or acquisitions

Established businesses

8

Improve efficiency-Training employees or purchasing new tech

Established businesses

9

Develop new products-Research and new production facilities.

Established businesses

10

Property-Their building

New businesses

11

Vehicles-Van/Lorries to transport goods

New businesses

12

Advertisement-Inform potential customers about their existence

New businesses

13

Machinery and equipment-To manufacture your product

New businesses

14

Raw materials-To be made into the products

New businesses

15

External sources of finance

Bank loans-Requires interest and may ask for collateral
Mortgages-Solely for property, longer repayments than loans
Overdrafts-Borrow more than in account. Flexible loans.
Issuing shares-A business chooses when to IPO but new businesses with little value won’t get as much. Also means letting go of control.
Friends and Family-Free of interest, easier to get.
Hire purchase-Pay off tech/machinery over a long period of time
Government grants-Business that fit with government aims will receive money from the government, usually startups.

16

Bank loans-Requires interest and may ask for collateral

External

17

Mortgages-Solely for property, longer repayments than loans

External

18

Overdrafts-Borrow more than in account. Flexible loans.

External

19

Issuing shares-A business chooses when to IPO but new businesses with little value won’t get as much. Also means letting go of control.

External

20

Friends and Family-Free of interest, easier to get.

External

21

Hire purchase-Pay off tech/machinery over a long period of time

External

22

Government grants-Business that fit with government aims will receive money from the government, usually startups.

External

23

Influences on choosing which source (New businesses)

Amount of personal finance available
Legal structure
Risk-Is there space in the industry

24

Amount of personal finance available

New businesses

25

Legal structure

New businesses

26

Risk-Is there space in the industry

New businesses

27

Influences on choosing which sources (Established businesses)

Profitability of the business
Assets owned
Past history and future prospects
Legal structure
Amount of finance needed

28

Profitability of the business

Established businesses

29

Assets owned

Established businesses

30

Past history and future prospects

Established businesses

31

Legal structure

Established businesses

32

Amount of finance needed

Established businesses

33

Advantages of using retained profits

No interest payments
Can be arranged immediately

34

Disadvantages of using retained profit

Only available to profitable businesses
Shareholders may oppose the decision

35

Advantages of selling assets

No interest payments
May keep assets (if leased back)

36

Disadvantages of selling assets

Many businesses do not have suitable assets
Leasing assets back means regular payments

37

Advantages of bank loans and mortgages

Can be arranged quickly
Allows repayments over a long period of time

38

Disadvantages of bank loans

Interest has to be paid
Banks may require an asset as collateral

39

Advantages of selling shares

No interest payments

40

Disadvantage of selling shares

The owners may lose control of the company
Only available to companies

41

Advantages of Government Grants

Many Government Grants do not have to be repaid

42

Disadvantages of a Government Grants

A business may have to meet strict conditions to receive a grant
Businesses may have to invest money alongside the grant

43

Influences on what source of finance to use (new businesses)

Amount of personal finance available to the entrepreneur
The business’ legal structure
How risky the new business is judged to be

44

Amount of personal finance available to the entrepreneur

New businesses

45

The legal structure of a business

New businesses

46

How risky the business is

New business

47

Influences on what source of finance to use (established businesses)

Profitability
Assets owned by the business
Past history and future prospects
Legal structure of the business
Amount of finance needed

48

Profitability

Established businesses

49

Assets owned by the business

Established businesses

50

Past history and future prospects

Established businesses

51

Legal structure

Established businesses

52

Amount of finance needed

Established businesses

53

What is cash flow

Cash flow is the money that flows into and out of a business on a day to day basis

54

Inflows

Income from sales
Loans from banks
Money invested by the business’ owner

55

Income from sales

Inflow

56

Loans from banks

Inflow

57

Money invested by the business’ owners

Inflow

58

Outflows

Buying raw materials
Wages
Rent or mortgage
Interest on loans
Taxes

59

Buying raw material

Outflows

60

Wages

Outflows

61

Rent or mortgages

Outflows

62

Interest on loans

Outflows

63

Taxes

Outflows

64

Benefits of having a positive cash flow

No need to borrow (avoid interest)
More able to arrange long term loans
Reduces the risk of businesses getting into debt and failing

65

What is a cash flow forecast

A table of the inflows and outflows of cash that are expected by a business’ managers

66

What is a cash flow statement

A cash flow statement is a table of past month’s cash flow to help predict and prepare for the future

67

Importance of cash flow forcastes

It can identify times when the business might be short of cash
Enables the business to take actions to avoid cash shortages becoming a major problem

68

Causes of cash flow problems

Poor management
The business is making a loss
Offering customers too long to pay

69

Solutions to cash flow problems

Reschedule payments
Cut costs
Use overdrafts
Find new sources of cash inflows

70

Influences on choosing the best solution

The cause of the cash flow problem
The business’ circumstances

71

Price

Price is the amount a business asks a customer to pay for a single product.

72

2 factors affecting price?

The prices set by the competition
The cost of production

73

What are sales?

Sales is the number of products sold by a business over some time. Usually a week, month, quarter or year.

74

What are costs?

Costs are the spending that is necessary to set up and run a business. A business normally has to pay two main types of cost: fixed costs and variable costs.

75

What are fixed costs?

Fixed costs do not alter when a business changes its output. For example, a shopkeeper still needs to pay the same amount of rent, regardless of sales.

76

What are variable costs?

Variable costs are costs which vary based on output. For example, if a shopkeeper is serving more customers, he will need to buy more inventory.

77

Equation for total costs

Fixed costs+Variable costs

78

Equation for total variable costs

Variable costs of a single unit X Number of Units

79

What are total costs?

Total costs are a business’s expenditure over a time period.

80

What is profit?

Profit is the amount by which a business’s revenue from all its sales exceeds its costs.

81

What is loss?

A loss is the amount by which a business’s costs are larger than its revenue from all sales.

82

What is a balance sheet?

A balance sheet sets out the assets and liabilities that a business has on a particular day.

83

What does a balance sheet show?

It shows where a business’ finance has come from and how the business has spent the money that it has raised. It is only a snapshot of the business’ position.

84

Types of assets

Non-current assets and Current assets.

85

What are non-current assets?

Non-current assets are assets which a business will normally keep for many years. Examples of non-current assets include shops and vehicles. They create revenue for the business and enable it to earn profits.

86

What are current assets?

They are assets that the business only expects to have for a short time (normally less than one year). Examples of current assets include cash and inventories of raw materials. Current assets (especially cash) are used by the business to settle debts such as paying for raw materials.

87

What are assets?

An asset is something that is owned by a business.

88

What are liabilities?

Liabilities are the amounts owed by a business to other businesses and individuals.

89

Types of liabilities.

Non-current liabilities and Current liabilities.

90

What are non-current liabilities?

They are debts that will be paid back over many years. Loans from the bank or a loan to buy property (mortgage) are examples of this type of liability.

91

What are current liabilities?

They are debts that a business will pay within a year. Examples of current liabilities include money owed to suppliers and tax the business has to pay.

92

What is total equity?

Total equity is part of a company’s money that belongs to shareholders. If a company stops trading and sells all its non-current and current assets, it would normally have a large sum of money remaining. This would be used to pay all the company’s liabilities. The money that is left once this is done is called total equity.

93

What are net assets.

The sum of all the assets a business owns.

94

What will equal the amount of money put into the business (total equity) on a balance sheet?

Net assets.

95

If the shareholders of a business raised extra finance to buy new vehicles than what would increase by the same amount?

The value of the business’ non-current assets and the shareholders’ total equity.

96

Key indicators of a business’ performance over time from its income statement.

The revenue from sales of goods and services and gross and net profits.

97

What are financial ratios?

Financial ratios are ratios that compare two figures from a business’ financial statements. For example profit to revenue.