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Business > Finance > Flashcards

Finance Flashcards

1
Q

Start up capital

A

The capital needed by an entrepreneur when first starting a business

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2
Q

Working capital

A

The capital needed to finance the day to day running expenses and pay short-term debts of a business

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3
Q

Non currrent assets

A

Resources owned by a business which will be used for a period longer than one year (e.g buildings and machinery)

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4
Q

Capital expenditure

A

Spending by a business on non-current assets such as machinery

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5
Q

Why do businesses need finance?

A
  • To pay day to day expenses of the business (e.g wages, materials etc.)
  • Purchasing non current assets (e.g machines)
  • Investing in technology
  • To finance expansion
  • To conduct market research
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6
Q

Long term finance

A

Debt or equity used to finance the purchase of non-current assets of finance expansion plans.

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7
Q

Short term finance

A

Loans or debt that a business expects to pay back within a year

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8
Q

Internal sources of finance

A

Capital which can be raised from within the business itself

  • Owners savings
  • Retained profits
  • Sale of non current assets
  • Use of some of the business’s working capital
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9
Q

Retained profit

A

Profit remaining after expenses, tax and dividends have been paid, which is put back into the business

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10
Q

External sources of finance

A

This is capital which is raised from outside the business. External sources of finance are usually divided into short term and long term sources

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11
Q

Short term finance

A
  • Overdraft
  • Trade credit
  • Debt factoring
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12
Q

Long term finance

A
  • Loan
  • Leasing
  • Mortgage
  • Debenture
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13
Q

Overdraft

A

An agreement with the bank which allows a business to spend more money than it has in its account up to an agreed limit. The loan has to be repaid within 12 months

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14
Q

Trade credit

A

Where suppliers deliver goods now are are willing to wait for a number of days before payment

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15
Q

Factoring

A

When firms sell their invoices to a factor such as a bank. They do this for cash rather than waiting 28 days to be paid the full amount

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16
Q

Debentures

A

Loans made to a company

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17
Q

Mortgage

A

A special type of loan for buying property where monthly payments are spread over a number of years

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18
Q

Cash flow forecast

A

An estimate of the future cash inflows and outflows of a business

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19
Q

Net cash flow

A

Cash inflow minus cash outflow

20
Q

Interpreting cash flow statements

A

The most important line on any cash -flow statement is the one containing the closing balance. If a businesses cash flow position is forecast to become negative, they might chose to finance it with an overdraft.

21
Q

How to finance a short-term cash shortage

A
  • Ask trade receivables to pay more for goods more quickly by offering discounts to customers who have good credit
  • negotiate longer term credit terms with suppliers
  • Delay the purchase of non-current assets
  • Find other sources of finance for the purchase of non-current assets
22
Q

Gross profit

A

The difference between revenue and cost of sales

23
Q

Profit

A

The difference between revenue and costs

24
Q

Total costs

A

Cost of sales + expenses

25
Q

Revenue

A

The amount earned from the sale of products

26
Q

Cost of sales

A

The cost of purchasing the goods used to make the products sold

27
Q

Expenses

A

Day to day operating expenses of a business

28
Q

The importance of profit to private sector businesses

A
  • Measure the success of a business
  • Measure the performance of managers
  • Decide whether or not to continue making or selling a product
  • Finance the purchase of non-current assets
29
Q

Income statements

A

Financial statement which records the revenue, costs and profits of a business for a given period of time

30
Q

Use of income statement

A

Internal and external stakeholders can use the information when analysing business performance. The most important figure is profit.

31
Q

Balance sheet

A

An accounting statement that records the assets liabilities and equity of a business at a particular date

32
Q

Assets

A

Resources that are owned by a business

33
Q

Liabilities

A

Debts that will have to be paid sometime in the future

34
Q

Current assets

A

Resources that the business owns and expects to convert to cash before the date of the next balance sheet

35
Q

Trade receivable

A

The mount of money owed to the business by customers who have been sold goods on credit

36
Q

Trade payable

A

The amount a business owes to its suppliers for goods bought on credit

37
Q

Non-current liabilities

A

Debts which will be payable after more than a year

38
Q

Owners equity

A

The amount owed by the business to its owners (including capital and retained profits)

39
Q

How to interpret financial statements

A
  • Identify its strengths and weaknesses so that it can be decided which, if any, of its policies or strategies née to be changed
  • Show heather the business is meeting its objectives
  • Improve future business performance
40
Q

Gross profit margin

A

Ratio between gross profit and revenue

(gross profit/revenue)x100

41
Q

Profit margin

A

Ratio between profit before tax and revenue

(profit/revenue)x100

42
Q

How to improve ratios

A

Increase denominator

Decrease numerator

43
Q

Liquidity

A

The ability of a business to pay its short term debts

44
Q

Current ratio

A

Ratio between current assets and current liabilities

current assets/current liabilities

45
Q

Acid test ratio

A

Ratio between liquid assets and current liabilities

(current assets - inventories)/current liabilities

46
Q

Interpreting acid test ratio

A

A ratio of 1:1 is satisfactory. If it is lower than this there is a risk of the business not having enough cash to pay its short-term liabilities. If it is too high, then cash is being tied up in unprofitable assets.

Business (6 decks)

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