Finance - Definitions

Question 1

Finance

Answer 1

The capital needed to start up and run a business

Question 2

Internal

Answer 2

Capital found inside the business

Question 3

External

Answer 3

Capital found outside the business

Question 4

Internal - Retained profit

Answer 4

The profit made by the business in earlier years

Question 5

Internal - Owners capital

Answer 5

The owner provide the money for the business. Capital invested by owners

Question 6

Internal - Share capital

Answer 6

Selling shares for money

Question 7

Internal - Selling assets

Answer 7

Can provide a business with large sums of money, depending on what is sold

Question 8

External - Business angels

Answer 8

Individuals who invest in your business, and help support your business.

Question 9

External - Bank loan

Answer 9

A loan given by the bank. High interest

Question 10

External - Trade credit

Answer 10

A supplier gives a customer a period of time to pay a bill (30 days)

Question 11

External - Overdraft

Answer 11

The bank will allow the business to withdraw more money than it actually has in its account

Question 12

External - Hire purchase / leasing

Answer 12

A business can rent a piece of machinery and pay monthly instalments.
Own the asset after last instalment

Question 13

External - Government grant

Answer 13

Money given to a business for a particular reason

Question 14

External - Venture capital

Answer 14

They buy shares in small and risky companies at the early stages of development

Question 15

External - Mortgages

Answer 15

Loans from banks and building societies used to buy land and buildings

Question 16

Cash flow

Answer 16

Is the amount of money moving in and out of a business on a day to day basis

Question 17

Who effects cash flow?

Answer 17

• Season
• External factors
• Competitors
• Changes in demand

Question 18

Cash flow statement

Answer 18

A cash flow statement is financial amount that records the receipts and payments of a business (previous year)

Question 19

Net cash flow

Answer 19

Net cash flow is the difference between the cash coming in and the cash flowing out

Question 20

Cash flow forecast

Answer 20

A financial plan to predict receipts and payments over a future period

Question 21

Why is it useful to forecast cash flow?

Answer 21

• Identify if and when business has a cash flow problem
• Helps business to plan ahead
• Identify / find sources of finance to resolve
• Show it to the bank to get a loan
• Assess whether business is viable

Question 22

Liquidity (CF problem)

Answer 22

If a business experiences problems where they do not have enough cash to cover their payments they cannot continue to trade

Question 23

What causes CF problems?

Answer 23

• If a business overspends
• Unexpected costs
• Seasonal changes
• External factors - e.g. competitor, economy

Question 24

Trade credit:
1. How can this improve cash flow?

2. What if you are giving trade credit to customers?

Answer 24

1. You might refuel receipts firn selling the goods, before you have to pay your suppliers leading to a positive cash flow
2. You might have money going out to pay your suppliers, but do not get the inflows from your customers until later

Question 25

Breakeven

Answer 25

The level of output at which the business makes neither profit or a loss

Question 26

Why is breakeven important?

Answer 26

* Monitor their performance * Know when they will earn profit * See if business is viable * Assess how changes effect breakeven

Question 27

Margin of safety

Answer 27

* The difference between your actual output and the breakeven. * Measures the amount by which a businesses current level of production exceeds its break even level of production

Question 28

How is breakeven useful to a business?

Answer 28

* See how long it will take to be profitable * See if need any sources of finance * Wether business is worthwhile * Assess the impact of change in variables

Question 29

Breakeven limitations:

Answer 29

* Made assumptions that aren’t true * Doesn’t consider external factors * If a time selle product at different prices it is difficult to use

Question 30

Investment project

Answer 30

When a business invests in an asset in the hope of making a profit from its use

Question 31

Income statements

Answer 31

A record of the costs and revenues of a business over a period of time (1 year)

Question 32

Reasons why income statements are useful

Answer 32

* If a business is making a loss it shows directors what is causing it * Assess business performance in terms of profitability * Identify which costs need to be reduced

Question 33

Profitability ratios

Answer 33

These ratios are ways of measuring how profitable a business is so that its performance can be assessed