Finance (unit 3) Flashcards
What is capital expenditure?
money a business spends on non- current (long term) assets such as equipment or buildings. These investments help improve efficiency, productivity and maximize profits
What is revenue expenditure
money a business spends on its everyday and regular operations. These expenses must be paid to keep a business running.
eg: utility bills, wages and salaries, raw material suppliers, delivery costs
What happens if a business spends all their finance on capital expenditure
it will place the business at risk as they will not be able to afford regular payments, eg: utility bills.
limiting finance
what happens if a business spends all their finance of revenue expenditure
they won’t be able to expand or sustain growth because they cannot afford non current assets, which puts the business at risk due to limited finance
What is fixed cost?
Costs that do not change with the level of output (eg:. rent, insurance) they must be paid regularly, no matter how much the business produces or sells
What is variable cost?
Cost that changes with the level of output and they increase with the level of production or sales. eg: raw materials, packaging)
What is direct cost?
costs that are specifically linked to producing goods and services (eg: raw materials)
What is indirect cost?
costs that are not directly linked to producing goods and services (eg: utility bills, rent, insurance)
what is total revenue
the money a business gets from selling goods and services
TR = Price X Quantity
what is average revenue?
Total money earned per unit sold
Total Revenue / Quantity = Price
what is revenue streams?
the different sources a business earns money from (eg: Hotel rooms, restaurants, etc)
What are the 3 cost formulas
Variable cost: cost per unit sold x no. of units sold
Fixed cost: total cost of production - variable cost
Total Costs: Fixed cost + Variable cost
how to calculate contribution margin
CM = price per unit - variable cost per unit
What is internal sources of finance:
Finances that come within the organization by using personal assets and resources without financial help from a 3rd party.
3 types: personal funds, retained profit and sale of assets
give advantages and disadvantages of using personal funds in internal sources of finance
:ADV
1. the money does not need to be repaid
2. their is no interest charge
3. higher chance of borrowing money as it shows commitment to the business venture
DISASV:
1. personal funds are not always sufficient
2. partners and sole traders have unlimited liability
what is retained profit?
(internal sources of finance)
a type of internal source of finance that comes from having financial surplus. These funds are reinvested back into the business rather than distributing it to share holders
aka: sloughed back profit
what are advantages and disadvantages of retained profit
Advantages:
1. no interest charge
2. it is a permanent source of finance and does not have to be repaid)
3. flexible and can be used for any purpose within the business
Disadvantages:
1. less dividends are paid to shareholders
2. start up businesses cannot have retained profit
what is selling assets
it is a type of internal finance and Is when a business sells non current assets to raise funds. eg: vehicles, buildings or machinery
what are advantages and disadvantages of fixed selling assets?
ADV
1.raises large sums of money quickly
2. reduces maintinance cost: selling unused assets cuts the business expenses
3. no borrowing or interest cost
DISADV:
1. time consuming to find a buyer
2. low resale value
4. only applicable established businesses
what is revenue and its formula
It is the income made from the selling of a product.
Total revenue = total quantity x total price
what is non current assets
Long term investments that a company keeps and uses for more than 1 year, and is not easily turned to cash
eg: buildings, land, machinery
what are current assets
short term investments that can be turned into cash within 1 year (eg: cats and supplies)
what are non current liabilities?
Long term debts/obligations that a business can may off in over a year
eg: mortgage on property
deferred tax liability
what are current liabilities?
Short term debts or obligations that a business must pay off within a year (eg: short term loans)
