Flashcards in NEw booshness Deck (32)
What are retained profits?
- Money is kept in the business by the owners and reinvested.
- ADV: no need to pay interest on the money
- DIS: money could have been invested elsewhere
- DIS: business may not have enough retained profit to meet its needs
- DIS: shareholders may become unhappy if this means lower dividened payments
What are selling assets?
- Items owned by the business are sold and the money made is used to finance the business
- ADV: business uses money it already has, no need to pay any interest or charges
- DIS: the business has to have something worth selling for this to be an option
- the business may sell something they later need.
What is overdraft?
- the bank allows he business to draw more money from their bank account than they actually have in it
- ADV: quick to arrange, good short term solution
-DIS: only suitable for smaller amounts, has to be repaid in a small amount of time, interest or charges are paid
What is trade credit?
- Items are bought from suppliers on a buy now pay later basis
- ADV: gives the business more cash to use in the immediate future
- DIS: can only be used to buy certain goods, Bills must be settled shortnotice
What is leasing?
- Leasing is when the business rents the item from its owner
- ADV: cost of asset is spread over its life, no need for lump sum of money to purchase it
- DIS:may be ore exspensive in the long run
- DIS:business does not own asset
What is a bank loan?
- an amount of money is borrowed from the bank (then repaid with interest over time)
- ADV: easy and quick to set up
- large amounts of money can be borrowed
-DIS:interest payable, if repayments cannot be kept up, the business risks getting a poor credit rating or being made bankrupt
What are government grants?
- Money given to the business by the government
-ADV: no need to repay the grant
- \DIS: limited funds are available, restrictions on what money can be spent on
What is hire purchase?
- An item is bought on finance, repayments are made each month until the final payment when the item becomes the property of the firm.
-ADV:flexible method can hand back the item if no longer required and payment will stop
-DIS:high interest often charged
- Item doesn't belong to the business until the end of the term
What is venture Capital?
- Venture capitalists invest in small, risky business e.g. new business start ups
- ADV:can raie money from them when banks have refused to lend to the business
-DIS:risky for the venture capitalist
-The VC may want to have some control over how the business operates
What is revenue?
- revenue is the income received by a business for goods sold or services provided. it is the cash flow into a business
What are cash sales?
- cash sales are created when sales are made and payment is immediate. this payment can be cash or with debit and credit cards. in all of these cases money is immediate for the business.
What are debtor payments?
- debtor payments occur because any businesses sell goods on credit - payment for the goods may not be due for 30 days or more. when goods are sold on credit; a debtor is created. we only enter the revenue from these sales when payment is made.
all the payments received by a business within the time period are known as total revenue.
What are expenses?
- under expenses or expenditure all of the money spent by a business within a time period is shown.
- this is the money flowing out of the business. there are many different types of expenditure - some of the more common types are shown here
What is cash flow and how is it calculated?
- net cash is alculated by taking total exspenses away from total revenue. if revenue is greater than this figure then this figure is positive (+) vice versa for negative(-)
- net cash flow is the total spending of a business
What is closing balance and how is it calculated?
- to find the closing balance, if the net cash flow is a negative we deduct this from the opening balance, or if it is a positive we add the net cash flow to the opening balance. the opening balance is the amount of cash available at the beginning of the period.
Reasons for cash flow forecast problems?
- increased competition
- economic growth/decline
- changing fashions
- raw materials cost increases
- higher than expected level of inflation
- interest rates increase
- increased labour costs
- poor initial predictions of income and expenditure
- late payment of debtor
- poor budgetting and lack of control of spending
What are some solutions a business can use to accomadate a predicted cash shortage?
- Increase revenue,; by increasing revenue, a business may try to increase its prices but reduce its demand.
- Reduce costs: by reducing staff will cut costs, but will impact on output or service provided. looking for cheaper suppliers makes sense, however this could impact on quality.
- delay payment,; if the business has creditors then delaying payment will improve immediate cash flow. however, the impact could be delayed deliveries, interest charges on debts, as well as demand for cash on delivery for future supplies.
- extra funding;; this could be a new injection of capital from the owner or perhaps a business loan
What are the benefits of preparing a cash flow?
- an accurate cash flow forecast will allow a business to get a clear idea of how it is performing (although it does not provide an accurate statement of profitability), and how it is likely to perform in the future
- the forecast allows managers to be able to specify times when the business may need additional funding, such as when cash flow exceeds inflow
- in addition, inconsistencies in future performance can be identified and remedied.
- also, when there is predicted to be a large positive cash flow, businesses can plan ahead on how to use this money - perhaps by investing or paying off debts.
What are the limitations of using a cash flow forecast?
- drawing up cash flow forecasts takes management time that might be more productively used completing other tasks in the business.
- cash flow forecasts need to be accurate to have value; this may be especially difficult to achieve if the business has little or no trading history to base the predicted cash flow on.
- the longer the time scale the less accurate the forecast is likely to be
- inflation can impact on the accuracy of figures
- cash flow forecasts needs to be monitored to have ongoing usefulness.
What is a trading, profit and loss account?
- profit and loss accounts are said to give a 'historic view' of the business's trading income and expenditure over the previous 12 months.
- the account will show all income and expenditure received and incurred over the previous year
- trading account. the trading account sows what the sales of the business have been and the direct costs of making those sales - known as the cost of sales.
how do you work out Cost of sales?
opening stock + purchases - closing stock
Why is net profit worked out?
- net profit is an indicator of how efficient the business is overall, this is because all the business's revenues and expenses are included in the calculation. like the figure for gross profit, net profit on its own does not help us judge the level of efficiency.
how do you calculate net profit?
gross profit - total expenses
What is gross profit?
- a calculation is used to help us judge the efficiency of the business. this calculation, known as an accounting ratio, is called the gross profit margin (GPM). The better the performance the higher the gross profit margin will be.
How is the gross profit margin calculated?
- Gross profit is divided by sales X 100/1 = GPM%
What is net profit?
- net profit is an indicator of how profitable the business is overall; this is because all the business's revenues and expenses in its calculation are included.
How is net profit margin calculated?
net profit/sales X 100/1 = NPM%
How is gross profit calculated?
net sales - cost of goods sold
How are net sales calculated?
sales - sales returns
What are flexible hours?
- a worker on flexible hours has an agreed number of working hours. They have Core hours that need to be worked between a specific time, the remainder of their hours can be worked throughout the day
- good for families
- suits employers when they can work.
- can avoid traffic
- personal control over schedule
- a flexible workforce is likely to make a business more efficient.
- sense of isolation within workforce
- people can lose their organisation skills
- heating and lighting costs may increase.
What is homeworking?
- jobs like IT, accountancy etc.
- jobs are completed at home
- benefits businesses because less office space is required.
- reduced stress of commuting