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gcse business > section 5 > Flashcards

section 5 Flashcards

(92 cards)

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1
Q

finance

A

Finance is the money required in the business.

Finance is needed to set up the business, expand it and increase working capital

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2
Q

start-up capital

A

the capital needed by an entrepreneur when first starting a business

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3
Q

why businesses need finance

A
  • to set up a business (start-up capital)
  • to pay day-to-day expenses (working capital)
  • purchase non-current (fixed) assets (capital expenditure
  • market research
  • expansion
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4
Q

working capital

A

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

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5
Q

non-current (fixed) assets

A

resources owned by a business which will be used for a period longer than one year, for example buildings and machinery

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6
Q

capital expenditure

A

spending by a business on non-current assets such as machinery and buildings

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7
Q

long-term finance

A

debt or equity used to finance the purchase of non-current assets or finance expansion plans. long-term debt is borrowing a business does not expect to repay in less than five years

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8
Q

short-term finance

A

loans or debt that a business expects to pay back within one year

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9
Q

retained profit

A

profit remaining after all expenses, tax and dividends have been paid and which is ploughed back into the business

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10
Q

internal sources of finance

A
  • owner’s savings
  • retained profits
  • some of the business’s working capital
  • sale of non-current assets such as equipment and machinery
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11
Q

retained profits +- (internal finance)

A

+ no interest paid
+ no need to repay
- Takes time to raise this
- Might not raise enough
- can only be used as a source of finance if the business is profitable

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12
Q

owner’s savings +- (internal finance)

A

+ no interest paid
+ no need to repay
- Risk losing own money
- Might not raise enough

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13
Q

sale of non-current assets +- (internal finance)

A

+ no interest paid
+ no need to repay
- must find a buyer first, may be a slow process
- Might not raise enough
- Limited number of assets can be sold

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14
Q

use of working capital +- (internal finance)

A

+ no interest paid
+ no need to repay
- Can upset customers, if asked to pay earlier
- Can lead to insufficient inventory levels

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15
Q

use of working capital examples

A
  • cash balances (the amount of money currently available to the business)
  • reducing inventory levels (selling inventory to free up cash)
  • reduce trade receivables
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16
Q

external sources of finance

A

short-term sources and long-term sources

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17
Q

short-term sources of finance

A
  • overdraft
  • trade credit
  • debt factoring
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18
Q

overdraft

A

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

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19
Q

overdraft +-

A

+ quick to arrange
+ flexible source of finance (can change the amount of borrowing)
- Interest needs to be paid
- Recalled at short notice

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20
Q

trade credits

A

when a business delays paying suppliers for some time, improving their cash position.

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21
Q

trade credits +-

A

+ No interest paid
+ Easy to arrange
- Suppliers can refuse future deliveries
- Can damage relations

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22
Q

trade receivables

A

amount owed to a business by its customers who bought goods on credit

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23
Q

debt factoring

A

selling trade receivables to improve business liquidity

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24
Q

debt factoring +-

A

+ Immediate cash
+ No responsibility to collect
debts
- Never receive full amount owed

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25
long-term sources
- bank loan - hire purchase - leasing - mortgage - debenture - share issue
26
bank loan
provision of finance by a bank which the business will repay with interest over an agreed period of time
27
bank loan +-
+ Large amounts of money can be borrowed + No risk to ownership + Business has a set time period to repay - Needs to be repaid with interest - Collateral will be requested
28
leasing
obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. Ownership remains with the leasing company
29
leasing +-
+ No large initial payment needed + Leasing company covers the repair cost + Replace asset if technology improves - The business never owns the asset - Overall cost can be high due to monthly payments
30
hire purchase
the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion of the final repayment
31
hire purchase +-
+ No large initial payment needed + The business owns the item at the end - Responsible for maintenance - Overall cost can be high due to monthly payments
32
mortgage
a long-term loan used for the purchase of land or buildings
33
debenture
a bond issued by a company to raise long-term finance usually at a fixed rate of interest
34
share issue
a source of permanent capital available to limited liability companies
35
share issue +-
+ No need to repay + No interest paid - Risk for takeover, if too many shares are issued - Only for limited/incorporated businesses - Less control for existing shareholders
36
debt or equity financing
advantages and limitations
37
equity finance
permanent finance provided by the owners of a limited company
38
micro-finance
small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time
39
crowd- funding
financing a business idea by obtaining small amounts of capital from a large number of people, most often using the internet and social media networks
40
factors influencing the choice of finance
- size and legal form of business - amount required - length of time - existing borrowing
41
why is cash important to a business
- pay employees wages - pay suppliers pay rent, heating, and lighting etc
42
cash-flow forecast
an estimate of the future cash inflows and outflows of a business
43
net cash flow
cash inflow minus cash outflow
44
constructing a cash flow forecast
- net cash flow= inflow - outflow - closing balance of one month is opening balance of next - net cash flow + opening balance= closing balance
45
liquidity
the ability of a business to pay its short-term debts
46
the working capital cycle
- inventories purchased on credit - production of goods for sale - goods sold to customers on credit - cash
47
the length of the working capital cycle depends on
- the length of the credit period customers are given (credit sales) - how long it takes to produce the goods for sale - how quickly they find buyers
48
credit sales
goods sold to customers who will pay for these at an agreed date in the future
49
gross profit
the difference between revenue and cost of sales
50
gross profit formula
revenue - cost of sales
51
profit (net profit)
the difference between revenue and total costs
52
(net) profit formula
revenue - cost of sales - expenses or gross profit - expenses
53
total cost
costs of sales plus expenses
54
revenue
the amount earned from the sale of products
55
revenue formula
selling price x quantity
56
cost of sales
the cost of purchasing the goods used to make the products sold
57
expenses
day-to-day operating expenses of a business
58
importance of profit to private sector businesses
- measure the success of a business - measure the performance of managers - finance the purchase of non-current assets + expansion - attracts investors
59
difference between profit and cash
- money invested in a business or borrowed by a business increases cash but not profit - capital expenditure such as buying a new machine decreases cash but not profit - sales of goods on credit increases profit but does not increase cash until buyer pays for the goods
60
income statement
a financial statement which records the revenue, costs and profits of a business for a given period of time
61
uses of income statements
62
statement of financial position
an accounting statement that records the assets, liabilities and owners' equity of a business at a particular date
63
assets
resources that are owned by a business
64
liabilities
debts of the business that will have to be paid sometime in the future
65
constructing a statement of financial position
net assets=non-current assets + current assets - current liabilities capital employed= owner's capital + retained profit + non-current liabilities
66
non-current (fixed) assets
resources that a business owns and expects to use for more than one year
67
current assets
resources that the business owns and expects to convert into cash before the date of the next statement of financial position
68
trade receivables
the amount of money owed to the business by customers who have been sold goods on credit
69
current liabilities
debts of the business which it expects to pay before the date of the next statement of financial position
70
trade payables
the amount a business owes to its suppliers for goods bought on credit
71
non-current liabilities
debts of the business which will be payable after more than one year
72
owner's equity
the amount owed by the business to its owners, includes capital and retained profits
73
shareholders' equity (funds)
alternative term for owner's equity, but can only be used by limited liability companies
74
liabilities
- current liabilities - non-current liabilities - owner's equity - shareholders' equity
75
assets
- current assets - non-current assets
76
interpreting a statement of financial position
77
analysing a business's profitability (ratios)
- gross profit margin - profit margin - return on capital employed
78
gross profit margin
ratio between gross profit and revenue
79
gross profit margin formula
gross profit/revenue x100
80
profit margin
ration between profit (before tax) and revenue
81
profit margin formula
profit /revenue x 100
82
adding value
selling a product for more than it cost to produce it
83
return on capital employed (ROCE)
ratio between profit before tax and capital employed
84
ROCE formula
profit/capital employed x100
85
liquidity
the ability of a business to pay its short-term debts
86
how to measure liquidity
- current ratio - acid test ratio
87
current ratio
ratio between current assets and current liabilities
88
current ratio formula
current assets/current liabilities
89
acid test ratio
ratio between liquid assets and current liabilities
90
acid test ratio formula
(current assets - inventories)/current liabilities
91
profitability vs liquidity
92
why and how accounts are used

gcse business (3 decks)

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