Topic 6 Flashcards
(19 cards)
Cash flow
The money coming in and out of a business
Trade credit
Business’ may give firms one or two months to pay for certain purchases. If the firm makes the payment too late they could end up paying a large fee.
Overdrafts
These let firms take out more money than what is paid into the bank account. These usually have a higher interest rate than other loans and if it is not paid off the business’ assets could be seized.
Mortgages
Mortgages are loans that are used to finance buying a property. The property could be used as collateral.
Hire purchase
When a firm purchases something by first paying a deposit, then paying the rest in instalments over time
Internal sources of finance
. Personal or business savings
. Retained profits
. Selling fixed assets
External sources of finance
. Bank loans, overdrafts and mortgages
. Loans from friends and family
. New share issues
. Trade credit
. Government grants
. Hire purchase
Break even
The point in which a business covers its costs. If they regenerate the same amount of its costs it is known as the break even point.
Margin of safety
This is the gap between the break even output and the current output of sales a business is at.
Credit terms
Tell you how long after agreeing to buy a product the customer has to pay.
Effects of poor cashflow
. Staff may not get paid on time (poor motivation)
. May miss out on business opportunities due to lack of finance
. Can be in debt to creditors and banks - could face legal troubles and risk assets being seized
Reasons for poor cashflow
. Poor sales
. Takes too many orders (overtrading)
. Poor decisions
. Poor planning
Income statements
Type of financial statement showing how income has changed over time
Three parts of an income statement
The trading account (records the firm’s gross profit or loss)
The profit and loss account (this records all the indirect costs of a business, such as replacing worn assets)
The appropriation account (records where the profits have gone, only for limited company accounts)
What is the difference between profit and gross profit
Profit - the remaining money after you subtract all business costs from revenue.
Gross profit - the remaining money after you subtract production costs from revenue.
Examples of Fixed assets
. Premises
. Machinery
. Vehicles
Examples of current assets
. Stock
. Cash
. Debtors
What are current liabilities
Bills or payments a firm has to pay within one year.
Share capital
The money ivested into a business by the shareholders
