Unit 5 - Finance Flashcards Preview

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Flashcards in Unit 5 - Finance Deck (46)
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What is the role of the finance department?

To control costs and expenses

To monitor cash flow into/out of the business

Forecast the future

Monitor performance

Provide information for decision making


What are some cash flow problems and their solutions?

Too much cash tied up in stock = introduce a JIT approach

Too much time being given to customers to pay credit = offer cash discounts

Not enough money being generated from sales = increasing advertising/offer promotions


What are retained profits?

Profits that are not distributed to shareholders or taken as drawings by the owner(s). They are reinvested back into the business.


What are the advantages and disadvantages of retained profits?

Advantages -
-can help with expansion
-no interest
-can be spent in any way

Disadvantages -
-Shareholders may be unhappy that they are not receiving a higher return
-if all profits are spent, business may be unable to pay for unexpected costs


What is sale of assets?

When a business sells off its unused assets - usually machinery.
The money is then reinvested into the business.


What are the advantages and disadvantages of sale of assets?

-can help with expansion
-no interest
-can be spent in any way
-frees up cash

-expensive to repurchase machinery if it’s needed again


What is a bank loan?

When a large sum of money is borrowed by a business from a bank. It is then paid back over a number of years (long term).


What are the advantages and disadvantages of a bank loan?

Advantages -
-Loans are quick and easy to arrange
-the business can spend it however they wish but it is usually used for expansion

Disadvantages -
-Interest is charged with each monthly repayment


What is a mortgage?

A long term source of finance, borrowed from the bank - purely for the purchase of land or property.


Advantages and disadvantages of a mortgage?

Advantages -
-large amounts of finance can be raised quickly
-given for a long period of time

Disadvantages -
-interest is charged
-property can be lost to the lenders if payments are missed


What are grants?

A fixed amount of money usually awarded by the government or charity.
Usually given it a business meets criteria’s such as providing jobs in high unemployment areas.


What are the advantages and disadvantages of grants?

Advantages -
-no repayments needed
-good image generated

Disadvantages -
-criteria needs to be met
-applications are time consuming


What is the difference between hire purchase and leasing?

They both involve paying a deposit then paying in monthly instalments.

Leasing equipment = not owned by the firm

Hire purchase = owned by the firm


What is share issue?

It is available to limited companies only.
Where they invite new shareholders to invest in the business by issuing extra shares.


Advantages and disadvantages of share issue?

Advantages -
-large amounts of capital can be raised without interest
-shareholders have limited liability

Disadvantages -
-loss of control as shareholders become part owners


What sources of finance are short term?

Retained profits


What are medium term sources of finance?

Bank loan
Hire purchase


What are long term sources of finance?

Owners personal finance
Share issue


What are some reasons for cash-flow problems?

Too much money tied up in inventory
Customers are given too long to pay
Sales revenue is not enough
Sudden increase in expenses


What are solutions for cash-flow problems?

Offer discounts for cash purchases
Sell any unused assets
Advertise more
Use a cheaper supplier


Why do businesses use cash budgets?

To compare predicted spending with actual spending
To measure the performance of different departments and set targets
To show to potential lenders and investors


What is gross profit?

The profit that is made on making and selling the product


What is profit for the year?

The actual profit the business receives


What are current liabilities?

Short term debts


What are fixed assets?

Items owned that last longer than a year


What are current assets?

Items owned that last less than a year


How do you calculated capital employed?

Current Assets - Current Liabilities


How is technology used in the finance department?

-record and edit numerical data
-can undertake lots of calculations using formulae
-graphs can be made
-edit easily

EFTPOS (electronic funds transfer point of sale)
-contactless, Apple Pay, credit/debit cards etc


What is a liability?

Money that the business is due


What is an asset?

Something owned by the company ~ an item of property