finance

• short term sources of finances

  • trade credit
  • overdrafts
• what an overdraft?


  it lets firms take more money out of its bank account than it has paid into it
• advantages of an overdraft

  • can allows them to make payments on time
  • have a higher interest rates than loans and the bank can cancel it at anytime
• disadvantages of overdrafts

  • if its not paid of, then the bank can take the businesses assets
• what is trade credit?

  Trade credit is a form of financing where a supplier allows a customer to purchase goods or services on credit, with payment due at a later date.
• why is using trade credit useful for business?

  gives firms one or two months to pay for certain purchases
• what is a disadvantage of trade credit?

  if the firm makes the payment too late they could end up with a large fee
• what are long term sources of finance?

  they lend money for longer period, usually more than one year. paid back in regular instalments over a fixed time

  period
• what are some examples of long term sources of finance?

  • loans
  • hire purchases
• what are the two types of loans?

  • bank loans
  • mortgages
• what are bank loans?

  Financing provided by a bank to individuals or businesses. they are quick and easy to take out but the bank can repossess items if not repaid
• what are mortgages?


  Loans for buying property. this property can be used as collateral - this means that the property can be taken by the bank if the individual cant pay of the mortgage
• what are hire purchases?

  these are when a firm purchases something by first paying a deposit then paying the rest in instalments over a period of time, whilst they have use of the product
• what are government grants?

  funding by the goverment
• what are some sources of finance for established firms?

  • retained profits
  • fixed assets
  • new share issues
• what are retained profits?

  these are profits that the owners have decided to plough back into the business after they've paid themselves a dividend
• what are fixed assets?

  firms can raise cash by selling fixed assets that are no longer in use. theres a limit to how many assets you can sell though - sell too many and you cant go on trading
• what is internal finance ?

  finance that comes from inside the business, it can be a quick and easy way to get money
• what is external finance?

  comes from outside of the business, it usually needs to be paid back with a high interest
• what are egs of internal sources of finance?

  • personal or business savings
  • retained profits
  • selling fixed assets
• what are egs of external sources of finance?

  • bank loans
  • loans from family or friends
  • trade credit
  • new share issues
  • government grants
  • hire purchases
• what are four factors that affect the choice of finance?

  • size and type of company
  • amount of money needed
  • length of time the finance is needed for
  • cost of the finance
• why do businesses have to make investments?


  to make improvements in order to make the business more profitable
• why can making investments be risky?

  spending money can be risky as the investment may not bring in more money to the business, it may result in a loss
• why do businesses calculate their investments?

  to make sure they are worthwhile
• what do we use to calculate investment?

  average rate of return = average annual profit/initial investment x100
• what is the break even analysis?


  its how companies work out at what point they will cover their costs
• what is revenue?


  this is the amount of money that the business earns
• what are costs?


  this is the amount of money that the business spends
• what is profit?


  this is the money left over after costs are taken away (profit = revenue-costs)
• what is loss?


  when costs are greater than revenue the business makes a loss - they loose money
• how are costs broken into different parts?

  • fixed costs
  • variable costs
  • total costs
• fixed costs


  are costs that don't change with output eg the cost of renting a building
• variable costs


  are costs that will increase as output increases eg the cost of raw materials
• total costs


  are fixed costs plus the variable costs
• what is the break even output?

  is the level of output where the firm will just cover its costs
• how do you find the margin of safety?

  its the gap between the current level of output and the break even output
• advantages of a break even analysis

  • easy to work out
  • quick - can take immediate action to increase sales or reduce costs
  • allows businesses to predict how changes in sales may affect costs, revenue & profits
  • can use them to help persuade the bank to give them a loan
• disadvantages of a break even analysis

  • assumes the firm can sell any quantity of the product at the current price
  • assumes all products are sold
  • if data is wrong, analysis will be wrong
  • can be complicated if its involves more than one product
• what is cash?


  money a company can spend immediately