topic 6

Cards (38)

  • 5 reasons firms need finance
    for start up capital - the money or assets needed to set up a business
    new firms often have poor initial cash flows- meaning they find it hard to cover up their costs, so need additional finance for this
    sometimes customers delay payment, so finance is needed to cover this shortfall in liquidity.
    if a business is struggling it might need finance to reach its day to day running costs
    need finance too expand
  • smaller firms have several sources of start up finance
    government grants- don't have to be repaid.
    short term sources:
    trade credit- businesses can be given 1 or 2 months to pay purchases.
    overdrafts- let the firm take more money out of bank account then is in it.
    long term sources:
    loans- bank loans, mortgages , interest payments
    hire purchases- this is when a firm buys something by first paying a deposit then paying the rest over time
  • established firms have other sources of funds available
    retained profits- profits owner has decided to put back into business after they have Pais themselves a dividend.
    fixed assets- firms can raise money buy selling fixed assets ( assets a business keeps in a long term ) that are no longer in use
    new share issues - a limited company can issue more shares
  • finance can be classed as internal or external
    internal finance- comes from inside the business. saves borrowing and paying interest. examples are personal or business savings, retained profits selling fixed assets
    external finance - comes from outside the business. usually has to be paid back. examples are bank loans, overdrafts or mortgages.
    loans from family and friends
    new share issues
    trade credit
    government grants
    hire purchases
  • four factors affect the choice of finance
    size and type of company
    amount of money needed - company would issue more shares to buy a toaster.
    length of time the finance is needed for
    cost of finance
  • businesses have to make investments
    an investment is money which is put into a business to make improvements in order to make it more profitable.
    examples of investments:
    new machinery
    new buildings
    new vehicles
    spending more money can be risky as investment might not be profitable.
    so business has to make sure it is profitable, this is done by calculation return on an investment
  • you can find the average rate of return on an investment
    the return on an investment is how much the business makes or loses as a proportion of the original investment that is put in.
    average rate of return = average annual profit/ initial investment X 100
  • revenue
    amount of money business earns
  • COSTS
    amount of money business has to spend
  • profit
    money left over after costs are taken away
  • loss
    when costs are greater then the revenue
  • fixed cost
    costs that don't change. e.g rent
  • variable cost

    cost that increase as output increases. e.g raw mats
  • breaking Even means covering your costs
    the break even output is the level of output needed to cover the costs
    new business should do a break even analysis to find the break even output
  • break even output in a chart is found where total revenue meets total costs
  • finding Margin of safety
    can use break even chart to calculate margin of safety
    margin of safety is the gap between the current level of output and the break even output
  • break even analysis advantages
    easy to work out
    it is quick
    allows business to predict how changes in sales may effect things
    businesses can use break even analysis to help persuade a bank to give them a loan
    can stop businesses from releasing products that can be difficult to sell in large quantities
  • break even output disadvantages
    assumes the firm can sell any quantity of the product at the current price
    break even analysis assumes all products are sold without waste
    if data is wrong, results of analysis can be wrong
    can be complicated if involves more then one product
    only shows how much a business needs to sell and not how much it will actually sell
  • cash flow forecast
    shows all the money that's coming into and going out of a business.
  • cash and profit
    cash is the money a business can spend immediately, profit is the amount of money a company earns after costs have been taken into account
  • cash flow
    the flow of all money into and out of a business
  • net clash flow
    difference between cash inflow and cash outflow
  • cash flow forecast help to anticipate problems

    is a good way of predicting when a firm might have a liquidity problem. ( lack of cash ).
    the firm will see when a short term of finance might be needed
  • credit firms can affect cash flow
    credit firms tell you how long after agreeing to buy a product the customer has to pay. this can affect timing of cash flows.
  • poor cash flows means you got big problems
    staff might not get paid on time- causing poor motivation
    creditors may not get paid on time
    some creditors might not wait and take legal action
    some suppliers offer discounts for prompt payments
  • three main reasons for poor cash flow
    poor sales
    overtrading- firm takes on to many orders, as a result buys to many mats and hires to many staff. something goes wrong with the orders and the firm doesn't get the money from customers quickly enough to pay debt
    poor business decisions
  • ways to improve cash flow
    rescheduling payments - for example giving customers less generous credit terms.

    reducing cash outflow- spending less on mats

    arranging to have an overdraft with their bank
    finding other sources of finance
    increasing cash inflow- increase selling prce
  • income statement
    type of financial statement showing how income has changed over time.
  • first part to income statement: trading account
    this records firms growth profit or loss
    revenue is the value of all products sold in given period of time
    cost of sales- records how much it costs to make the products sold during the year- the direct costs.
    gross profit is the difference between the revenue and the direct cost.
    gross profit = revenue - direct costs
  • second part of income statement: profit and loss account

    records all indirect costs of running the business
    doesn't cover cost of manichery but covers depreciation.
    depreciation is the amount of value which an asset has lost over a period of time due to wear and tear
    the money left after paying all the indirect cost is called operating profit
    any interest paid or received is included. what is left is called net profit
  • third part of income statement: the appropriation account
    only included for limited company accounts
    records where the profit has gone
  • gross profit margin
    is the fraction of every pound spent by customers that doesn't go directly towards making the product
    gross profit margin = gross profit/ sales X 100
  • net profit margin
    is the fraction of every pound spent by customers that the company gets to keep
    net profit Margin = net profit / sales X 100
  • statement of financial position
    records where the business got its money from, and what it has done with it
  • fixed assets will last more then a year
  • current assets last a few months
    they are listed in increasing order of liquidity in the statement of financial position:
    stock is the least liquid
    debtors is next. referring to value of products sold
    cash is the most liquid
  • current liabilities are bills that firms have to pay soon
  • current assets - current liabilities = net current assets
    net current assets is money available for the day to day operating in a business.