Finance

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  • Created by: Krishna_
  • Created on: 11-12-16 18:23
What's Finance?
Finance refers to sources of money for a business, sources of finance can be short term (paid back within a year) or long term (paid back over many years)
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What are internal and external sources of Finance?
Internal sources of finance are funds found inside the business e.g. keeping back profit or selling assets. External sources of Finance are found outside the business e.g. banks, grants, hire purchase etc.
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What's a creditor?
An individual or business that has lent funds to a business and is owed money
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What's a debtor?
An individual or business who has borrowed funds from a business and so owes it money
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What's interest?
Money paid regularly at a particular rate of the use of money lent. Interest is the cost of borrowing and the reward for lending
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What's Revenue and how do you work it out?
Revenue is the term used for all the money brought into the business. Revenue = Quantity Sold * Selling Price. Revenue is often called sales revenue or turnover
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What are costs?
Costs are money going out out of the buiness (expenses). Variable costs change with the amount produced e.g. the costs of raw materials changes. Fixed costs stay the same even if more is produced e.g. office rent/
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What are direct and indirect costs?
Direct costs, such as raw materials, can be linked to a product . Indirect costs, such as rent, can't be directly linked to the product
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How do you calculate profit?
Profit = Revenue - Costs
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Reasons why businesses need cash and what they use it to pay for
Suppliers, Wages,Rent, Raw materials etc.
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What's Cashflow
It's the movement of money in and out of the business
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What's a cashflow forecast?
An estimate of the amount of money you expect to flow in an out of the business, they are useful to show to banks if the business wants a loan or overdraft
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Why is cash flow so important?
It allows the owner to see whether s/he has enough money and it shows the times of the year where the business may have cash outflow problems, therefore the business can take action if there are cash flow problems.
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What's insolvency?
A business is insolvent when it runs out of cash and can't pay its suppliers or workers. This is also why drawing up a cash flow forecast is so important, it identifies when the firm might need an overdraft.
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What are receipts?
This is how cash flows in the business e.g.from cash received from selling products or from loans
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What are payments? (Cashflow)
This is how cash flows out of the business e.g. to pay wages, supplies and interest on loans
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What's net cash flow?
The difference between money in and out (lets you see an overall profit or loss for the month)
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Where can a business get advice and guidance from?
Banks, Business angels and Charities such as the Prince's Trust
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How can a business deal with cash flow problems?
Reducing stock levels, Increase credit with suppliers (30 days to 60 days), Reduce credit for customers so they pay straight away, Get a short term loan or overdraft
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Wha are the sources of Finance for a small business?
Family/Friends, Own savings, Overdraft, Bank loans, Government grants,Mortgages, and trade credit
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What's an Overdraft?
A deficit in a bank account caused by drawing more money than the account holds
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Advantages of an Overdraft
You can access money when things are tight
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Disadvantages of an Overdraft
The provider can ask for the money back at any time, You're charged interest
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What's Trade Credit?
The Credit extended to you by suppliers, buy now pay later
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Advantages of Trade Credit
You can give the products some more time to sell
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Disadvantages of Trade Credit
It could lead to bankruptcy, The products may not sell, The costs are quite high
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What's a Lease?
A contract where one party agrees to lend something for money (aka Rent or borrowing machinery)
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Advantages of a Lease
The company fixes it, it could help balance cash outflow
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Disadvantaged of a Lease
You can't become the owner of the asset, you have to give monthly payments even if it isn't being used
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What's Hire Purchase?
Giving regular payments for something while you're using it
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Advantages of Hire Purchase
You have immediate use of access without paying the entire amount, You can purchase it at the end
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Disadcantages of Hire Purchase
If you can't afford the agreed monthly payments then you may lose the asset, Overall you're paying more than just buying it
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What's a Grant?
The amount of money given to an individual or business for a specific purpose
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Advantages of a Grant
You won't have to pay it back or pay interest on it (free money)
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Disadvantages of a Grant
There's a lot of competition, If you're over 25 you can't get it
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Advantages of borrowing money from Friends/Family
They might be inclined to say yes, You may not have to pay interest
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Disadvantages of borrowing from Friends/Family
You're risking a relationship and might damage it, They might not be able to give you enough
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Advantages of taking a Bank loan
The amount you can borrow is high, it might not take a lot of time
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Disadvantages of taking a Bank loan
It could be difficult, You have to pay interest
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Other cards in this set

Card 2

Front

Internal sources of finance are funds found inside the business e.g. keeping back profit or selling assets. External sources of Finance are found outside the business e.g. banks, grants, hire purchase etc.

Back

What are internal and external sources of Finance?

Card 3

Front

An individual or business that has lent funds to a business and is owed money

Back

Preview of the back of card 3

Card 4

Front

An individual or business who has borrowed funds from a business and so owes it money

Back

Preview of the back of card 4

Card 5

Front

Money paid regularly at a particular rate of the use of money lent. Interest is the cost of borrowing and the reward for lending

Back

Preview of the back of card 5
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