Finance Unit 1 &2

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1.1. State two features of a loan.
1. High interest rates 2. Must have a good credit rating.
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1.2. State two features of selling shares.
1. Have to be a private limited company (Ltd) or a public limited company (PLC). 2. You are selling a part of your business.
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1.3. State two features of a mortgage.
1. Property only. 2. Low interest rates.
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1.4. State two features of retained profit.
1. Must have made a profit to use retained profit as a source of finance 2. No interest.
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1.5. State two features of an overdraft.
1. Very short term load 2. There is a limit you must stay within. Usually £1000.
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1.6. State two features of leasing/renting.
1. You don't own the item. 2. Leasing helps with cash flow because you spread out the costs.
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1.7. State one benefit of lending money from family and friends.
1. Low or no interest on the loan.
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1.8. State one downside of lending money from family and friends.
1. If things get complicated it could damage your relationship with them.
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2.1. State two sources of advice for an entrepreneur.
1. UKTI 2. Prince's Trust.
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2.2. State two things which a bank can help an entrepreneur with.
1. Business specialists to provide free advice to entrepreneurs 2. Can offer financial support.
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2.3. Explain what an accountant can help an entrepreneur with.
1. Tax returns 2. Preparing annual accounts.
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2.4. Explain what a solicitor can do to help an entrepreneur.
Can provide legal advice on: -employment law -property advice
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2.5 What can UKTI do to help an entrepreneur?
Assist their success in international markets and with overseas investors looking to the UK as an investment destination.
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2.6. What can the Prince's Trust do to help a young entrepreneur?
1. Give them advice 2. Give them training 3. Give them a grant
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3.1 What is meant by a cashflow forecast?
It predicts the money coming in and going out over a number of months.
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3.2. What does () mean?
It means negative cashflow. This means that you don't have enough money to pay your bills that month.
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3.3. Why should a business create a cashflow forecast?
It will help a business plan. The business will be able to identify the moths when they don't have enough money to pay their bills and can take action to avoid the problem.
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3.4. What could a business do if they predict they will have a negative cash flow in a future month?
1. Try and increase the money coming in e.g. advertise, check up on customer payments, diversify if seasonal business 2. Arrange a source of finance such as a loan or overdraft for negative cash flow months. 3. Pay suppliers at a later date.
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3.5. What happens if a business can't pay their bills?
1. Workers are not paid 2. Suppliers are not paid 3. Business closure.
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4.1. What is a profit and loss account?
The profit and loss account shows if a business has made a profit or a loss over the last financial year.
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4.2. Why would a business create a profit and loss account?
1. Helps manager analyse where a business has spent money and how they can improve the business. 2. To show an investor. 3. Legal requirement for a limited business.
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4.3. What is sales revenue?
Money coming into the business.
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4.4. What is the cost of sales?
Cost to make the product.
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4.5. What is gross profit?
Sales revenue - Cost of sales = Gross profit
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4.6. What are overheads?
Bills not to do with making the product.
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4.7. What is net profit?
Gross profit - Overheads = Net profit
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4.8. Why do you think large businesses such as Warburton's have a lower cost per unit than a small bakery?
1. They can buy in bulk 2. More efficient machinery 3. Can afford really efficient managers.
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5.1. What does the Gross Profit Margin show?
It is the percentage of revenue which is gross profit. (Hasn't got overheads taken out.)
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5.2. Jake's Jam has a gross profit margin of 70%. The average for the industry is 40%. What does this mean?
Jake is working more efficiently than the industry average.
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5.3. Clare's Cake's has a gross profit margin of 20%. The average for the industry is 50%. What does this mean?
It's costing her more money per £1 of sales to make her product.
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5.4. How can Clare improve her gross profit margin?
1. Reduce cost of sales 2. Increase price
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6.1. What does the Net Profit Margin show?
It shows the profit per pound of sales. But has had the overheads taken out.
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6.2. How do you know if it's a good profit margin?
1. Compare it to industry average 2. Compare it to last years figure.
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7.1. What is a balance sheet?
It shows the assets and liabilities and how much the business is worth.
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7.2. Why does a business need to create a balance sheet?
1. It's a legal requirement for limited businesses 2. To show investors.
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7.3. What is an asset?
Things of value owned by the company.
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7.4. Fixed Assets
Things that you own for more than a year.
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7.5. Current Assets
Things that you own for less than a year.
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7.6. What are liabilities?
Items owed to other parties by the business.
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7.7. Long term liabilites
Long term bills such as a mortgage.
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7.8. Current liabilities
Short term bills such as an overdraft/supplier.
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7.9. How do you work out how much the business is worth?
Assets - Liabilities = What the business is worth
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7.10. What is working capital?
(Assets - Liabilities = working capital) This is the amount of money available for the day to day running of the business. Can be a problem if you have a negative figure = not enough cash for debts.
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8.1. What does liquidity mean?
Liquidity is the amount of cash that a business has and shows whether the business can pay its debts over the coming months.
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8.2. What happens if a business is unable to raise cash to improve it's liquidity position?
It may be forced to stop trading.
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8.3. What does the current ratio show?
It shows how much in stock and cash a business has for each £1 or short term debt.
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8.4. What would it mean if a business had a ratio of 0.9:1?
They would have liquidity problems because they would only have 90p for each £1 of short term debt.
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8.4. What makes a good current ratio?
One that is higher than 2:1 meaning that a business has £2 to pay each £1 of debt. Having twice as much cash as the business is likely to need allows it to cope with situations such as an unexpected bill from suppliers.
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8.5. If a business has an acid test ratio of 2:1 what does that mean?
For every £1 or debt the business has £2 available. The figure has had stock taken out so it is a more realistic figure of how much cash the business has to pay its short term debts.
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8.6. What is a good acid ratio?
1.1:1. It is expected that a business has £1.10 available in the form of accessible current assets (excluding stock).
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Other cards in this set

Card 2

Front

1.2. State two features of selling shares.

Back

1. Have to be a private limited company (Ltd) or a public limited company (PLC). 2. You are selling a part of your business.

Card 3

Front

1.3. State two features of a mortgage.

Back

Preview of the front of card 3

Card 4

Front

1.4. State two features of retained profit.

Back

Preview of the front of card 4

Card 5

Front

1.5. State two features of an overdraft.

Back

Preview of the front of card 5
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