Theme Two - Raising Finance

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  • Created by: Rachelcfx
  • Created on: 26-03-19 22:29
Finance
The money a business needs to start and operate. Businesses need finance at different times for different reasons.
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Depreciation
The loss in value of assets (i.e. the worth of a resource for the business will go down over the years)
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Internal finance
Comes from within the business (owners capital, retained profit, sale of assets)
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External finance
Requires some other person(s) to give up the use of their money toward your business (authorities, family/friends, banks, peers, angels, share buyers, crowdfunding, other businesses, grants, loans, shares)
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Soft loans
Funds made available at favourable terms for the borrower, less than normal commercial interest rates
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Creditor
A person or business to which money is owed, either for providing supplies or finance.
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Debtor
A person or business who owes money to a creditor.
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Bankruptcy
An official court finding that a person has more liabilities than assets and so is unable to pay off their debts.
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Unlimited liability
Businesses lose any money they have put into the business if it fails, and are also responsible for any debts the business has. This means they have to personally repay debts to the full extent of their means. (sole traders and partnerships)
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Limited liability
Limited companies (PLC's and LTD's) exist legally separate from their owners. The company may fail and lose its assets, but the personal wealth of the owners is separate in law and so not at risk.
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Business Plan
A document that sets out what the business is, what it does, what it wants to achieve and how it is going to do so. Normally used as part of an attempt to gain financial backing.
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Cash Flow Forecast
A month by month prediction of the timings of expected cash inflows, outflows and balances for a business.
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Cash inflows (CFF)
Money gained from sales, finance, and any other income the business has.
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Cash outflows (CFF)
Payments made for all the costs of a business such as materials, labour, rent, capital costs, and loan repayments.
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Net cash flow (CFF) formula
Total cash inflow - total cash outflow
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Closing balance (CFF) formula
Opening balance + Net cash flow
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Sales Forecast
An estimation of future sales that may be based on previous sale figures, market surveys and trends or managerial estimates
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Market Intelligence
Information relevant to a company's markets, gathered and analysed specifically to inform accurate and confident decision-making
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Big data
High-volume, high-velocity and high-variety information that combines with cost-effective, innovative information processing for better insight and decision making.
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Output
Measured in quantity. Sold in order to generate sales revenue (Cash income)
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Sales
How many products/services a business sells to its customers.
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Revenue
Stream of income generated by the sale of goods and services
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Costs
Payments a business makes in order to produce goods and services.
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Sales Volume
Total physical quantity of products sold
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Sales Revenue
Total of incoming receipts for products sold
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Fixed costs
Are not directly linked to the level of output of the business. They do not change when output increases or decreases (indirect costs/overheads). Include all loan repayments and interest, and some regular costs like staff salaries.
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Variable costs
Directly linked to the level of output of the business. They change as output increases/decreases. These are something called direct costs. Include materials and cost of paying employees solely according to their contribution to actual production.
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Contribution
The amount each sale provides towards fixed costs and profit (PRICE - VARIABLE COSTS)
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Breakeven Point
The level of output at which Total Revenue is exactly the same as Total Costs. Neither a profit or a loss is being made.
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Margin of Safety
Number of units by which sales volume can fall before reaching the breakeven point (the greater the margin of safety the better position the business is in)
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What are the values of a breakeven analysis?
Inform pricing decisions, predict profit, seek finance, conduct "what if" analysis.
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Budget
financial plan for the future that sets out targets to be met, the costs of achieving them and how that spending might be financed.
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What are the 4 main purposes of budgeting?
Planning, Forecasting, Communication, Motivation
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What are the 5 steps of a budget process?
Decide objectives, obtain information, prepare budgets, monitor performance, review
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Historical approach to budgeting
Starts from the recorded experience of previous years. Extrapolation means assuming that past trends will continue into the future. This is not guaranteed but is a good starting point.
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Zero-based budgeting
Starts with no assumptions based on experience. Managers are asked to bid for funds or predict revenue they can raise. They then negotiate on an agreed budget.
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Variance
The difference between a budgeted figure and actual figure
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Adverse variance
Actual figures are worse than budgeted ones
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Favourable variance
Actual figures are better than budgeted ones
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Other cards in this set

Card 2

Front

Depreciation

Back

The loss in value of assets (i.e. the worth of a resource for the business will go down over the years)

Card 3

Front

Internal finance

Back

Preview of the front of card 3

Card 4

Front

External finance

Back

Preview of the front of card 4

Card 5

Front

Soft loans

Back

Preview of the front of card 5
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