Flashcards · 8132 · Topic 6

Finance flashcards

17 cards on Topic 6, subtopics 3.6.1 to 3.6.4. Pick a subtopic or study them all.

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Internal and external sources of finance: Internal: retained profit, selling unwanted assets. External: family and friends, new share issue, loan or mortgage, overdraft, trade credit, hire purchase, government grants.
Overdraft versus loan: Overdraft: short term and flexible, for a temporary gap; interest is high and the bank can withdraw it. Loan: a fixed amount with set repayments, suited to a big long-term purchase; interest is paid and security may be needed.
Why does a start-up find it harder to raise finance than an established business?: It has no retained profit, no track record and little security, so it often relies on the owner's savings, family and friends, grants or a loan backed by a business plan.
Hire purchase: a £600 deposit plus 10 payments of £250. What is the total paid?: £600 + (10 × £250) = £3,100. The extra cost is the total paid minus the cash price.

Net cash flow and closing balance: formulas and example: Net cash flow = inflows − outflows. Closing balance = opening balance + net cash flow, and it becomes next month's opening balance. Example: opening £2,200, inflows £9,100, outflows £10,000: net −£900, closing £1,300.
Why is cash not the same as profit?: A business can make a profit on paper from credit sales while short of cash to pay staff and suppliers now. It can also have plenty of cash from a loan while making a loss.
Ways to improve cash flow: Re-schedule payments, use an overdraft, reduce outflows, increase inflows, or find new finance. First identify what caused the problem.
Why is cash important to a business, and what can a cash flow problem lead to?: Cash pays staff, suppliers and bills when they are due. Without it a business may miss payments, lose supplier trust, pay overdraft interest or even fail, however profitable it is. Positive cash flow allows it to pay on time and invest.

Average rate of return (ARR): formula and example: ARR = [(total return − cost of investment) ÷ years] ÷ cost of investment × 100. Cost £20,000, total return £29,000 over 3 years: £9,000 ÷ 3 = £3,000 a year; 3,000 ÷ 20,000 × 100 = 15%.
Reading a break-even chart: Fixed costs: a horizontal line. Total costs: start at fixed costs and slope up. Revenue: starts at zero and slopes up more steeply. Break-even is where revenue meets total costs; loss to the left, profit to the right. AQA asks you to read the chart, not draw it.
Margin of safety, with an example: Actual output − break-even output. Break-even 900 units, sales 1,150 units: margin of safety = 250 units.
Fixed costs, variable costs and total costs: Fixed costs do not change with output; variable costs change with output; total costs are fixed plus variable costs. Profit (or loss) = revenue − total costs, where revenue = price × quantity sold.
The value and limits of break-even analysis: Value: shows the sales needed to survive, supports a loan application and tests price and cost changes. Limits: assumes all output sells at a constant price and variable cost per unit, depends on forecasts and ignores the timing of cash.

Sales revenue £120,000, cost of sales £78,000, expenses £33,000. Find gross and net profit and their margins.: Gross profit = £42,000; margin 42,000 ÷ 120,000 × 100 = 35%. Net profit = £42,000 − £33,000 = £9,000; margin 9,000 ÷ 120,000 × 100 = 7.5%.
Income statement versus statement of financial position: Income statement: performance over a period (sales revenue, cost of sales, gross profit, expenses, net profit). Statement of financial position: a snapshot on one date of assets, liabilities, net assets and owners' funds.
Asset and liability: Asset: what the business owns or is owed. Liability: what it owes.
How do you judge a business's financial performance from its statements?: Compare current figures with previous years and with competitors, and look at them from each stakeholder's view: owners want profit, lenders the ability to repay, employees security and suppliers prompt payment.