Flashcards · 4BS1 · Topic 3

Business finance flashcards

28 cards on Topic 3, subtopics 3.1 to 3.5. Pick a subtopic or study them all.

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Internal sources of finance: Personal savings, retained profit and selling assets. No interest, but the amount is limited.
Overdraft and trade payables (short-term): Overdraft: flexible, interest only on the amount used, but high interest and can be recalled. Trade payables: free credit from suppliers, but discounts or future credit may be lost.
Loan capital and share capital: Loan capital: borrowed and repaid with interest; the lender gets no ownership. Share capital: not repaid, but shareholders own part of the company and expect dividends.
Stock market flotation, venture capital and crowdfunding: Flotation (plc only): very large sums, but costly, more reporting and takeover possible. Venture capital: specialist investors fund risky ventures for part of the ownership. Crowdfunding: many small backers; tests demand, but the target may be missed.
How do you match finance to a need?: Short-term needs (inventory, wages) suit short-term finance; long-term needs (a factory, vehicles) suit long-term finance. Only companies can issue shares, and only a plc can float on the stock market.

Why cash matters, and insolvency: Cash pays suppliers, overheads and employees. A business unable to pay its debts on time is insolvent, and can fail even when sales are good.
Net cash flow and closing balance: Net cash flow = total inflows − total outflows. Closing balance = opening balance + net cash flow. The opening balance is the previous month’s closing balance.
Opening balance 1,500. Net cash flows of −300, −400 and +1,300. Find each closing balance.: 1,500 − 300 = 1,200 1,200 − 400 = 800 800 + 1,300 = 2,100
Profit and cash: why do they differ?: Timing. A credit sale adds to profit when made but to cash only when paid; a machine bought for cash reduces cash at once but its cost is spread over its life; a loan adds cash but not profit.
What can a business do about a forecast negative closing balance?: Arrange an overdraft, negotiate longer supplier terms, get customers to pay faster, delay purchases, or sell an asset.

Revenue, fixed costs and variable costs: Revenue = price × quantity sold. Fixed costs: do not change with output in the short run (rent, insurance). Variable costs: change in direct proportion to output (materials, packaging).
Total costs and profit or loss: Total costs = fixed costs + total variable costs. Profit or loss = revenue − total costs (a loss when negative).
Break-even level of output, and the formula: The output at which revenue equals total costs, so profit is zero. Break-even output = fixed costs ÷ contribution per unit, where contribution per unit = selling price − variable cost per unit.
A stool sells for £30, variable cost £18, fixed costs £6,600 a month. Find break-even output and revenue.: Contribution = 30 − 18 = £12. Break-even = 6,600 ÷ 12 = 550 stools. Break-even revenue = 550 × 30 = £16,500.
Effect on break-even output of a price rise, a variable cost rise and a fixed cost rise: Price up: revenue line steeper, break-even falls. Variable cost up: total costs line steeper, break-even rises. Fixed costs up: total costs line starts higher, break-even rises.
Limitations of break-even charts: They assume straight-line revenue and costs, a constant price and variable cost per unit, fixed costs that stay fixed and all output sold; they rely on forecasts, ignore demand and suit a single product.

Statement of comprehensive income: the main lines: Sales revenue − cost of sales = gross profit. Gross profit − other operating expenses = operating profit.
Why profit matters: It rewards owners for risk, retained profit funds growth, it attracts lenders and investors, and it measures success. Profit is not cash.
Statement of financial position: assets and liabilities: Non-current assets: kept over a year (machinery, premises). Current assets: become cash within a year (inventory, trade receivables, cash). Current liabilities: due within a year (trade payables, overdraft). Non-current liabilities: due after a year (long-term loan).
Capital employed (standard form): Capital employed = non-current assets + current assets − current liabilities, which equals equity + non-current liabilities.
Non-current assets 310,000, current assets 90,000, current liabilities 150,000. Find capital employed.: 310,000 + 90,000 − 150,000 = 250,000

Gross profit margin and operating profit margin: Gross profit margin = gross profit ÷ revenue × 100. Operating profit margin = operating profit ÷ revenue × 100.
Markup: Markup = profit per item ÷ cost per item × 100. It is on cost, so for the same profit it is larger than the margin on selling price.
An item costs 25 and sells for 35. Find the markup and the gross profit margin.: Profit = 10. Markup = 10 ÷ 25 × 100 = 40%. Margin = 10 ÷ 35 × 100 = 28.6%.
Return on capital employed (ROCE): ROCE = operating profit ÷ capital employed × 100. Example: 18,000 ÷ 150,000 × 100 = 12%.
Current ratio and acid test ratio: Current ratio = current assets ÷ current liabilities. Acid test ratio = (current assets − inventory) ÷ current liabilities. The acid test leaves out inventory, which usually takes longest to become cash.
Current assets 72,000 (inventory 30,000), current liabilities 48,000. Find both liquidity ratios.: Current ratio = 72,000 ÷ 48,000 = 1.5 : 1. Acid test = 42,000 ÷ 48,000 = 0.875 : 1.
Revenue 80,000, cost of sales 52,000, other operating expenses 16,000. Find both margins.: Gross profit = 28,000, so GPM = 35%. Operating profit = 12,000, so operating profit margin = 15%.