Finance flashcards

Topic 6: Finance

Internal and external sources of finance

Internal: retained profit and selling unwanted assets. External: family and friends, a new share issue, loans or mortgages, overdrafts, trade credit, crowdfunding, and government or charitable grants and loans.

Why do new and established businesses differ in raising finance?

A new business has no track record, so lenders see more risk. An established business has a profit history, assets and credibility.

Net cash flow and closing balance

Net cash flow = inflows − outflows. Closing balance = opening balance + net cash flow. Example: opening 2,000, inflows 6,500, outflows 7,200: net −700, closing 1,300.

Ways to solve a cash flow problem

Re-schedule payments, an overdraft, reduce cash outflows, increase cash inflows (chase debtors, prompt-payment discounts, sell assets), or new sources of finance.

Margin of safety, and an example

Margin of safety = actual or planned output − break-even output. Break-even 800 units, planned 1,100 units: margin of safety = 300 units.

Payback period: cost 24,000, net inflows 8,000, 12,000 and 15,000 a year

After two years 20,000 is repaid. Remaining 4,000 ÷ 15,000 ≈ 0.27 of a year, about 3 months. Payback ≈ 2 years 3 months.

Assets

Owned by, or owed to, the business (non-current and current).

Liabilities

Owed by the business (current and non-current).

Gross profit margin and net profit margin

Gross profit margin = gross profit ÷ revenue × 100. Net profit margin = net profit ÷ revenue × 100.

Revenue 80,000, cost of sales 52,000, expenses 20,000. Find both margins.

Gross profit = 28,000, margin 35%. Net profit = 8,000, margin 10%.

Four comparisons for judging financial performance

Current performance, previous years, competitors, and the view of each stakeholder (owners, lenders, employees, suppliers).