business - finance

what is finance

money raised and used by a business

7 roles of finance

calculating sales revenue + production costs

calculating profit or loss

forecasting cash flow

managing payments and receipts

arranging finance

calculating the break-even point

calculating average rate of return

5 reasons for finance

establishing a new business

funding expansion

recruitment

marketing

running the business

what is retained profit

profit that isn’t distributed to shareholders as dividends

what is owner’s capital

money put into the business from owner’s savings

what is sale of assets

items sold by the business

what is overdraft

an arrangement made with a bank so a business can spend more money than it has in its bank account

what is trade credit

when the business buys goods that don’t need to be paid for for a set period of time (usually a month)

what is a loan

a sum of money borrowed for a set time at an agreed rate of interest

9 ways of raising finance

overdraft

loans

trade credit

owner’s capital

new partner

crowdfunding

retained profit

sale of assets

issue shares

2 advantages and 2 disadvantages of owner’s capital

no need to repay and no interest

doesn’t affect ownership or control

owners risk savings

may not have enough savings

an advantage and 2 disadvantages of retained profit

no need to repay and no interest

profits may not have been made

owners will get no / less profit

2 advantages and a disadvantage of sale of assets

no need to repay and no interest

good if selling old stock / equipment

may be difficult and take time to sell

3 advantages and a disadvantage of overdrafts

fixes short-term cash flow problems

interest only paid on money owed

repayment only when business closes or overdraft is no longer needed

interest is very high (charged per day)

2 advantages and 2 disadvantages of trade credit

helps with cash flow problems

no interest if repaid on time

goods must be paid for, even if they don’t sell

interest charged if payed late

2 advantages and a disadvantage of taking on a new partner

partner may bring new skills

no need to repay and no interest

loss of control / ownership

2 advantages and 2 disadvantages of loans

repayment is in fixed sums over a period of time

money is available immediately

interest must be paid

business may need to give lender security

2 advantages and 2 disadvantages of share issue

new investors can contribute a lot of money

no need to repay and no interest

existing owners will have to give the new owners a say in running the business and a share of the profits

shares can only be sold by companies

what are 2 advantages and 2 disadvantages of crowdfunding

new supporters can contribute a lot

no need to repay and no interest

interest will be paid if the money is raised through a loan

ownership will be shared if raised through investment

what are 3 examples of short-term finance

owner’s capital

sale of assets

trade credit

what are 5 examples of medium-term finance

owner’s capital

sale of assets

retained profit

bank loan

crowdfunding

what are 7 examples of long-term finance

owner’s capital

sale of assets

retained profit

bank loan

crowdfunding

taking on a new partner

share issue

what is crowdfunding

money raised through an appeal to the public who are supporters of the business

what is revenue and its formula

the sum of money a business earns from all the sales it makes

quantity sold x price = revenue

what are 3 ways of increasing profit

increase the price

reduce price to increase sales

increase sales by increasing advertising, growth or diversification

what are 2 reasons a business won’t want to increase revenue

they may not want to expand to avoid sharing control

may want to sell to a niche market so they can charge a high price

what is the formula for total costs

total fixed costs + total variable costs

what are fixed costs

costs that stay the same regardless of a change in output

what are variable costs

costs that vary as output changes

what are 3 reasons a business may want to reduce costs

increase profits

reduce price to be more competitive

save money to expand

what are 3 ways yu can reduce costs

using new technolgy instead of workers

finding cheaper supplies of materials / goods

asking suppliers to reduce prices or lower employees wages

what is the calculation for gross profit

total revenue - cost of sales = gross profit

what is the calculation for net profit

gross profit - expenses = net profit

what are expenses

fixed costs like costs of operating the business (rent, wages etc)

gross profit margin calculation

(gross profit / total revenue) x 100 = gross profit margin

net profit margin calculation

(net profit / total revenue) x 100 = net profit margin

what is the average rate of return formula

AAR = (annual average profit / cost of investment) x 100

how do you calculate average annual profit

average annual profit = total profit / life of investment (years)

how do you calculate the total profit

total profit = total revenue from the investment - cost of investment

what are 2 uses of ARR

compare different investments

compare an investment with saving

what is the break even quantity

the nmber of sales needed for revenue to equal costs

what is the break even formula

break even output = total fixed costs / contribution per unit

how do you calculate contribution per unit

price - variable cost per unit = contributin per unit

what are 3 issues with break-even forecasts

they are only a prediction

the business may not be able to sell at the planned price

costs maybe higher than forecasted

what are 2 uses of break-even forecasts

planning how much to produce

planning the price to charge

what is cash

physical money and money a business has in their bank account

what is liquidity

the ability of a business to pay its short-term debts

what is the importance of cash

provides liquidity and enables a business to meet its short term expenses

what are 4 uses of a cash flow forecast

planning tool

anticipating periods of cash shortages

dealing with cash flow shortages

providing targets

how is cash flow used as a planning tool

bank loans are more likely given to a business with a positive cash flow and high liquidity

what are 2 ways a business can deal with cash flow shortages

arranging for finance

reducing spending or increase revenue

what is the net cash flow formula

total inflow of cash - total outflow of cash