Combined Business flashcards

Financial Transaction

an agreement, or a communication, carried out between a buyer and a seller to exchange an asset for payment

Assets

items an enterprise owns - including products, property, machinery and cash

Revenue

the income that a business have from its normal business activity’s

when does a financial transaction occor?

a financial transaction occurs when a buyer purchases goods or services from a seller. all enterprises need to keep these records. the buyer/seller can be B2B or B2C

what is the purpose of financial documents?

the purpose of financial documents is to ensure that the business, its customers and its suppliers have an accurate record of all trading has taken place

Why do enterprises keep financial records?

* enterprises keep these financial records so that
* managers and owners are able to calculate revenues, costs and profit/loss
* they have records of all customers and suppliers for future businesses and marketing purposes
* faulty goods can be tracked, mistakes put right or refunds sent to customers

Taxation and financial documents

* enterprises keep financial documents because they are required to do so by law
* these records are used to calculate the amount of Tax an enterprise must pay to HMRC

Flow of financial documents

* purchase order (from enterprise to supplier)
* Delivery note (supplier to enterprise)
* Goods received note (enterprise to enterprise)
* invoice (supplier to enterprise)
* payment/remittance advice (enterprise to supplier)
* receipt (supplier to enterprise)
* Statement of account (supplier to enterprise)

when is a purchase order used?

when a buyer orders goods or services from a seller

Why is a purchase order used?

* lists types, quantities and agreed prices for goods or services seller will provide to buyer
* constitutes a legal offer to buy goods or services (that is, a request to purchase goods or services)

when is a delivery note used?

when goods are delivered to the buyer

Why is a delivery note used?

* lists details about the order
* explains the contents of a package
* states anything ordered that is not in the package (due to lack of stock, unavailability, ect.)
* used by customers to check-off goods and ensure they match the purchase order

when is a goods received note used?

when goods are recived

why is a goods received note used?

* confirms all goods have been received
* can be compared against the purchase order before payment is made

when is a credit note used?

if a customer returns their goods to the seller

why are credit notes used?

* acts as a record that goods have been returned and the customer has received a refund
* may be issued so that the sum of money owed can be used later to buy goods or be discounted against another purchase from the same retailer.

when is an invoice used?

details the money owed, usually after goods have been recived

why is an invoice used?

* details the amount owed
* gives date by which money must be paid back
* explains how to pay (cash, bank transfer, ect.)

when is a receipt used?

a document acknowledging and providing proof of the purchase of a good or service

why are receipts used

* used as proof of purchase should a product needed to be returned to the seller for a refund
* provides details of the item, price paid and date of purchase

Total price

total price = quantity x unit price

Assets

items owned by the business or owed by the business

Liabilities

are amounts owed by the business

Capital

is the money invested by the owner

Balance sheet

A balance sheet is a financial statement which shows the assets, liabilities and capitals of a business on a particular date

All assets must

equal all liabilities

Fixed assets

* costs a lot of money
* are kept in the business a long time
* e.g. Equipment or buildings

Current Assets

* gets used up quickly and replaced
* can be sold quickly to raise money
* e.g. stock

current liabilities

* money owed by the business
* need to be paid within a year
* e.g. money owed to suppliers

Long Term liabilities

* long term loans
* amounts that needs to be paid back in more than 1 years time
* e.g. mortgage

statement of financial position

it is a record of a businesses assets and liabilities

top half of a SoFP

* shows what the money has done with its money
* it is the Net Assets for a business

bottom half of a SoFP

* shows where all the money that the business has used came from
* it usually comes from shareholders, retained profit and loans
* it is often called __**Capital employed**__

Working Capital

Current assets - current liabilities

Net assets = capital employed

Net assets:

* fixed assets + working capital (Current assets - current liabilities)

Capital employed:

* shareholders funds + retained profit + long term loans

Benefits of Statement of accounts

* it will enable people to be able to plan their payments
* it can help with customers as they will be able to identify when the due dates are
* the business knows the account balance is accurate because he can check payments have been credited to his account
* a customer will know how much they owe and when this amount has to be paid

Drawbacks to statement of accounts

* a business may loose customers/revenue because the enterprise would get a bad reputation as a result of customers being asked to pay an incorrect amount of money
* it can cause cash flow problems because suppliers may be relucent to offer credit as a result of missed/inaccurate payments in the past

Current ratio

current assets / current liabilities

liquid capital ratio

current assets - inventory / current liabilites

target Market

a particular group of customers or businesses within a segment at which a product is aimed

Importance of establishing a target market

* to develop a brand
* to reduce he costs of marketing to those outside the segment
* to better understand the wants and needs of the target market
* helps to develop ideas for growth and improvement

Behavioural segmentation

Behavioural segmentation distinguishes potential and current customers in terms of their shopping behaviour. this includes how much they spend, how much they consume, how often they use something and how loyal they are to the brand

behavioural segments

* spending
* consumption
* rate of usage
* loyalty status
* desired benifits

Types of markets

B2B (business to business)

B2C (business to customer)

advantages of segmentation

* improves the efficiency in marketing spend and reach
* makes choosing suable marketing media easier
* means that very specific messages and offers can be made
* can provide a competitive advantage over enterprises who do not use segmentation

Markets

* enterprises either operate in the mass market, or within a niche market
* they may sell their goods or services to other enterprises, directly to customers, or a combination of both

Profit

total revenue - total costs

Profit definition

a financial gain. the difference between amount earned and the amount spent

total revenue defnition

the amount of money an enterprise makes from sales of goods or services

total costs definition

the amount of money spent on the production of a given level of output

turnover/revenue

* turnover (also refers to sales) is the total revenue an enterprise in a given financial period
* turnover might come from a range of different products

revenue equation

price x quantity sold

cost of sales

* it costs money to make or produce any product. this is called the cost of sales or cost of goods soldG

Gross profit equation

turnover - cost of sales

Gross profit

* gross profit is the profit a business makes on selling its products
* it considers the direct costs of producing or supplying products, but does not take into account the expenses

Expenses

* expenses include all of the indirect costs of an enterprise. these are the costs not associated with the products the enterprise sells

examples of expeses

* administration
* salaries
* utility bills
* advertising

Net Profit

* net profit is the money made from selling a product after all costs have been deduced from gross profit
* it is the amount on money left when all the expenses are deducted from the gross profit figure
* net profit is also referred to as ‘the bottom line’, because it is the actual profit that can be returned to the owners of the enterprise or reinvested to help the enterprise grow

net profit equation

gross profit - expenses

negative impact of gross profit

* increase sales revenue (maybe increasing the sales volumes or prices)
* reduce the cost of sales
* using cheaper raw materials
* buying in bulk
* changing supplier or negotiating discount

positive impact on gross profit

* when gross profit is positive, its revenue is greater than cost of sales

impact of net profit

this is likely because gross profit is too low and/or expenses are too high

* increase gross profit
* reduce expenses by checking to see where savings can be made

impact of net profit when positive

* gross profit is also positive and expenditure is within budgeted levels

Purchase order

* the purpose of a purchase order is to communicate which specific services or products a customer wishes to purchase from a seller
* purchase orders are often uniquely numbered

Delivery note

* a delivery note provides a list of the products and their quantity in a delivery
* the delivery note should match the purchase order and the contents of the delivery

Goods received note

* a GRN provides an accurate record of what has been received against what has been ordered
* GRNs are commonly signed by the recipient to confirm that the delivery is correct and there are no damage’s
* once confirmed, a payment for the goods can be authorised

invoice

* an invoice lets a buyer/customer know via a written document what they purchased and how much they owe the seller/supplier
* payment details are usually provided on the invoice

Remittance advice

* remittance advice provides notice of payment sent by a customer to a supplier
* once a supplier has been notified of payment, they can cross reference the invoice as having been paid

receipt

* a receipt confirms a transaction has taken place between a buyer/customer and supplier/seller
* it is proof there has been an exchange of money for goods or services

Credit Note

* a credit note shows a return of funds in the event of damaged products, an invoice error or missing items

statement of account

* a statement of accounts shows all transactions that have taken place between a buyer and a seller over a particular period
* they highlight any monies owed or credits with an outstanding balance

Payment methods

* cash
* credit card
* debit card
* direct debit
* payment technologies
* \
* BACS

Short term sources of External finance

Bank overdraft, crowdfunding, trade credit

Medium term sources of external finances

Hire Purchase (HP), leasing, loans, peer-to-peer (P2P) lending, business angel investment

Long term sources of External finance

Mortgage, share capital, taking on new partners

Other sources of external finance

Government or charitable grants

Bank overdrafts definition

an agreement with the bank to access funds beyond those already int he account (to a specified limit)

bank overdrafts Advantages

* quick and flexible to organise and access
* helps cover shortfalls in payments in the immediate term

Bank Overdrafts Disadvantages

* high interest rates charged daily
* limited funds that have to be repaid quickly

Crowdfunding defnition

* a way to raise capital through fundraising
* members of the public each invest a small amount towards and online tagret

Crowdfunding advantages

* can be quick to raise finance, with no fees
* access to large pool of investors
* alternative source if banks say ‘no’

Crowdfunding disadvantages

* if funding target is not reached, the enterprise gets nothing and the money is returned to investors
* if you dont have a copyright or patent someone can steal your idea
* need to invest time and money to launch the product

Hire Purchase (HP) definition

A large value item is paid for in a series of monthly instalments

Hire Purchase (HP) advantages

* enterprise owns the asset at the end of the borrowing term
* splits large purchases into smaller, fixed payments
* makes expensive items more affordable and easier to buget for with fixed payments

Hire Purchase (HP) disadvantages

* large lump sum payment often required as deposit or to settle the debt
* total repaid is more than cost price owing to interest
* failure to make a payment may result in the assets being repossessed

Leasing Definition

Monthly ‘rental’ payments are made towards a large value item

Leasing Advantages

* large, expensive items become more affordable
* maintenance and repair often part of the lease agreement

Leasing Disadvantages

* item is never owned by the enterprise, and therefore cannot be included as an asset
* finance costs are often very high so you pay more in total than the market value

Loans definition

a lump sum payment is provided by a bank and then repaid in monthly instalments with interest of a period of time, usually years

Loans Advantages

* the interest rate is fixed for the entire loan
* easy to budget each months for a known repayment amount

loans disadvantages

* interest rates may be high
* the bank may want to lend against and could take ownership of it if payments are not made

Peer to peer lending (P2P)

businesses lending to other business

Peer to Peer Advantages

* unsecured so minimal risk to personal or business assets
* quick to get money as most lenders have a waiting list of investors
* convenient online applications

peer to peer lending disadvantages

* additional arrangement fees on top of interest payments may make borrowing expensive
* enterprises need to pass a credit check
* initial amount borrowed needs to be paid at the end of the loan period

Business angel definition

an investment from an individual in exchange for a share of the enterprise and its profits

Business Angel advantages

* access to advice and mentoring
* quick way to secure finance
* so not need to pay interest or repayments

Business angel disadvantages

* may involve a loss of control of core decision making
* differing visions may cause conflict as an angel will expect input into enterprise operations
* will need to give away a share of the enterprise

Mortgage definition

a loan from the bank used to purchase property or premises

* repayment terms are usually around 25 years

Mortgage Advantages

* long term period means repayments are low/affordable
* no ‘empty’ money towards rent

mortgage disadvantages

* long-term debt with significant overall interest
* missed payment jeopardises the property