BUSINESS IGCSE EDEXCEL UNIT 3 FLASHCARDS (copy)

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IGCSE Edexcel Business Studies unit 3 - business finance

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87 Terms

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short term finance

money borrowed for one year or less

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long term finance

money borrowed for more than one year

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capital

finance provided by the owners of a business

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internal finance

finance generated by the business from its own means

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internal sources of finance

  1. personal savings

  2. retained profit

  3. selling assets

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retained profit

profit held by a business rather than returning it to the owners

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assets

resources owned or used by the business

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advantages of retained profit

  1. cheap

  2. very flexible

  3. do not dilute ownership of company

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disadvantages of retained profit

  1. shareholders may prefer dividends

  2. can be very small

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advantages of personal savings

  1. easy to use

  2. potential to earn interest

  3. can be used however the owner sees fit

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disadvantages of personal savings

  1. may not be much to use

  2. no further finance

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advantages of selling assets

  1. doesn’t have to be repaid

  2. can get money for assets that are not in use

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disadvantages of selling assets

  1. sold for less than what was purchased for

  2. asset can’t be used once sold

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external finance

finance obtained from outside the business

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bank overdraft

agreement with bank where business spends more money than it has in its account

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advantages of bank overdraft

  1. easy to arrange

  2. flexible

  3. not secured on assets

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disadvantages of bank overdraft

  1. can be withdrawn at short notice

  2. higher interest rate than bank loan

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trade payables

buying resources from suppliers and paying for them at a later date

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advantages of trade payables

  1. flexible

  2. commonly available

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disadvantages of trade payables

  1. cost of goods is higher

  2. extra costs if payments delayed

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advantages of credit cards

  1. no need to carry cash

  2. shopping online

  3. buying what you need when you need it

  4. pay for things in instalments

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disadvantages of credit cards

  1. takes time to pay off debt

  2. interest rates may be high

  3. missing a payment could affect credit rating

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advantages of loan capital

  1. lower interest rate than an overdraft

  2. appropriate method of financing expensive assets

  3. greater certainty of funding if all terms of the loan are complied with

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disadvantages of loan capital

  1. requires security

  2. interest on full amount outstanding

  3. harder to arrange

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debenture

long-term security yielding a fixed rate of interest, issued by a company and secured against assets

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advantages of debenture

  1. control of business is not lost

  2. directors receive reassurance and financial protection

  3. ownership is not diluted in the company

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disadvantages of debenture

  1. interest must be paid even if the company makes a loss

  2. debenture holder has no control over the decision-making process

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hire purchase

buying specific goods with a loan, often provided by a financial house

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advantages of hire purchase

  1. access to newer and modern products

  2. fixed re-payment

  3. if something happens to the equipment, such as a breakdown, the owners must fix it

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disadvantages of hire purchase

  1. goods may be repossessed if payment is not fulfilled

  2. expensive in the long run

  3. product is not actually owned, it is still owned by the financial house

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advantages of share capital

  1. can raise large amounts of money

  2. could benefit from expert guidance

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disadvantages of share capital

  1. profit and control is diluted

  2. dividends usually need to be paid

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venture capitalists

specialist investors who provide money for business purposes

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advantages of venture capital

  1. can benefit from guidance and support

  2. opens up to new contacts

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disadvantages of venture capital

  1. share of profit and control is given up

  2. very competitive, not all business will be eligible

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crowd funding

where a large number of individuals (crowd) invest in a business venture using an online platform and therefore avoiding using a bank

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advantages of crowd funding

  1. able to attract a crowd of investors

  2. fast way to raise finance

  3. can get feedback and expert guidance

  4. valuable form of marketing

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disadvantages of crowd funding

  1. can be time consuming and a lot of work

  2. no guarantee that the project will succeed

  3. can dilute equity

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importance of cash

  1. to pay suppliers, overheads and employees

  2. to prevent business failure

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liquid

asset that is easily changed into cash

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overheads

money spent regularly on rent, electricity eg.

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insolvent

inability to meet debts

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cash flow forecast

prediction of all expected receipts and expenses of a business over a future time period, which shows the expected cash balance at the end of each month

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cash inflow

flow of money into a business

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cash outflow

flow of money out of a business

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net cash flow

cash inflow - cash outflow

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closing cash balance

amount of cash that the business expects to have at the end of each month

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importance of cash flow forecasts

  1. identifying cash shortage

  2. supporting applications for funding

  3. help when planning the business

  4. monitoring cash flow

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costs

expenses that must be met when setting up and running a business

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fixed costs

costs that do not vary with the level of output

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variable costs

costs that change when output levels change

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total costs

fixed cost + variable cost

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closing balance

net cash flow + opening balance

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total revenue

price x quantity

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total variable costs

variable costs per unit x quantity

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profit

total revenue - total cost

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break-even

level of output where total costs and total revenue are the same

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break-even point

fixed cost/selling price - variable cost per unit

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margin of safety

actual sales - break-even sales

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statement of comprehensive income

financial document showing a firm’s income and expenditure in a particular time period

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profit

money left over after all costs have been subtracted from revenue

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gross profit

sales revenue - cost of goods sold

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operating profit

gross profit - expenses

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mark-up

profit/cost x 100

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capital

assets - liabilities

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net assets

total assets - total liabilities

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distributed profit

profit returned to owners of the business

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labour productivity

output/number of workers

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capital productivity

output/capital employed

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retained profit

profit for the year after taxes/dividends

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statement of financial position

summary at a point in time of business assets, liabilities and capital

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liabilities

debts of the business, which provide a source of funds

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non-current assets

assets that last for more than one year

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current assets

assets likely to be changed into cash within a year

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liquidity

ease at which assets can be sold for cash

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trade receivables

amounts of money that are owed to a company by customers

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current liabilities

debts that have to be repaid within a year

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working capital

current assets - current liabilities

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non-current liabilities

debts that are payable after 12 months

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goodwill

value that a company has because it has a good relationship with its customers and suppliers

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profitability ratios

measure the performance of the business and focus on profit, revenue and the amount invested in the business

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liquidity ratios

measures how easily a business can pay its short-term debts

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gross profit margin

gross profit/revenue x 100

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operating profit margin

operating profit/revenue x 100

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current ratio

current assets/current liabilities

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acid test ratio

current assets - inventory/current liabilities

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return on capital employed

operating profit/capital employed x 100