BUSINESS IGCSE EDEXCEL UNIT 3 FLASHCARDS

short term finance

short term finance

money borrowed for one year or less

long term finance

money borrowed for more than one year

capital

finance provided by the owners of a business

internal finance

finance generated by the business from its own means

internal sources of finance

1. personal savings

2. retained profit

3. selling assets

retained profit

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

assets

resources owned or used by the business

advantages of retained profit

1. cheap

2. very flexible

3. do not dilute ownership of company

disadvantages of retained profit

1. shareholders may prefer dividends

2. can be very small

advantages of personal savings

1. easy to use

2. potential to earn interest

3. can be used however the owner sees fit

disadvantages of personal savings

1. may not be much to use

2. no further finance

advantages of selling assets

1. doesn’t have to be repaid

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

disadvantages of selling assets

1. sold for less than what was purchased for

2. asset can’t be used once sold

external finance

finance obtained from outside the business

bank overdraft

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

advantages of bank overdraft

1. easy to arrange

2. flexible

3. not secured on assets

disadvantages of bank overdraft

1. can be withdrawn at short notice

2. higher interest rate than bank loan

trade payables

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

advantages of trade payables

1. flexible

2. commonly available

disadvantages of trade payables

1. cost of goods is higher

2. extra costs if payments delayed

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

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

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

disadvantages of loan capital

1. requires security

2. interest on full amount outstanding

3. harder to arrange

debenture

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

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

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

hire purchase

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

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

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

advantages of share capital

1. can raise large amounts of money

2. could benefit from expert guidance

disadvantages of share capital

1. profit and control is diluted

2. dividends usually need to be paid

venture capitalists

specialist investors who provide money for business purposes

advantages of venture capital

1. can benefit from guidance and support

2. opens up to new contacts

disadvantages of venture capital

1. share of profit and control is given up

2. very competitive, not all business will be eligible

crowd funding

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

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

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

importance of cash

1. to pay suppliers, overheads and employees

2. to prevent business failure

liquid

asset that is easily changed into cash

overheads

money spent regularly on rent, electricity eg.

insolvent

inability to meet debts

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

cash inflow

flow of money into a business

cash outflow

flow of money out of a business

net cash flow

cash inflow - cash outflow

closing cash balance

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

importance of cash flow forecasts

1. identifying cash shortage

2. supporting applications for funding

3. help when planning the business

4. monitoring cash flow

costs

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

fixed costs

costs that do not vary with the level of output

variable costs

costs that change when output levels change

total costs

fixed cost + variable cost

closing balance

net cash flow + opening balance

total revenue

price x quantity

total variable costs

variable costs per unit x quantity

profit

total revenue - total cost

break-even

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

break-even point

fixed cost/selling price - variable cost per unit

margin of safety

actual sales - break-even sales

statement of comprehensive income

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

profit

money left over after all costs have been subtracted from revenue

gross profit

sales revenue - cost of goods sold

operating profit

gross profit - expenses

mark-up

profit/cost x 100

capital

assets - liabilities

net assets

total assets - total liabilities

distributed profit

profit returned to owners of the business

labour productivity

output/number of workers

capital productivity

output/capital employed

retained profit

profit for the year after taxes/dividends

statement of financial position

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

liabilities

debts of the business, which provide a source of funds

non-current assets

assets that last for more than one year

current assets

assets likely to be changed into cash within a year

liquidity

ease at which assets can be sold for cash

trade receivables

amounts of money that are owed to a company by customers

current liabilities

debts that have to be repaid within a year

working capital

current assets - current liabilities

non-current liabilities

debts that are payable after 12 months

goodwill

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

profitability ratios

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

liquidity ratios

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

gross profit margin

gross profit/revenue x 100

operating profit margin

operating profit/revenue x 100

current ratio

current assets/current liabilities

acid test ratio

current assets - inventory/current liabilities

return on capital employed

operating profit/capital employed x 100