Internal Sources: Funds from within the business; examples include:
Retained profit
Personal funds
External Sources: Funds from outside the business; examples include:
Loans
Venture capital
Types of Finance:
Debt Financing: Borrowing money, including bank loans and overdrafts.
Equity Financing: Selling shares of ownership, often through angel investors or venture capital.
Grants & Subsidies: Government support that does not require repayment.
Trade Credit: Delayed payments owed to suppliers.
Definition: Snapshot of a company’s financial position at a specific point in time.
Key Components:
Assets:
Fixed Assets: Equipment, buildings, vehicles
Current Assets: Cash, accounts receivable, inventory
Liabilities:
Current Liabilities: Accounts payable, taxes
Long-term Liabilities: Bank loans, mortgages
Owner’s Equity: Net assets, comprising share capital and retained profit.
Formula: Assets = Liabilities + Owner’s Equity
Definition: Shows a company’s profitability over a specified period.
Key Components:
Sales Revenue: Earnings from sales.
Cost of Goods Sold (COGS): Direct costs of production.
Gross Profit: Calculated as Sales Revenue - COGS.
Expenses: Indirect costs, including salaries and marketing.
Net Profit: Gross Profit - Expenses.
Retained Profit: Net Profit - Taxes - Dividends.
Gross Profit Margin (GPM):
Formula: (Gross Profit / Sales Revenue) × 100
Measures: Efficiency in managing production costs.
Net Profit Margin (NPM):
Formula: (Net Profit / Sales Revenue) × 100
Measures: Efficiency in managing all expenses.
Increase Sales Revenue: Implement effective marketing strategies, adjust prices.
Reduce Costs:
Lower production costs.
Negotiate better terms with suppliers.
Reduce indirect costs.
Cash Flow Definition: Movement of money in and out of a business.
Key Components:
Cash Inflows: Sales revenue, loans, capital investments.
Cash Outflows: Rent, salaries, loan repayments.
Cash Flow Forecasting:
Predicting future cash movements to avoid cash shortages.
Improving Cash Flow:
Reduce Outflows: Eliminate unnecessary expenses, negotiate longer payment terms.
Increase Inflows: Offer discounts for early payments, enhance sales strategies.
Alternative Finance Sources: Utilize overdrafts, sell assets.
Break-even Point: Level where total revenue equals total costs, resulting in neither profit nor loss.
Formula:
Break-even Quantity = Fixed Costs / (Selling Price - Variable Cost per Unit)
Margin of Safety: The gap between actual sales and break-even sales.
Raising Prices: Increases revenue but may lead to decreased demand.
Reducing Costs: Lowers the break-even point.
Unit Sales: Selling individual products (e.g., retail).
Advertising: Revenue from advertisements (e.g., YouTube, social media).
Subscription: Charging for ongoing access to services (e.g., Netflix, Spotify).
Licensing: Selling usage rights for a product (e.g., software).
Franchising: Granting rights to operate under a brand (e.g., McDonald's).
Freemium: Offering basic services for free with paid upgrade options (e.g., LinkedIn, Dropbox).
Ethical Principles:
Integrity: Honesty and transparency in financial reports.
Objectivity: Avoidance of conflicts of interest.
Confidentiality: Safeguarding private financial information.
Unethical Practices:
Insider Trading: Trading based on confidential information.
Window Dressing: Manipulating financial statements for better presentation.
Greenwashing: Misleading claims about sustainability.
Which of the following is an internal source of finance?
a) Bank loan
b) Trade credit
c) Retained profit
d) Venture capital
What does the balance sheet show?
a) Profitability of a business over a year
b) Cash inflows and outflows over time
c) A company’s financial position at a point in time
d) Only a company’s liabilities
What is the formula for Gross Profit Margin?
a) (Net Profit / Sales Revenue) × 100
b) (Gross Profit / Sales Revenue) × 100
c) (Net Profit / Expenses) × 100
d) (Sales Revenue / COGS) × 100
Which of the following improves cash flow?
a) Increasing inventory levels
b) Delaying payments from customers
c) Reducing expenses
d) Taking more loans
What is break-even quantity?
a) Sales revenue needed to cover costs
b) Total profit of a business
c) Net cash inflow from operations
d) The maximum number of units a company can sell
Which financial statement reports net profit?
a) Balance sheet
b) Income statement
c) Cash flow forecast
d) Revenue model
What is an example of ethical financial behavior?
a) Insider trading
b) Accurate financial reporting
c) Window dressing
d) Greenwashing
What does the income statement show?
a) Business profits over a period
b) Cash balances
c) A company's assets and liabilities
d) Business costs only
How can a business improve net profit margin?
a) Increase production costs
b) Increase indirect costs
c) Reduce expenses
d) Lower selling prices
Which revenue model is used by streaming services like Netflix?
a) Advertising
b) Freemium
c) Subscription
d) Licensing