Business Revision
Sources of Finance
Cash flow
Liquidity ratios
Grants-a sum of money given by a government or other organization for a particular purpose
Credit- money lent or borrowed under a credit arrangement
Overdrafts-a deficit in a bank account caused by drawing more money than the account holds.
Loans-a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.
Venture capital-capital invested in a project in which there is a substantial element of risk, typically a new or expanding business
Business angel-a person who supports a business financially, typically one who invests private capital in a small or newly established enterprise.
Retains profit-Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet.
Fixed assets-assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.
Shares-one of the equal parts into which a company's capital is divided, entitling the holder to a proportion of the profits.
Debentures-a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.
Mortgage-a legal agreement by which a bank or building society lends money at interest in exchange for taking title of the debtor's property.
Profitability ratios
Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity.
Cash flow problems mean a business spends more money than it earns
Ways to improve cash flow:
Speed up receipt of cash.
Use your business credit card
Encourage use of payment cards.
Analyse your cash flow- cash flow forecast
Work with an accountant.
Get a line of credit.
Put your cash to work.
Longer term financing.
Invest in your business
Business Costs
Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output.
Profit is the total money made once all costs have been taken from revenue
Revenue is income, or the amount of money made from sales
The income statement
An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
This information will affect stake holders because is will help show if the business is in financial trouble. This will allow employees and shareholders to predict if the business may not be the best place to work or invest into,
Statement of financial position
Gross profit margin is a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold . Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues.
Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales. The net sales part of the equation is gross sales minus all sales deductions, such as sales allowances
The statement of financial position is another name for the balance sheet. It is one of the main financial statements and it reports an entity's assets, liabilities, and the difference in their totals.
The balance sheet provides a summary of the assets and liabilities of a business. It is a snapshot of those assets at a particular moment in time.
Current assets- cash and other assets that are expected to be converted to cash within a year.
Non-current assets- A noncurrent asset is an asset that is not likely to turn to unrestricted cash within one year of the balance sheet date
The ratio between the liquid assets and the liabilities of a bank or other institution.
Ratios allow a business to identify aspects of their performance to help decision making. Ratio Analysis allows you to compare performance between departments and over time
Four different types of ratios can be used to measure:
Profitability – how profitable the firm is
Liquidity – the businesses ability to pay
Investment/shareholders – allows businesses to look at risk and potential earnings of investments
Gearing – looks at the balance between loans and shares in a business