Sources of Finance
What is the difference between internal and external sources of finance?
Internal sources come from within the business, like retained profits; external sources involve outside funding, such as loans or investors
What is the formula for calculating total revenue?
Total revenue = Price × Quantity sold
What is the primary purpose of a profit and loss account?
To show the profitability of a business over a specific period
What does the current ratio measure?
Whether a firm can use its liquid assets (cash or assets that can be turned into cash quickly) to cover its short-term debts
What is the primary purpose of a cash flow forecast in business management?
To predict the cash inflows and outflows of a business over a specific period, helping to identify potential liquidity issues
Name one short-term external source of finance.
Overdrafts, trade credit, debt factoring
Define “fixed costs”
Costs that do not change with the level of production or sales, such as rent
Name the three main components of a profit and loss account
Revenue, costs, profit/loss
What steps can a business take to improve its net profit margin?
Reduce operating expenses.
Increase sales prices.
Improve efficiency in production and resource allocation.
What does it indicate when a business has a positive closing balance in its cash flow forecast?
The business has sufficient cash to cover its expenses and obligations at the end of the period
What type of finance involves selling shares to the public?
Equity
What is the break-even point?
The level of output at which total revenue equals total costs
What is gross profit?
Gross profit = Revenue - Cost of goods sold
List 4 efficiency ratios used to measure a company’s operational performance and give formula of gearing ratio
Stock turnover
Debtor days
Creditor days
Gearing - (non-current liabilities)/capital employed * 100
How does a business’s cash flow differ from its profit, and why is this distinction important?
Cash flow refers to the actual movement of money in and out of a business, while profit is the surplus after all expenses are deducted from revenue. A business can be profitable but still face cash flow problems
What is a debenture, and how does it differ from a loan?
A debenture is a long-term security yielding fixed interest, often unsecured, unlike loans that may require collateral.
Give an example of a semi-variable cost
Utility bills with a fixed component and a variable component based on usage
What is the difference between operating profit and net profit?
Operating profit is gross profit minus operating expenses; net profit accounts for all costs, including taxes and interest.)
A company has sales of $300,000, cost of goods sold of $180,000, and average inventory of $30,000. Calculate the inventory turnover ratio
6 times
Explain how a business could use sale-and-leaseback as a method to improve its cash flow position
By selling an asset to a third party and then leasing it back, the business generates immediate cash inflow while retaining the use of the asset
Which external source of finance requires no repayment but may involve giving up a stake in the company?
Venture capital
How is margin of safety calculated?
Margin of safety = Current output - Break-even output
How can depreciation affect a profit and loss account?
Depreciation reduces the value of assets and is recorded as an expense, lowering net profit.)
A small retail store has a current ratio of 0.8:1 and an acid-test ratio of 0.5:1. Comment on the liquidity position of this business
The liquidity position is weak because both ratios are below the ideal benchmarks (1:1 for acid-test ratio and 2:1 for the current ratio). This suggests the business may struggle to meet its short-term liabilities
In the context of a cash flow forecast, what is the significance of the payback period, and how can it influence a business’s investment decisions?
The payback period is the time it takes for an investment to generate enough cash inflow to recover its initial cost. Businesses use this metric to evaluate the feasibility of investments, especially when managing limited cash reserves