Financial Information and Decisions Quiz

Financial Information and Financial Decisions

• Businesses need finance for start-up capital (initial funds), working capital (daily expenses), expansion (growth), research & development (innovation), and emergencies.

Sources of Finance (Internal)

• Retained Profit: Profits reinvested in the business instead of distributed to owners. This method has no repayment or interest requirements. However, it may not be enough funding.
• Sale of Assets: Selling existing equipment, vehicles, or land to quickly raise capital, but this isn't always feasible.
• Owners' Capital: Sole traders and partnerships can use owner investments; no interest is owed but is risky for the owner.

Sources of Finance (External)

• Short-Term:
  • Overdraft: Allows a business to withdraw more money than in the account.

Cash Flow

• Definition: The movement of money into and out of a business.
• Cash Inflows: Money coming in (sales revenue, loans, investment).
• Cash Outflows: Money going out (wages, rent, raw materials).
• Forecast: A table predicting future cash inflows and outflows. This helps prevent cash shortages and secure financing to plan for future expenses.

Causes of Cash Flow Problems

• Poor Sales: Low sales, resulting in less income flow.
• Late Payments: Customers taking too long to pay.
• High Fixed Costs: Significant expenses like rent or wages.

Income Statement

• Definition: A financial document illustrating a business's profit or loss over a specified timeframe.
• Key Components: Revenue (sales), cost of sales (direct production costs), gross profit (difference between revenue and cost of sales), expenses (indirect costs), and net profit (overall profit after all expenses).

Statement of Financial Position (Balance Sheet)

• Definition: Shows a business's financial standing on a particular date.
• Components:
  • Assets: What the business possesses: Fixed (long-term assets like land, buildings, machinery) and Current (short-term assets like cash, stock, and accounts receivable).
  • Liabilities: What the business owes: Current (short-term debts like overdrafts and accounts payable) and Non-current (long-term debts like loans, mortgages).
  • Capital/Equity: Money invested by shareholders and retained profits (profits reinvested in the business).

Financial Ratio Analysis

• Profitability Ratios: Determine a company's profitability, including gross profit margin (showing the profit based on revenue relative to costs) and net profit margin (overall profit after all expenses).
• Liquidity Ratios: Assess a business's ability to meet short-term debts, such as the current ratio (comparing current assets and liabilities), and acid-test ratio (comparing current assets minus inventory with current liabilities).