N5BM - Finance

Describe retained profits

Using money from previous years’ profits.

Describe a grant

Money given by the government.for meeting certain criteria

Describe a bank overdraft

A facility that allows you to borrow more money than you have in your account.

Describe a mortgage

A special type of loan used to purchase land or property

Describe a bank loan

Money borrowed from the bank and paid back in instalments with interest.

Describe a lease

Renting vehicles or a piece of equipment.for a monthly fee - asset is never owned.

Describe hire purchase

Hire purchase allows a business to buy an asset and pay for it in instalments - the asset is owned after the last payment

Explain benefits of a loan

flexible > can be used for various purposes; spread the cost of an item over many months due to small monthly repayments

Explain disadvantages of a loan

Costly . must repay with interest; collateral > must have assets to prove you can repay the loan

Explain benefits of a grant

inexpensive > does not have to be repaid; advice > may come with support from government

Explain disadvantages of a grant

time-consuming > lots of paperwork to complete; inflexible > must be used for specific purpose

Explain benefits of a lease

saves repair costs > covered by leasing firm; up-to-date equipment > can ensure new equipment is leased after expiration of old lease

Explain disadvantages of a lease

costly . will pay more than if bought outright; no ownership - have nothing to show for leasing payments

Explain benefits of a bank overdraft

flexible - can be used for multiple expenses; quick to set up > can be done by using an app.

Explain disadvantages of a bank overdraft

expensive > interest rates high; limited use > only a small amount of money will be available

Explain benefits of retained profit

flexible > can be used for multiple expenses; inexpensive > does not have to be repaid

Explain disadvantages of retained profit

unavailable to new firms > business must have previous profits; upset shareholders > would rather dividend payments were higher

Describe Fixed Costs

Costs that do not change based on the number of units produced, such as rent, manager salaries, electricity, or insurance.

Describe Variable Cost

Costs that do change based on the number of units produced, such as labour, materials, or delivery

How do you calculate total costs

total fixed costs + total variable costs

How do you calculate total variable costs

variable cost per unit x units sold

Describe Sales Revenue

The income received from a company in exchange for the goods/services it provides.

How do you calculate Sales Revenue

Selling Price x Units sold

Describe Selling Price

Selling price is how much a buyer pays for a good or service.

Describe Profit

Profit is the difference between the income generated by sales revenue and the expenses incurred from costs.

How do you calculate Profit

Sales Revenue - Total Costs

Describe Breakeven

The breakeven point is the point at which sales revenue and total costs are equal. At this point, the firm is making neither a loss or profit.

How do you calculate the breakeven point

fixed costs / unit contribution

How do you calculate unit contribution

selling price - variable cost per unit

How do you the find the breakeven point on a graph

where the total costs and sales revenue lines cross.

Which units are used to show breakeven point?

Depends on the question; if it asks for how many units need to be sold, then the answer is “x units”; if it asks for the sales revenue where you will breakeven, the answer will be “£XXXX”

Describe cash

Cash is the stock of money available to a business. It is used on day-to-day expenses such as fixed costs and variable costs.

Describe how firms get cash

By selling goods and services; by using a source of finance

Explain why cash is important

Avoids demotivating employees because they will get paid on time; ensures products are in stock because materials can be bought from suppliers’ can keep the business running because overheads can be paid.

Describe how cash flow problems occur

Spending too much on stock that isn’t selling; purchased an expensive asset that they could not afford; giving customers too much time to pay; paying expenses immediately instead of using credit.

Explain how to solve cash flow problems

Using a lease for equipment > this means no one-off large payment; take out a loan > provides cash injection; hold less stock > frees up cash in the business to be used elsewhere.

Describe a cash budget

A cash budget is a forecast of a firm's inflows and outflows over a specific period of time. It can be used as a tool to aid decision-making.

Explain the importance of a cash budget

gain investment > proves to shareholders you are well run; gain loans > proves to banks you can repay; improved decision-making > can see which costs need to be reduced; “what-if?” analysis > can see impact of purchasing expensive asset.

Describe an income statement

Income Statements show profit for the year by calculating sales revenue, subtracting the cost of goods sold, and then subtracting overhead expenses.

Describe Gross Profit

The profit/loss from manufacturing goods/services and selling them, not including overhead expenses.

Describe Profit for the year

The profit/loss made when accounting for all the expenses in the business.

Describe Cost of Sales

Expenses directly associated with producing the good/service, such as labour, materials/purchases, delivery, etc.

Describe Expenses

Overhead costs required to keep the business running, but do not directly go to producing the good/service, such as rent, advertising, insurance, etc

Explain why firms create income statements

to avoid fines > it is legally required; to calculator profit > can see all sales and expenses; gain investment > prove to shareholders you make profit; gain loan > can show banks you can repay.

Explain the use of spreadsheets in finance

accurate > can be programmed to automatically calculate; saves time > templates can be created; can help when presenting > graphs and charts can be easily created; collaboration > can be accessed and edited by multiple people.

Describe technology that can be used in finance, other than spreadsheets

BACS allows for money to be transferred electronically between bank accounts; e-mail can be used to send invoices to customers; powerpoint can be used to present reasons a loan should be given