Business Management Unit 3- Finance and Accounts

Sources of Finance

Businesses can obtain their finance from a range of sources, such as bank loans or by selling unused assets. The choice of which source(s) to use depends on several factors, including the size and type of firm, the time scale involved and the purpose of the finance.

Capital Expenditure

The purchase of resources that an organisation intends to keep for longer than a year and helps with the productive capacity now and in the future.(a accounting definition is the purchase of fixed assets)

Revenue Expenditure

Fixed assets will need maintaining and repairing and these costs are counted as revenue expenditure.

Internal sources

Come from within the business

Personal funds

Money that the owner of a business may already have

Advantages of Personal funds

Instant, no interest rate, more control

Disadvantages of Personal funds

Risky, may impact others

Retained profit

Profit which is kept back in the business and used to pay for investment in the business.

Advantages of Retained profit

Doesn't have to be paid back and there is no interest to be paid

Disadvantages of Retained profit

Not good for new businesses, no emergency money, shareholders still must be paid back

Sale of fixed assets

Also known as liquidation, it is when a company sells an asset (Fixed assets > 1 year)

Advantages of Sale of fixed assets

Instant

Disadvantages of Sale of fixed assets

Long term productivity due to sale of fixed assets, hard to turn the assets to cash

External sources of finance

Finance which is obtained from outside the business such as bank loans and cash from the issue of new shares

Share capital

money raised from the sale of shares of a limited company(Long Term)

Advantages of Share capital

No repayments or interest, large sums can be raised

Disadvantages of Share capital

Loss of control, mad shareholders, ownership diluted

Loan capital

money sourced from financial institutions such as banks, with interest charged on the loan to be repaid (medium term)

Advantages of Loan capital

Guarantee, quick

Disadvantages of Loan capital

Dept, Interest rates, may impact shares

Overdraft

Spending more money than is really in an account(short term)

Advantages of a Overdraft

Instant, flexible, always available

Disadvantages of a Overdraft

High interest rates

Trade credit

Purchasing goods and services with delayed payment( Medium term)

Advantages of Trade credit

Money can be used for other things and the supplier can be paid back at a later date

Disadvantages of Trade credit

Depends on the relationship

Grants

Money given to a firm by the government(short term)

Advantages of Grants

No repayments or loss of control, government support

Disadvantages of a Grant

The government may keep a close eye on the business

Subsidies

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.(medium/long term)

Advantages of Subsidies

No need to pay them back

Disadvantages of Subsidies

May increase competitiveness

Debt factoring

A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.(short term)

Disadvantages of Debt factoring

Full amount of debt is not received

Advantages of Debt factoring

Quick and easy source of finance, decreases bad debts

Leasing

Its like renting out equipment etc (medium term)

Advantages of leasing

Can make money off of equipment or things that may not be in use

Disadvantages of leasing

May decrease productivity

Venture capital

money provided by large investors to finance new products and new businesses that have a good chance to be very profitable(medium term)

Advantages of Venture capital

Finance is provided by a business professional who
will often offer advice and mentoring alongside the investment

Disadvantages of Venture capital

Higher risk

Business Angels

individuals who invest their personal capital directly in start-ups(long term)

Fixed costs

Costs that do not vary with the quantity of output produced

Variable costs

costs that vary with the quantity of output produced

Semi-variable costs

Costs that vary somewhat based on the number of units you sell.

Direct costs

Costs that can be specifically identified with a particular project or activity.

Indirect (overhead) costs

Cannot be traced to the production or sales of a single product

Total revenue

The amount of money generated from selling a good or service

Total Revenue Equation

Price x Quantity

Revenue streams

The range of methods in which a company makes money.

Revenue stream examples

Advertising revenue(Advertising other companies on the website), Transaction fees(a fee a firm charges for a credit card transaction), Franchise costs, Sponsorship revenues, Subscription fees, Merchandise, Donations

Breakeven analysis

the process of determining the number of units a firm must sell to cover all costs

Breakeven quantity Equation

Total Fixed Costs /
(Price of product - Variable costs/unit)or Contribution

Total contribution

Total Contribution is the difference between Total Sales and Total Variable Costs

Contribution per unit

Contribution per unit is the difference between selling price per unit and Variable Costs per unit

Breakeven quantity with profit target

(Fixed costs+Profit target)/Contribution

Break-even point

the point at which the costs of producing a product equal the revenue made from selling the product

Profit or loss

the difference between total revenue and total expenses

Margin of saftey

How much output can fall before a company reaches its breakeven point.

Profit equation

total revenue - total cost

Profit and loss account

a financial statement showing revenue, expenditure and profit during a given period

Balence sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Intangible assets

assets that do not have physical substance

Depreciation

A decrease or loss in value

Straight line method

A depreciation method that allocates an equal amount of depreciation each year.

Straight line method equation

(cost-residual value)/useful life

Reducing balance method

Calculates depreciation by subtracting a fixed percentage from the previous year's net book value

Net book value equation

Historical cost - accumulated depreciation

Ratio analysis

A quantitative management tool for analysing and judging the financial performance of a business

Gross Profit Margin

Shows the value of gross profit as a percentage of sales revenue

Net profit margin

Shows the percentage of sales turnover that is turned into net profit

ROCE

Return on capital employed

Liquidity Ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Current ratios

Shows if a firm can use its liquid assets to cover its short-term debts.

Acid Test Ratio

Is similar to current ratio however it ignores stock

Efficiency Ratios

Tells you how well your assets are being managed

Stock Turnover

number of times the average inventory on hand is sold & replaced in a given period

Debtor days

the average time it takes for a firm to collect money from its debtors

Creditor days

the average period (in days) taken to settle amounts owed by a business to suppliers

Gearing ratio

A measure of the percentage of capital employed that is financed by debt and long term finance.

Working capital cycle

1. Purchase of raw materials(cash out)
2. Process the raw materials(cash out)
3.fufill orders and deliveries(cashout)
4. firm follows up on unpaid orders(debtors), Payment received by debtors, creditors are paid and profit is made(cash in)

Cash flow forecasts

State the inflows and outflows of cash that the managers of a business expect over some future period

Investment appraisal

Evaluating the profitability or desirability of an investment project

Payback Period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Average rate of return

A measure of the total accounting return from an investment project

Net present value

The sum of all discounted cashflows minus the cost of a particular investment project...Money received in the future is worth less than it is worth now

Budgets

quantitative plans through which managers decide how to allocate available money to best accomplish company goals

Cost centres

A section of the business which creates costs but does not generate any profit eg. IT support

Profit centres

A section of a business creates costs and profit

Variances

the differences between planned amounts and actual amounts spent

Total costs Equation

fixed costs + variable costs

Total variable costs Equation

variable cost per unit x quantity

Contribution Equation

Price of the product - variable cost per unit

Gross profit Equation

sales revenue - cost of goods sold

Net profit Equation

Gross Profit - Expenses

Cost of goods Equation

Opening stock+Purchases-closing stock

Net assets Equation

Fixed assets + Working capital - longterm liabilities OR Total assests - Total liabilities

What can we deduce from a balance sheet

Total assets - total liabilities = Net assets = Owners equity

Equity

The value of the business belonging to the owners

Annual Depreciation Equation

(cost-residual value)/useful life