AQA A level Business: Finance (Entire of unit 5)

Capital expenditure

Finance used to purchase, upgrade or improve the life of long-term assets.

Borrowing

Finance that a business raises through loan capital.

Gross profit

revenue- variable costs

Operating profit

gross profit- fixed costs

Profit for the year (net profit)

operating profit- interest and taxation

Profit margins

accounting measures designed to gauge the financial health of a business.

Gross profit margin

(gross profit/ sales revenue) x 100

Operating profit margin

(operating profit/ sales revenue) x 100

Profit for the year margin

(profit for the year/ sales revenue) x 100

Cash flow

the cash moving into and out of a business over a given period of time.

Budget

A financial plan.

Variance Analysis

The differences between planned activities in the form of budgets and the actual results achieved.

Payables

money owed for goods and services that have been purchased on credit.

Receivables

money owed by a business' customers for goods and services purchased on credit.

Contribution

the amount of money left over after variable costs have been subtracted from revenue.

Contribution calculation

selling price per unit - variable cost per unit

Total contribution calculation

total revenue - total variable costs

Break even calculation

fixed costs/ contribution per unit

Working capital

A measure of an organisation's short-term financial health: the cash available for day-to-day operations

Working capital calculation

current assets - current liabilities

Profitability

profits compared to sales revenue

External sources of finance

equity, loans, venture capital, mortgages, crowdfunding

Internal sources of finance

retained profit, sale of assets

Revenue

Earnings generated by a business from its trading activity.

Speed up cash inflows

Incentivise early repayment, reduce trade credit, inject fresh capital into the business.

Slow down cash outflows

delay payments to suppliers, increase trade credit, cut costs.

Ways to increase revenue

increase prices, reduce process, increase marketing, add value.

Ways to reduce costs

reduce production costs, improve efficiency, use capital more fully, eliminate unprofitable processes, reduce variable costs, lover overheads

Break even

when total revenue is equal to total costs, so a business is making neither a loss or a profit

Margin of safety calculation

actual sales - break even point

Margin of safety

The difference between how many goods are sold, and how many goods need to be sold

Retained profit

profit left at the end of the year when costs are taken from revenue

Bank overdraft

a pre- authorised loan which is an external and short-term form of borrowing

Bank overdraft pros

always available (lets you spend money you don't have), great for helping working capital, prearranged, good for temporary cash shortages, flexible repayment

Brank overdraft cons

high interest rates, limited amount, risk dependant (bank can randomly cancel or demand repayment)

Trade credit

A B2B arrangement where a supplier allows a customer to purchase goods and services upfront or a day later

Trade credit pros

improves cash flow and increases working capital

Trade credit cons

is limited in size and may annoy both customers and suppliers, leading to a loss of goodwill

Debt factoring

A short-term, external source of finance where a business sells its outstanding sales invoices to a third party

Debt factoring pros

Helps manage cash flow, provides immediate liquidity

Debt factoring cons

The factor takes a cut, so reduces overall revenue

Venture capital

An external, long-term source of equity finance where specialist investors provide funds for start-ups or expanding small-to-medium enterprises

Venture capital pros

Debt and repayment fee, may offer large sums of capital (often in 'rounds'), offer expert advice in the field

Venture capital cons

Loss of equity, loss of control over the business

Share capital

Share capital is the permanent, long-term finance raised by a company through the sale of shares to investors

Share capital pros

Potential to raise a lot of capital for expansion, no interest has to be paid like bank loans, doesn't have to be paid back

Share capital cons

lose decision making power, new shareholders may take over the business, may have to share profits in the form of dividends

Crowdfunding

Crowdfunding is an external source of finance where a business raises money by asking a large number of people to each invest a small amount, typically via online platforms like Crowdcube

Crowdfunding pros

can act as a marketing tool, investors are also advocates for the business, can raise funds for businesses that banks might ignore

Crowdfunding cons

investors get a share in the business or payments with interest, might not raise amounts needed

Mortgage

a loan securitised against a property with a long term bond/ debenture

Grant

A grant is an external source of finance typically provided by the government, local authorities, or charitable organisations to fund specific business activities

Grant pros

doesn't have to be repaid

Grant cons

a business has to meet certain criteria to qualify, amount is often related to employment size