Finance

Finance

a critical aspect of business operations, influencing every decision from daily activities to long-term strategic planning

Retained Profits, Sale of Assets, Personal Savings

Internal Sources of Finance

Retained Profits

Profits that a business keeps after paying

Sale of Assets

Selling off non-essential or underutilized assets to raise cash.

Personal Savings

Money that the business owner invests from their own savings.

Bank Loans, Overdrafts, Trade Credit, Venture Capital, Crowdfunding, Government Grants, Issuing Shares, Leasing, Hire Purchase

External Sources of Finance

Bank Loans

Money borrowed from a bank that must be repaid with interest over a set period

Overdrafts

An arrangement with a bank that allows a business to withdraw more money than it has in its account, up to a certain limit.

Trade Credit

An agreement where suppliers allow the business to pay for goods and services at a later date.

Venture Capital

Investment from individuals or firms in exchange for equity in the business

Crowdfunding

Raising small amounts of money from a large number of people, typically via the internet

Government Grants

Non-repayable funds provided by the government to support specific projects or industries

Issuing Shares

Selling ownership stakes in the company to raise capital.

Leasing

Renting equipment or property instead of purchasing it outright

Hire Purchase

Acquiring assets by paying an initial deposit followed by regular payments.

Financial Planning

The process of forecasting future financial performance and determining how to achieve financial goals

Financial Planning

Ensures that the business has sufficient funds to operate, grow, and achieve its objectives

Budgeting

Creating detailed financial plans that outline expected income and expenditure over a specific period

Sales Budget, Expenditure Budget, Cash Flow Budget

Types of Budgets

Forecasting

Predicting future financial performance based on historical data and market trends

Break-Even Analysis

Calculating the point at which total revenue equals total costs, resulting in neither profit nor loss

Financial Risk Management

Identifying and managing potential financial risks to protect the business.

Market Risk, Credit Risk, Liquidity Risk

Types of Financial Risks

Risk Management Strategies

Diversification, Hedging, Insurance, Contingency Planning

Income Statement

A financial statement that shows the business’s revenues and expenses over a specific period, resulting in a net profit or loss

Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, Operating Profit, Net Profit

Components of Income Statement

Balance Sheet

A financial statement that shows the business’s financial position at a specific point in time, detailing assets, liabilities, and equity.

Assets

Resources owned by the business

Liabilities

Obligations owed by the business

Equity

Owner’s interest in the business

Cash Flow Statement

A financial statement that shows the cash inflows and outflows over a specific period.

Operating Activities

Cash flows from primary business operations.

Investing Activities

Cash flows from the purchase and sale of assets

Financing Activities

Cash flows related to borrowing and repaying debts, and issuing equity

Statement of Changes in Equity

A financial statement that shows changes in the equity section of the balance sheet over a specific period.

Share Capital

Money raised from issuing shares

Retained Earnings

Profits reinvested in the business

Dividends Paid

Earnings distributed to shareholders

Gross Profit Margin

Gross Profit Margin = (Gross Profit / Revenue) × 100

Measures the proportion of revenue that exceeds COGS.

Net Profit Margin

Net Profit Margin = (Net Profit / Revenue) × 100

Measures the proportion of revenue that remains as profit after all expenses

Return on Capital Employed (ROCE)

Measures the efficiency and profitability of a company’s capital investments.

Current Ratio

Current Ratio = Current Assets / Current Liabilities

Measures the ability to pay short-term obligations with current assets

Quick Ratio (Acid-Test Ratio)

Quick Ratio = Current Assets − InventoryCurrent /  Liabilities

Measures the ability to pay short-term obligations without relying on inventory

Inventory Turnover

Inventory Turnover = COGS / Average Inventory

Measures how quickly inventory is sold and replaced

Receivables Turnover

Receivables Turnover = Credit Sales / Average Accounts Receivable

Measures how quickly a business collects payments from its customers

Payables Turnover

Payables Turnover = COGS / Average Accounts Payable

Measures how quickly a business pays its suppliers.

Debt-to-Equity Ratio

Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity

Measures the relative proportion of shareholders' equity and debt used to finance the company’s assets.

Interest Coverage Ratio

Interest Coverage Ratio = Operating Profit / Interest Expense

Measures the ability of a company to pay interest on its outstanding debt.