theme 2 business - finance

internal source of finance

when the finance comes from inside the business

external source of finance

when the finance comes from outside the business

owners capital

the personal savings of the businesses owner

retained profit

profit that has been generated in previous years and not distributed to the owners is reinvested back into the business

sales of assets

Selling business assets which are no longer required e.g. machinery, land and buildings

family and friends

family and friends may be able to lend the business some money but this is only likely suitable for sole traders

banks

large sums of money are able to be loaned from the bank - easier for bigger businesses such as PLC than smaller businesses such as a sole trader

peer to peer lending

when a business is able to take out a loan from a group of individuals or an institution. Loan paid back over a certain period of time.

business angels

group of experts invest in the business in exchange for a percentage share in the business. E.g. dragons den

crowdfunding

when an individual are able to invest in a business in return for a share of their business - usually used for a startup

other businesses

get finance through other businesses that are looking to invest in the business in return for a percentage of shares

loans

loaning money from a bank is like “renting” the money with an agreement to pay it back with interest over a set period.

overdrafts

when a business is allowed to spend more than it holds in its current bank account up to a pre-agreed limit, often incurring interest on the overdrawn amount.

leasing

a way of renting an asset that the business requires such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of leased item

trade credit

type of short term financing offered by suppliers or distributors that allows a business to purchase goods or services now and pay them later

grant

a sum of money provided by the government to a business that does not have to be repaid

share capital

finance invested into a company as a result of the sake of shares in the business

venture capital

funds advanced to businesses thought to be relatively high risk in the form of share and loan capital

limited liability

the liability (responsibility) of the owners of the business is limited to the fully paid up value of their share capital i.e money they have invested in the business, protecting personal assets from being used to settle business debts.

unlimited liability

the owner of the business is responsible for all the debts (money owed) of a failed business

cash flow forecast

A cash flow forecast is a document created to help predict the cash inflows and cash outflows of a business over a period of time.

cash inflows

sales of items, payments by debtors, sales of assets, interest received

cash outflows

purchase of items, loans repaid, purchase of assets and interest payments

net cash flow

cash in - cash out

closing balance

opening balance + net cash flow

opening balance

is the closing balance from previous period

sales forecast

estimates the volume or value of future sales using market research or past sales data

sales volume

quantity of products sold in a specified period. SV = SR/SP

sales revenue

Money into your business through sales is called sales revenue, SR = SP X SV

fixed costs

costs that DO NOT vary with the level of output. Including salaries, insurances and loan payments

variable costs

costs that DO vary with the level of output including raw materials, fuel and wages - TVC = AVC X Q

total costs

figures of the sum of all the costs in reaching a certain level of output - TC = VC + FC

break evem

calculated when a business is earning enough sales revenue to pay for all its costs. But it is not yet making a profit/ it is not recording loss either - break even point = fixed costs/ contribution margin per unit

contribution

looks at whether an individual product is helping the business to make a profit - contribution per unit = selling price per unit - variable cost per unit and total contribution = contribution per unit X number of units sold

profit calculation

total contribution - fixed costs

budget

an estimate of income or expenditure for a set period of time

historical budgeting

budget set for the business used current and past historical performance of the business

zero based budgeting

budgeting set for a business using figures based on potential performance

favourable variances

actual figure is BETTER than budgeted figure

adverse variances

actual figures are WORSE than budgeted figure

profit

financial gain of a business through trading and can be found by deducting expenditure from income

gross profit

revenue - cost of sales

operating profit

gross profit - other operating expenses

net profit

operating profit - interest/tax/exceptional costs

profitability

ratio over revenue, expressed as a percentage and mainly indicates the ability of a company to control costs

gross profit margin

tells a business how much gross profit is made for every pound of sales revenue received. Gross profit/revenue X 100

operating profit margin

examines the relationship between operating profit and the level of revenue. Operating profit/ revenue X 100

net profit margin

proportion of sales revenue that is left once all costs have been paid. Net profit/revenue X 100

liquidity

ability of a business to turn its assets into cash

current ratio

current assets/current liabilities - ideal ratio is 1.5:1, lower than this is not enough money to pay bills and higher than this means the money is not enough and should be invested into non-current assets

acid test ratio

current assets - stocks/ current liabilities. Harsher test of liquidity because you cannot guarantee to sell all stocks. If business is less than 1:1 then its current assets do not cover its current liability

business failure

when a business ceases to trade.

internal causes of business failure

poor efficiency, failure to innovate, bad management of working capital and poor marketing

external causes to business failure

economic recession and strong pound