theme 2 business alevel ms jacks

finance

the management of investment needed to open, run and grow a business

reasons for raising finance

to pay debts

to help a business over a slow trading period (overdraft)

to start up a business

to buy stock

to expand

owners capital

funds invested by the business owner, representing their net assets of the company

retained profit

the portion of a company's profit that is held back from the previous year and reinvested back into the business

sale of assets

refers to the process of selling off a company's property or goods to raise capital or pay down debt. This can involve physical assets like equipment, real estate, or inventory.

Overdraft

organised by the bank, short term lending of smaller amounts of money, allows them to withdraw more money than they have in their account, up to a certain limit.

share capital

the money raised by a company through the issuance of shares, representing ownership stakes in the company.

venture captial

a type of financing provided to startups and small businesses with long-term growth potential. It typically involves investment in exchange for equity, aiming for high returns on investment. e.g dragons den

loan

a sum of money that is borrowed, typically from a financial institution, and is expected to be paid back with interest over a specified period.

leasing

a method of acquiring the use of an asset without owning it, typically in exchange for regular payments over a specified period. It allows companies to use equipment or property while preserving capital. e.g vans or machinery needed for operations.

trade credit

a type of short-term financing where a buyer is allowed to purchase goods or services on account, delaying payment for a specified period. This enables businesses to manage cash flow while building supplier relationships.

grants

funds given by an organization, government, or individual for a specific purpose, typically not requiring repayment. They are often awarded to support initiatives like research, education, or community development.

peer to peer funding

a method of raising capital where individuals lend money to each other, typically facilitated through online platforms. This approach bypasses traditional financial institutions and often connects borrowers with individual lenders looking for investment opportunities.

crowdfunding

the practice of raising small amounts of money from a large number of people, typically via the Internet, to fund a project or venture. This method allows individuals or organizations to reach a wide audience for financial support.

business angels

wealthy individuals who provide capital to startups or early-stage businesses in exchange for equity or convertible debt, often offering mentorship and guidance.

limited liability

A legal structure that protects owners' personal assets from being used to satisfy business debts; typically applies to corporations and limited liability companies (LLCs). only liable for their original investment should they fall into debt

unlimited liability

A legal structure where the owners are personally responsible for all of the business's debts and liabilities, meaning their personal assets can be used to satisfy business debts. e.g sole trader or partnership

finance suitable for an unlimited liability business

• business loans from a bank

• private investors (angels)

• credit cards from a bank

• crowdfunding from websites

• trade credit from suppliers

• owner savings

• overdraft from bank

finance suitable for a limited liability business

• retained profit from the business

• sale of assets from the business

• ordinary and preference share issues

• government grants

• venture capital - as they may be borrowing larger amounts than unlimited liability businesses

PLCs (public limited company)

these companies allow shares to be publicly traded and typically have limited liability for shareholders.

LTD (private limited company)

Private Limited Companies that restrict share ownership to a small group, providing limited liability to shareholders and not trading shares publicly.

a business plan

a document which sets out the future plans for a business, it describes goals, strategies, financial forecasts, and market analysis. the owner then may show it to a bank or another investor to ask for finance to support the business's growth and development.

reasons for writing a business plan

• to persuade lenders the business will make enough to pay back loans

• attract potential investors

• to give the owners some direction

• to set targets and objectives

cash flow

the movement of money in and out of a business over a specific period, crucial for managing liquidity and funding operations.

liquidity

the ability of a business to meet its short-term financial obligations and ensure it has enough cash flow to fund operations. and how quickly it can raise cash

cash flow forecast

a projection of future cash inflows (income) and outflows (expenditure) over a specified period, used to assess liquidity and plan for financial needs.

purpose of a business plan

• to help set up a new business

• to help raise finance

• to help the business to set objectives

• to outline how functions of the business will be organised

cash inflow (income)

the money received by a business from its operations, investments, or other activities, contributing to its overall revenue. appears at the top of the cash flow forecast

cash outflow (expenditure)

the money spent by a business e.g operational costs, reducing its overall cash balance. It is typically listed below cash inflows in the cash flow forecast.

sales forecast

estimated volume or value of future sales revenue based on historical data, market trends, and economic conditions, (market research) or past sales data.

purpose of sales forecast

• avoid cash flow problems

• frees up management time

• production capacity (may need to increase or decrease)

• employ more workers ( if high sales)

• start promotional activity

factors affecting sales forecasts

• consumer trends

• economic variables

• action of competitors

definition of break-even

point where total revenues equal total costs, resulting in neither profit nor loss.

definition of contribution

the amount remaining from sales revenue after variable costs have been subtracted, used to cover fixed costs of the business

formula for contribution

selling price per item - variable cost per item

formula for break-even

fixed costs e.g rent ÷ contribution (SP -VC)

what does margin of safety show

this shows how much sales can drop before reaching the break-even point, (before a business makes a loss)

formula for margin of safety

actual sales - breakeven of sales

budgets

an estimate of income or expenditure for a set period of time that helps organisations plan their financial resources and allocate funds effectively.

purposes of budgets

• planning

• forecasting

• motivation

• communication

profit

The financial gain achieved when total revenues exceed total costs; it's a key measure of a company's profitability.

formula for profit

P = TR -TC where P is profit, TR is total revenue, and TC is total costs.

The 3 types of profit

• gross profit,

• operating profit,

• net profit.

statement of comprehensive income

a financial statement that summarises a company's revenues, expenses, and gains or losses,

formula for gross profit

? Profit = total Revenue - Cost of Goods Sold

formula for operating profit

? Profit = Gross Profit -Expenses

formula for net profit

? Profit = Operating Profit - interest

formula for gross profit margin

? = (Gross Profit / Total Revenue) x 100

formula for Operating profit margin

? = (Operating Profit / Total Revenue) x 100

liquidity

the ability of a business to turn assets into cash to pay its current liabilities quickly and efficiently.

current ratio formula

? = Current Assets / Current Liabilities

acid test ratio formula

? = (Current Assets - Inventories) / Current Liabilities

working capital

the day to day finance needed in a business and can be calculated by CA -CL (current assets - current liabilities)