AQA GCSE Business Unit 6 - Finance (WIP)

Reasons for needing finance

• start up capital

• to cover outflows

• to expand

Short Term Sources of Finance

• Government grants - strict critera but dont need to be repaid

• Trade Credit - not paying immediately for purchased resources, with a large fee if not paid in time

• Overdrafts - allow the firm to go into the negatives in their bank account. Higher interest rates than loans

Long Term Sources Of Finance

• Loans

  • Bank loans easy to take out but repaid with interest over a set period of time

  • Mortgages - loans used to finance purchasing property, with the property being used as collateral if the firm were to default on their payments

• Hire purchases - when a firm purchases something buy paying a deposit then paying the rest in instalments

Sources of Finance for Established Businesses

• Retained Profits - profits that the owners have put into the business after theyve paid themselves a dividend

• Fixed assets - the selling of asstes thay a business has kept long term, such as machinery

• Share Issue - a Public limited company can issue and sell shares, shares are parts of the business which means selling shares reduces control of the business

Investments

• an investment is something a business outs money into in order to make profit

• some examples of investments are

  • new machinery

  • new buildings

  • new vehicles

• spending money is risky because if there isnt a ROI (Return On Investment) the business may lose lots of money

Average Rate of Return

Average annual Profit

ARR(%)= —————————— X100

Initial Investment

Break even Analysis

• Breaking even is when your total revenue = your total costs

• When total costs are higher than revenue the busmess is making a Loss

• when revenue is higher than total costs, a business is making rpofit

Margin of Safety

• The margin of safety is how many less units a business could produce and sell and still break even.

• If the break even output for a business was at 1000 Units, and the business was producing 1800 Units, the margin of safety would be 800 Units (1800-1000=800)

Advantages of Break even analysis

• easy to work out

• allows business to predict how changes in output may affect revenue costs and profit

• can be used in cohesion with a business plan to get a loan

Disadvantages of Break even analysis

• break even analysis assumes all products sre sold and there are no returns

• can be complicated with more than one product

• doesnt predict how much a business WILL sell

Cash Flow Forecasts

• a cashflow forecast is a way of predicting when a firm my face a liquidity problem

• the firm will see when or if they are scheduled to go into the red

• the forecast needs to be monitored to see the impact of unexpected cash flows

Cash Flow - Credit

• credit terms tell you how long after a purchase a customer has to pay

• if a business gives two months credit, customers must pay within two months of purchase

• this changes cash flow diagrams as even though the sals may be registered in a certain month the inflows are only marked at the end of the credit term

Poor Cash Flow

• Having poor cash flow is one of the major problems that can kill a business

• The main reasons for poor cashflow are

  • Poor sales - lack of demand from consumers

  • Overtrading - taking on too many orders and not being able to fulfill them

  • Poor business descisions - e.g. expanding into a new market which doesnt give the revenue forcasted

Improving Cash Flow

• Rescheduling payments

  • giving customers less time to pay

• Reducing cash outflow

  • laying off worker or selling their retained surplus of products

• arranging an overdraft

• finding new sources of finance

• increasing inflows e.g. increasing selling price

Income Statements

• an income statement is a financial statement showing how income has changed over time

• There are three parts to an Income statement

  • Trading account

  • Profit and Loss account

  • Appropriation account

• The trading account shows the gross profit/loss, the revenue and the cost of sales

• the Profit and Loss Account shows the indirect costs of running a business, such as wages or rent. it also coveres depreciation, which is how much the value of an asset decreases

• The appropriation account is unique to Limited companies and records where the profit has gone e.g. to the government, to shareholders or being kept as retained profit