2.1.1 Internal Finance
Capital expenditure : spending on items that have been used again and again (factory)
Revenue expenditure : payments for goods that have been consumed or about to (Wages)
a) Owners Capital: b) Retained profits c) Sales of asset
Personal savings
- Profit after tax - Sell unwanted assets
- Money provided by - Flexible source / be (machinery)
the owners. accumulated in a
- source: personal saving bank
spending - Shareholders get less
dividends
Advantages Disadvantages
- Capital is ready immediately - Internal finance can be limited / no
- Internal finance is cheap unwanted assets - not enough profit
- No need for third parties - Inflexible
Knowledge Check
1. What is the difference between revenue expenditure and capital expenditure?
2. Give three examples of capital expenditure a farmer might undertake.
3. What is meant by capital?
4. State one advantage of using retained profit as a source of finance.
5. State two advantages of using the sale of assets to raise finance.
6. State two disadvantages of using internal finance.
2.1.2 External Finance
A) Sources of Finance b) Method of finance
Family and friends Loans
- Cheap source - Be repaid over a period (unsecured
- Family would not want a stake loan)
Negatives - Mortgages (secured) lender can sell
- May cause loss in friends assets to repay themselves
Banks Share capital
- Loans, overdrafts and mortgage - Sell of shares
- Equites risky , dividends aren't
Peer-to-peer lending guaranteed
- All loans are unsecured
- Lending money to unrelated Overdrafts
individuals - Bank overdraft can spend a lot more
than in their bank
Business angels
- Invest heavily for a stake in a Leasing
business - Contract - business gets resources in
Disadvantages return of regular payment
- Angels may put pressure on a Advantage
, business - No large sum of money are needed
- Repair costs are not responsibility of
Crowdfunding user
- Individuals lend money with no - Equipment is needed occasionally
background knowledge Disadvantage
- Long period of time can be more
expensive
Trade credit
- Paying for material within 30-90 days
Knowledge Check
1. What is meant by external finance?
2. What is the difference between crowdfunding and peer-to-peer lending?
3. State two reasons why a business angel would invest in a business
4. Bank overdrafts are flexible. What does this mean?
5. What is the main advantage of an unsecured bank loan for a business, when raising
finance?
6. What is the difference between an ordinary share Band a preference share?
7. What is meant by capital gain
8. State two advantages of leasing as a method of finance
9. How might a business use trade credit as a method of finance?
10. What sort of business might venture capitalists look to invest in?
2.1.3 Liability
a) Implication of unlimited liability b) Finance appropriate for limited and
unlimited liability businesses
- Exposed to financial to failure to
business Unlimited
- Inability to sell debts = sell of assets - Personal savings
- Retained profits
Implication of limited liability Limited
- Business angels / hard to find
- Shareholders cannot be legally forced - Share capital/selling shares are own
to sell assets resources
- Lose the money invested in shares
Case Study page
Knowledge Check
1. What is the difference between limited and unlimited liability?
2. State two implications of limited liability for a business.
3. Why might a business with unlimited liability sometimes find it easier to raise finance than
one with limited liability?
4. How is a limited liability business most likely to raise capital?
5. What is a rights issue?
6. Which sort of business is likely to issue
2.1.4 Planning
, a) Relevance of a b) Interpretation of a c) Use and limitations of
business plan in simple cash-flow a cash-flow forecast
obtaining finance forecast and
calculations based on - Based on estimates
- Investors are not changes in the cash- - If cash in / outflows
likely to invest without flow variables are inaccurate -
a plan closing balance are
- - Opening balance unreliable
(stays the same) - External factors may
- Sales (451) - total affect cash flow
payments (365) =
extra 86
- Closing balance 11 +
86 = 97
Knowledge Check
1. State 5 pieces of information that are likely to appear in a business plan.
2. Give two examples of cash inflows in a cash-flow forecast
3. Give two examples of cash outflows in a cash-flow forecast
4. How is the net cash flow calculated in a cash-flow forecast?
5. How is the closing cash balance calculated in a cash-flow forecast?
6. State three benefits of using a cash-flow forecast
7. How is a cash flow forecast used as a planning tool?
8. State three limitations of using a cash-flow forecast
2.2.1 Sales forecasting
a) Purpose of sales b) Factors affecting c) Difficulties of sales
forecasts sales forecasts forecasting
- Reduce uncertainty - Consumer trends -Uncertainties may affect
and plan effectively -Change constantly sales results
- Time series analysis - - Economic variables
predicting from past -inflation - consumers spend
data less
-unemployment
- Allows business to
plan orders and - Actions of competitors
supplies -Lowering prices
Knowledge Check
1. Why might a business want to predict future sales?
2. State three advantages to a business of using sales forecast
3. What is time series data?
4. What is meant by trend?
5. State three economic variables that might affect the sales forecasts of a business
6. Give three reasons why consumer trends might change
7. State three difficulties in accurately forecasting sales
, 2.2.2 Sales, Revenue and costs
a) Calculation of sales volume and sales b) Calculation of fixed and variable costs
revenue
Sales volume = number of units sold Variable costs - a cost that rises as output
Sales revenue = Price * Quantity sold rises
Knowledge Check
1. What is the difference between sales volume and sales revenue?
2. How is sales revenue calculated?
3. What is the difference between the short run and the long run in business?
4. Give two examples of fixed costs for a taxi driver
5. Give two examples of variable costs for an online retailer
6. What is meant by a semi-variable cost?
7. How is profit calculated?
2.2.3 Break-Even
A) Contribution: selling price - variable b) Break-even point
unit
Total contribution : total revenue - total - Total revenue = total fixed costs +
variable costs total variable costs
c) Using contribution to calculate the break- d) Margin of safety
even point -output of sales before a loss is made
- Break-even output: Fixed costs
contribution
e) Interpretation of break-even charts f) Limitations of break-even analysis
- Output and stocks - assumes all
output is sold
- Accuracy of data - effectiveness
depends on the accuracy of data
Knowledge Check
1. A product sells for £10 and the variable costs are £8.50. What is the contribution per
unit?
Capital expenditure : spending on items that have been used again and again (factory)
Revenue expenditure : payments for goods that have been consumed or about to (Wages)
a) Owners Capital: b) Retained profits c) Sales of asset
Personal savings
- Profit after tax - Sell unwanted assets
- Money provided by - Flexible source / be (machinery)
the owners. accumulated in a
- source: personal saving bank
spending - Shareholders get less
dividends
Advantages Disadvantages
- Capital is ready immediately - Internal finance can be limited / no
- Internal finance is cheap unwanted assets - not enough profit
- No need for third parties - Inflexible
Knowledge Check
1. What is the difference between revenue expenditure and capital expenditure?
2. Give three examples of capital expenditure a farmer might undertake.
3. What is meant by capital?
4. State one advantage of using retained profit as a source of finance.
5. State two advantages of using the sale of assets to raise finance.
6. State two disadvantages of using internal finance.
2.1.2 External Finance
A) Sources of Finance b) Method of finance
Family and friends Loans
- Cheap source - Be repaid over a period (unsecured
- Family would not want a stake loan)
Negatives - Mortgages (secured) lender can sell
- May cause loss in friends assets to repay themselves
Banks Share capital
- Loans, overdrafts and mortgage - Sell of shares
- Equites risky , dividends aren't
Peer-to-peer lending guaranteed
- All loans are unsecured
- Lending money to unrelated Overdrafts
individuals - Bank overdraft can spend a lot more
than in their bank
Business angels
- Invest heavily for a stake in a Leasing
business - Contract - business gets resources in
Disadvantages return of regular payment
- Angels may put pressure on a Advantage
, business - No large sum of money are needed
- Repair costs are not responsibility of
Crowdfunding user
- Individuals lend money with no - Equipment is needed occasionally
background knowledge Disadvantage
- Long period of time can be more
expensive
Trade credit
- Paying for material within 30-90 days
Knowledge Check
1. What is meant by external finance?
2. What is the difference between crowdfunding and peer-to-peer lending?
3. State two reasons why a business angel would invest in a business
4. Bank overdrafts are flexible. What does this mean?
5. What is the main advantage of an unsecured bank loan for a business, when raising
finance?
6. What is the difference between an ordinary share Band a preference share?
7. What is meant by capital gain
8. State two advantages of leasing as a method of finance
9. How might a business use trade credit as a method of finance?
10. What sort of business might venture capitalists look to invest in?
2.1.3 Liability
a) Implication of unlimited liability b) Finance appropriate for limited and
unlimited liability businesses
- Exposed to financial to failure to
business Unlimited
- Inability to sell debts = sell of assets - Personal savings
- Retained profits
Implication of limited liability Limited
- Business angels / hard to find
- Shareholders cannot be legally forced - Share capital/selling shares are own
to sell assets resources
- Lose the money invested in shares
Case Study page
Knowledge Check
1. What is the difference between limited and unlimited liability?
2. State two implications of limited liability for a business.
3. Why might a business with unlimited liability sometimes find it easier to raise finance than
one with limited liability?
4. How is a limited liability business most likely to raise capital?
5. What is a rights issue?
6. Which sort of business is likely to issue
2.1.4 Planning
, a) Relevance of a b) Interpretation of a c) Use and limitations of
business plan in simple cash-flow a cash-flow forecast
obtaining finance forecast and
calculations based on - Based on estimates
- Investors are not changes in the cash- - If cash in / outflows
likely to invest without flow variables are inaccurate -
a plan closing balance are
- - Opening balance unreliable
(stays the same) - External factors may
- Sales (451) - total affect cash flow
payments (365) =
extra 86
- Closing balance 11 +
86 = 97
Knowledge Check
1. State 5 pieces of information that are likely to appear in a business plan.
2. Give two examples of cash inflows in a cash-flow forecast
3. Give two examples of cash outflows in a cash-flow forecast
4. How is the net cash flow calculated in a cash-flow forecast?
5. How is the closing cash balance calculated in a cash-flow forecast?
6. State three benefits of using a cash-flow forecast
7. How is a cash flow forecast used as a planning tool?
8. State three limitations of using a cash-flow forecast
2.2.1 Sales forecasting
a) Purpose of sales b) Factors affecting c) Difficulties of sales
forecasts sales forecasts forecasting
- Reduce uncertainty - Consumer trends -Uncertainties may affect
and plan effectively -Change constantly sales results
- Time series analysis - - Economic variables
predicting from past -inflation - consumers spend
data less
-unemployment
- Allows business to
plan orders and - Actions of competitors
supplies -Lowering prices
Knowledge Check
1. Why might a business want to predict future sales?
2. State three advantages to a business of using sales forecast
3. What is time series data?
4. What is meant by trend?
5. State three economic variables that might affect the sales forecasts of a business
6. Give three reasons why consumer trends might change
7. State three difficulties in accurately forecasting sales
, 2.2.2 Sales, Revenue and costs
a) Calculation of sales volume and sales b) Calculation of fixed and variable costs
revenue
Sales volume = number of units sold Variable costs - a cost that rises as output
Sales revenue = Price * Quantity sold rises
Knowledge Check
1. What is the difference between sales volume and sales revenue?
2. How is sales revenue calculated?
3. What is the difference between the short run and the long run in business?
4. Give two examples of fixed costs for a taxi driver
5. Give two examples of variable costs for an online retailer
6. What is meant by a semi-variable cost?
7. How is profit calculated?
2.2.3 Break-Even
A) Contribution: selling price - variable b) Break-even point
unit
Total contribution : total revenue - total - Total revenue = total fixed costs +
variable costs total variable costs
c) Using contribution to calculate the break- d) Margin of safety
even point -output of sales before a loss is made
- Break-even output: Fixed costs
contribution
e) Interpretation of break-even charts f) Limitations of break-even analysis
- Output and stocks - assumes all
output is sold
- Accuracy of data - effectiveness
depends on the accuracy of data
Knowledge Check
1. A product sells for £10 and the variable costs are £8.50. What is the contribution per
unit?
