Business themes 2&3
Sources and methods of finance:
Internal:
- Owners capital: Owner invests in the business – unlimited liability. Easy to
access and no payback period, but amount of finance is limited.
- Selling assets: Generates capital. No interest and is cheap, but no longer
owns asset and can take time.
- Retained profits: Used for later investments. Not necessarily enough
profits to retain, shareholders may object as dividends. No interest
though!
External:
- Fam and friends
- Banks
- Peer-to-peer lenders – online operations. Have lower rates of interest than
banks. Attractive if rejected by banks.
- Business angels
- Crowd funding
- Other businesses
Short term:
- Overdrafts: flexible, but interest.
- Leasing: no large up-front sum, but more costly in long run than buying
outright.
- Grants: fixed sum given by gov. Doesn’t have to be paid back, but time
consuming and risk of failure.
- Trade credit: buy a good or service that doesn’t have to be paid back
straight away. Time period with interest but helps with cash flow.
Long term:
- Loans: borrowed money.
- Share capital: Method of finance for limited companies, money raised by
selling shares in the business.
- Venture capital: money that can be used as a method of finance that is
high risk, but has potential to be successful – business angels or
professional employees.
A business plan helps to obtain finance – research and assess risks.
Cash flow forecasts show expected inflows and outflows.
- Aren’t always accurate and needs lots of experience and research in
market.
Sales forecast help business makes decisions and predicts the future sales
volume and revenue based on past data and market research.
- Factors affecting it: consumer trends, economic variables and actions of
competitors.
Sales revenue = selling price x sales volume
Fixed costs – don’t change with output
Variable costs – rise and fall as output changes
Total costs = fixed + variable
Profit = total revenue – total costs
, Break-even point is level of sales a business needs to cover its total costs.
Break-even point = total fixed costs / contribution per unit
Contribution per unit = selling price – variable costs per unit
Margin of safety is the amount between actual output and break-even.
- Actual output – break-even output
Advantages of BE:
- Easy to do and quick – can take fast action to cut costs.
- Forecasts how variations in sales will affect costs, revenue and profits –
how much they need to sell.
Disadvantages of BE:
- If data is inaccurate, results will be wrong.
- Is simple for a single product – more complex than that. Also assumes all
products are sold with no waste, isn’t true.
Budget is financial plan for future.
- Can be motivating and helps control expenditure.
- However, can be restrictive and time consuming.
Variance is difference between actual figures and budgeted figures and means
the business is performing either worse or better than expected.
- Variance analysis means identifying and expanding variances.
Adverse (worse):
- Change marketing mix (cutting prices)
- Try motivating employees to work harder
Favourable (better):
- Set higher targets in next budget
- It can indicate more sales, therefore need to boost productivity.
Measures of profit:
Gross = total revenue – cost of sales
Operating = gross – operating expenses
Net = operating – interest
Profit margins show how profitable a business is – the amount of profit relative to
revenue or investment.
GPM = GP/revenue x 100
- Improved by increasing prices or reducing direct cost of sales
OPM = OP/revenue x 100
- Improved by increasing prices or reducing cost of sales/operating
expenses
NPM = NP/revenue x100
- High is attractive to shareholders as they may receive high dividends
- Gives overall impression of how profitable a business is
Current liabilities are debts to be paid off within a year.
Liquidity ratios show how much money is available to pay the bills.
- Liquidity of an asset is how quickly it can be turned into cash and be used
to buy things.
- Liquidity can be improved by decreasing stock levels.
Sources and methods of finance:
Internal:
- Owners capital: Owner invests in the business – unlimited liability. Easy to
access and no payback period, but amount of finance is limited.
- Selling assets: Generates capital. No interest and is cheap, but no longer
owns asset and can take time.
- Retained profits: Used for later investments. Not necessarily enough
profits to retain, shareholders may object as dividends. No interest
though!
External:
- Fam and friends
- Banks
- Peer-to-peer lenders – online operations. Have lower rates of interest than
banks. Attractive if rejected by banks.
- Business angels
- Crowd funding
- Other businesses
Short term:
- Overdrafts: flexible, but interest.
- Leasing: no large up-front sum, but more costly in long run than buying
outright.
- Grants: fixed sum given by gov. Doesn’t have to be paid back, but time
consuming and risk of failure.
- Trade credit: buy a good or service that doesn’t have to be paid back
straight away. Time period with interest but helps with cash flow.
Long term:
- Loans: borrowed money.
- Share capital: Method of finance for limited companies, money raised by
selling shares in the business.
- Venture capital: money that can be used as a method of finance that is
high risk, but has potential to be successful – business angels or
professional employees.
A business plan helps to obtain finance – research and assess risks.
Cash flow forecasts show expected inflows and outflows.
- Aren’t always accurate and needs lots of experience and research in
market.
Sales forecast help business makes decisions and predicts the future sales
volume and revenue based on past data and market research.
- Factors affecting it: consumer trends, economic variables and actions of
competitors.
Sales revenue = selling price x sales volume
Fixed costs – don’t change with output
Variable costs – rise and fall as output changes
Total costs = fixed + variable
Profit = total revenue – total costs
, Break-even point is level of sales a business needs to cover its total costs.
Break-even point = total fixed costs / contribution per unit
Contribution per unit = selling price – variable costs per unit
Margin of safety is the amount between actual output and break-even.
- Actual output – break-even output
Advantages of BE:
- Easy to do and quick – can take fast action to cut costs.
- Forecasts how variations in sales will affect costs, revenue and profits –
how much they need to sell.
Disadvantages of BE:
- If data is inaccurate, results will be wrong.
- Is simple for a single product – more complex than that. Also assumes all
products are sold with no waste, isn’t true.
Budget is financial plan for future.
- Can be motivating and helps control expenditure.
- However, can be restrictive and time consuming.
Variance is difference between actual figures and budgeted figures and means
the business is performing either worse or better than expected.
- Variance analysis means identifying and expanding variances.
Adverse (worse):
- Change marketing mix (cutting prices)
- Try motivating employees to work harder
Favourable (better):
- Set higher targets in next budget
- It can indicate more sales, therefore need to boost productivity.
Measures of profit:
Gross = total revenue – cost of sales
Operating = gross – operating expenses
Net = operating – interest
Profit margins show how profitable a business is – the amount of profit relative to
revenue or investment.
GPM = GP/revenue x 100
- Improved by increasing prices or reducing direct cost of sales
OPM = OP/revenue x 100
- Improved by increasing prices or reducing cost of sales/operating
expenses
NPM = NP/revenue x100
- High is attractive to shareholders as they may receive high dividends
- Gives overall impression of how profitable a business is
Current liabilities are debts to be paid off within a year.
Liquidity ratios show how much money is available to pay the bills.
- Liquidity of an asset is how quickly it can be turned into cash and be used
to buy things.
- Liquidity can be improved by decreasing stock levels.
