sources of finance

• What is the definition of turnover (revenue)?


  The amount of money taken in by a business when selling a good or a service.
• How is turnover calculated?

  Turnover = Selling Price x Quantity Sold.
• What are the ways to improve turnover?


  • Increase price to make more revenue per item sold.
  • Reduce price to create demand and sell more goods.
  • Increase promotion/advertising to attract more customers.
• What is the definition of total costs?


  The full amount of money spent by a business when producing the goods sold in a particular period.
• How are total costs calculated?

  Total Costs = Fixed Costs + Variable Costs.
• What are fixed costs?


  Costs which do not change with the number of goods made or sold.
• Give examples of fixed costs.


  Rent for the shop, monthly lease on equipment, and payment of business rates on premises.
• What are variable costs?


  A cost that changes with the number of goods produced/sold/output.
• Provide examples of variable costs.


  Raw materials, electricity, and gas.
• What is the definition of profit?


  The difference between the total revenue of a business and the total costs of a business when revenue is greater than cost.
• How is profit calculated?

  Profit = Total Revenue – Total Costs.
• What is the definition of break-even?


  Occurs where total revenue equals total costs, resulting in neither profit nor loss.
• How is the break-even point calculated?


  Break-even point is where total revenue equals total costs.
• What is contribution per unit?


  Contribution = Selling Price – Variable Costs.
• What are fixed costs?


  Costs that do not change with the number of goods made or sold.
• What are some factors a business needs to consider when raising extra finance?

  Availability of finance, interest charged, time for repayment, amount of money needed, effect on business ownership, and administration charges.
• What is personal savings/owners' capital?


  Money put into a business by its owner or owners.
• What is an advantage of using personal savings as a source of finance?


  It requires no interest or repayments.
• What is a disadvantage of using personal savings as a source of finance?


  Expansion plans may require a considerable sum of money.
• What are retained profits?


  Profits that have been kept in the business rather than paid out to its owners.
• What is an advantage of retained profits?


  It is cheaper than taking out a loan.
• What is a disadvantage of retained profits?


  Once the money has been used, it is gone.
• What is the sale of assets?


  Items of property owned by the business that are sold to raise funds.
• What is an advantage of selling assets?


  If the assets are no longer required, this could raise large sums of money.
• What is a disadvantage of selling assets?


  All assets are likely to be essential to the business, and once sold, they are no longer available for use.
• What is an overdraft?


  A form of short-term loan provided by banks to cover cash-flow difficulties of businesses.
• What is an advantage of an overdraft?


  The business is allowed to take more from its account than is in the account.
• What is a disadvantage of an overdraft?


  Interest is paid on the overdrawn amount.
• What is trade credit?


  A system of interest-free short-term credit for the purchase of non-durable goods.
• What is an advantage of trade credit?


  Allowed credit for a short time, usually 30 days, with no interest charged.
• What is a disadvantage of trade credit?


  Counts as a current liability as the amount has to be paid to the other business.
• What is hire purchase?


  A system where goods are rented but which are eventually owned by the business.
• What is an advantage of hire purchase?


  Useful for purchasing plant and machinery which can be obtained quickly.
• What is a disadvantage of hire purchase?


  Interest rates are usually very high.
• What is leasing?


  A system of renting an asset to a business where the asset remains the property of the company renting it out.
• What is an advantage of leasing?


  The business acquires the use of resources without the need for a large sum of money.
• What is a disadvantage of leasing?


  Over a long period of time, it can be very expensive and well in excess of the purchase price.
• What is a bank loan/mortgage?


  Long to medium term loans that can be used to buy producer goods.
• What is an advantage of a bank loan/mortgage?


  Access to large sums of money.
• What is a disadvantage of a bank loan/mortgage?


  Interest charged will add to costs, causing cash flow problems.