FINANCE

• why do businesses need finance?

  start up capital, to cover costs, shortfall in liquidity, day-to-day running costs, expansion
• source of finance for small firms: GOVERNMENT GRANTS

  often given to qualifying new or small firms.

  • dont have to be repaid.
  • strict criteria must be met
  • money must be spent in a specific way
• short term source of finance for small firms: TRADE CREDIT


  businesses may give firms one or two months to pay for certain purchases.

  • time to earn money
  • could end up with a large fee if payement is too late
• short term source of finance for small firms: OVERDRAFTS


  let the firm take more money out of bank account than it has.

  • allow business to make payement on time
  • have a higher interest rate than other loans
  • bank can cancel loan at any time
  • bank can take some of the business's assets
• long term source of finance for small firms: LOANS


  1. bank loan :

  • quick + easy to take out
  • repaid with interest
  • lower rate than overdrafts

  2. loans from friends and family

  • easier
  • go into business immediately
  • individual may expect a share of profits

  3. mortgages

  • property is collateral - bank can take it back
  • low interest payments
• what is a hire purchase?

  when a small firm something by first paying a deposit, then paying the rest in instalments over a period of time.
• sources of funds available for established firms:

  1. RETAINED PROFITS

  • profits that owners put back into business after being paid a dividend
  • larger companies are under pressure to give larger dividends, so have less retained profit.

  2. FIXED ASSETS

  • assets that a business keeps long term like machinery/buildings that are no longer in use

  3. NEW SHARE ISSUES

  • a limited company can sell more shares of the business
• external finances:

  • come from outside the business
  • usually has to be paid back
  • e.g. bank loans, mortgages, overdraftcs, new share issues, trade credit, government grants and hire purchases
• internal finances:

  • comes from inside the business
  • quick and easy way to get money
  • saves borrowing and having to pay back money
  • e.g. personal/business savings, retained profits, selling fixed assets
• what are the four factors affecting choice of finance?

  1. size + type of company
  2. amount of money needed
  3. length of time finance is needed for
  4. cost of the finance
• what is an investment?

  money which is put into a business to make improvements in order to make the business more profitable
• examples of investment:

  1. new machinery to make processes more efficient/make new products
  2. new buildings to expand and increase number of employees, amount of machinery, or amount of stock
  3. new vehicles to transport more products
• average rate of return = average annual profit / initial investment x 100
• revenue


  amount of money business earns
• costs


  amount of money business has to spend
• what is the break even output?

  level of output where the firm will just cover its costs.

  • sells more = profit
  • sells less = loss

  where the total revenue and total costs are equal
• how to calculate margin of safety?

  gap between current level of output and the break-even output
• advantages of break even analysis?

  easy to work out

  quick

  allows businesses to predict changes

  help persuade a bank
• disadvantages of break even analysis?

  assumes that the firm can sell any quantity of the product at the current price

  assumes that there is no waste

  data wrong = results wrong

  can be complicated if involves more than 1 product

  only shows how much a business needs to sell not how much it actually will
• closing balance = opening balance + net cash flow
• poor cash flow means....

  not enough cash in a business to meet day-to-day expenses

  • lack of working capital

  --> staff may not get paid on time (demotivation)

  • some supplies give discounts for immediate payements

  --> business will lose out on these

  • creditors may not get paid on time

  --> may insist on stricter credit terms in future

  • some creditors may not wait for payement

  --> may take legal action to recover debt
• reasons for poor cash flow?

  POOR SALES: lack of demand from consumers

  • less money coming in
  • cannot pay creditors

  OVERTRADING: firm took on too many orders

  • brought too many raw materials + hires too many staff
  • something goes with orders and the firm wont get money from customers quickly enough to pay the debts

  POOR BUSINESS DECISIONS:

  • not enough planning or market research
• gross profit = revenue - direct costs
• what is the operating profit?

  money left after paying all indirect costs
• what is the net profit?

  after indirect costs and interest is paid
• net profit = gross profit - expenses - taxes
• gross profit margin = gross profit / revenue x 100

  gross profit margin ignores indirect costs.
• net profit margin = net profit / revenue x 100

  net profit margin takes all costs into account
• what is the statement of financial position?

  records where the business got its money from and what it has done with it.
• what is a fixed asset?

  premises, vehicles, machinery.

  • last for more than 1 year
• current assets?

  only last a few months.

  cash, stock, products sold on credit
• what are current liabilities?

  bills the firm has to pay soon
• net current assests = current assests - current liabilities