Finance

• Role and Importance of Financial Management..

  • Ensure adequate funds are available to the organisation to achieve its objectives.
  • Ensure costs are monitored and controlled.
  • Ensure there is adequate cash flow.
  • Maximise and maintain profit levels.
  • Generate appropriate financial information for managers and design makers.
• Sources of Finance ( description, advantage, disadvantage )

  -> Debt Factoring


  • Involves the firm selling its debts to a 'factor' less than face value.
  • The factor chases up the unpaid debt, saving the company time and money.
  • Factors tend to be interested in only large outstanding debts as they can earn more profit.
• Sources of Finance ( description, advantage, disadvantage )

  -> Leasing


  • Involves the business renting equipment or vehicles instead of buying it themselves.
  • Equipment can be changed on a regular basis so it will be up-to-date.
  • Equipment is not owned by the business.
• Sources of Finance ( description, advantage, disadvantage )

  -> Retained Profits


  • Where profits are kept back from previous years to put back into the business.
  • This method does not involve paying back interest to another business.
  • Businesses may find it difficult to get enough finance just using retained profits.
• Sources of Finance ( description, advantage, disadvantage )

  -> Crowdfunding


  • Is where individuals or organisations invest in ( or donate to ) crowdfunding projects in return for a potential profit or reward.
  • Pitching a product online is a form of marketing and can lead to media attention.
  • If you don't reach your funding target, any finance that has been pledged will usually have to be returned to your investors and you will receive nothing.
• Sources of Finance ( description, advantage, disadvantage )

  -> Bank Loan


  • Where the bank agrees to lend a certain amount for a specific purpose for a specified period of time with agreed amounts to repay each month.
  • Helps the business to plan loan repayments spread over a number of years.
  • Interest has to be paid on the loan.
• Sources of Finance ( description, advantage, disadvantage )

  -> Hire Purchase


  • Where vehicles can be purchased by paying for them over a number of years in instalments.
  • The cost of the purchase is spread over a period of time.
  • High rates of interest make this an expensive way of financing the purchase of assets.
• Sources of Finance ( description, advantage, disadvantage )

  -> Government Grant


  • A grant is a sum of money given to an organisation to help create jobs in a deprived area.
  • A grant doesn't need to be repaid back.
  • It is usually only given once.
• Sources of Finance ( description, advantage, disadvantage )

  -> Debentures


  • PLCs can borrow money by selling debentures, which are long term 'IOU's. Debenture holders receive interest annually and the firm must repay the loan at the end of the specified period of time eg, 15 years.
  • A large amount of capital is raised.
  • If the business fails to make interest payments, or repay the debenture, the debenture holder can seize the assets from the business.
• Sources of Finance ( description, advantage, disadvantage )

  -> Share Issue


  • A company can issue more shares to raise more money for the business.
  • Shareholders benefit from limited liability.
  • Administrative costs involved in issuing shares can be expensive and paid for 'upfront'.
• Sources of Finance ( description, advantage, disadvantage )

  -> Venture Capital


  • Provides loans to businesses that a bank or other lenders consider to be too risky. In return for lending money, they usually acquire a share in the business.
  • Businesses with a risky credit rating can secure finance from a reputable source.
  • Part-ownership of business could be requested to secure the finance.
• Sources of Finance ( description, advantage, disadvantage )

  -> Sales and Leaseback


  • The business sells assets such as machinery to a finance company and then rents back from the company.
  • Business is no longer responsible for repairs and maintenance of the equipment.
  • Business assets are reduced, which makes it difficult to secure future finance.
• Sources of Finance ( description, advantage, disadvantage )

  -> Mortgage


  • Borrowing money to buy property. Interest is added to the loan at the beginning and the whole amount is usually repaid in equal monthly statements over a period (25 years)
  • Repayment is over a longer period of time.
  • Mortgages are usually secured against a property - failure to meet monthly repayments will result in the property being repossessed.
• Sources of Finance

  Factors to consider when choosing a source of finance..

  • Interest rate - Finding a lender with the best interest rate. Shop around for the best loan deals.
  • Payment plan - The length of the loan and total interest to be paid back.
  • Credit rating - The better a business is at paying back debt then the better deals they will get when borrowing money.
  • Is there anywhere else you can get the money? - Choosing a cheaper supplier, selling unnecessary assets, leasingot outsourcing.
• Cash Budget

  Purpose of a Cash Budget?

  • Let managers compare actual budgets with planned budgets and if there are any differences they can analyse.
  • Highlight periods where a negative cash flow is expected and take corrective action in advance.
  • They can show periods of surplus cash which would allow them to plan future purchases.
  • Highlights when expenses are high so they can take action to control spending.
  • Can be used to set targets for individual debts to achieve which can motivate staff.
• Cash Budget

  Reasons for Cash Flow Problems..

  • Owners drawing too much cash.
  • Lack of forward planning.
  • Tying up too much cash in stock.
  • Bad debts.
  • Purchasing fixed assets.
  • Allowing customers too long a credit period.
  • Repayments of loans.
  • Low sales.
• Cash Budget

  Solving Cash Flow Problems..

  • Owners draw less cash.
  • Sell unnecessary assets.
  • Cutting costs.
  • Arrange cheaper finance.
  • Discounts offered to encourage sales.
  • Debt factoring.
  • Arrange cheaper suppliers.
  • Promotions to reduce stock levels.
• Financial Statements

  -> Income Statement Terms..

  • Turnover - The revenue the business receives from selling goods and/or services.
  • Cost of Sales - The cost of purchasing goods from a supplier or cash and carry.
  • Gross Profit/Loss - Differences between sales revenue and the cost of sales.
  • Expenses - All the necessary expenses incurred by the organisation like electricity and advertising.
  • Profit for the Year - The money that the organisation has left once all the expenses have been deducted from the gross profit.
• Financial Statements

  -> Purpose of a Statement of Financial Position..

  • To state the value/net assets of the organisation.
  • It is a legal requirement.
  • Shows the working equity figure.
  • Informs decision making.
• Financial Statements

  -> Statement of Financial Position Terms..

  • Trade Receivables - Are customers who have received goods from the firm but not yet paid for them (owe you money).
  • Trade Payables - Are suppliers who have sold goods to the firm (you owe money).
  • Working Equity - The difference between current assets and current liabilities. Can you meet short term debts?
  • Equity - Money invested by the owners into a business. This money is owed back to the owners.
  • Drawings - Funds taken out by the owner for their own personal use.
• Financial Statements

  -> Statement of Financial Position Terms..

  • Non-Current Assets - Items of value owned by the organisation for more than a year that the business depends on to operate (property, equipment vehicles eg).
  • Current Assets - Items owned by the organisation that will be used, sold or converted into cash within the year (inventory, cash, bank balances).
  • Current Liabilities - Items which the business currently owes.
  • Non-Current Liabilities - Debts of the business that are not due to be repaid for more than 12 months.
• Ratio Analysis

  Types of Ratio..

  • Profitability - Can be used to evaluate the businesses buying policy, the selling price, the cost of buying inventory and the level of expenses of the business.
  • Liquidity - Does the organisation have enough money to pay its bills? Can it cover debts in the short term? The ability to continue trading and the need to arrange additional finance.
  • Efficiency - Is the organisation making the best use of its resources? Used to measure how successfully a business has used the equity invested into the business.
• Profitability Ratios

  -> Gross Profit Ratio and Purpose..

  $Formula: Gross Profit/ Sales *$$100$

  • To measure the percentage of profit earned on the trading activities of the organisation; to measure how much pence of the gross profit is earned out of every £
• Profitability Ratios

  -> Improving the Gross Profit Ratio..

  • Increase selling price.
  • Find cheaper suppliers.
  • Negotiate discounts from suppliers.
  • Increase supervision to reduce theft or breakages of stock.
• Profitability Ratios

  -> Profit of the Year Ratio and Purpose..

  $Formula: Profit of the Year / Sales *$$100$

  • To measure the percentage of overall profit of the firm after all expenses have been taken into account. To measure how many pence of the profit of the year is earned out of every £ sale.