Finance

• Role of Finance Department

  • Maintenance of financial records
  • Payment of wages & salaries
  • Payment of accounts & credit control
  • Production of organisation's annual accounts
  • Analysis of accounting information
  • Preparation & monitoring financial info
• Sources of Finance


  • Internal
  • External
• Internal Sources of Finance

  • Retained Profits
  • Loan from family & friends
  • Sale of Asset
• External Sources of Finance

  • Bank Loan
  • Selling Shares
  • Government Grant
  • Hire Purchase
  • Bank Overdraft
  • Mortgage
  • Trade Credit
  • Debt Factoring
• Bank Loan


  • Can be arranged quickly
  • Loan can be repaid over a long period of time
• Trade Credit


  • Finance raised does not need to be paid back
  • Large amounts of finance can be raised
• Government Grant


  • Does not need to be paid back
  • Business needs to meet certain criteria
• Hire Purchase


  • Expensive assets can be purchased and paid back over time
  • Equipment is not owned until the final payment is made
• Receipts


  Money in
• Payments


  Money out
• Negative balance in a cash budget

  Deficit
• Positive balance in a cash budget


  Surplus
• Causes of Cash Flow Problems (Deficits)

  • Spending too much money on stock that has not sold
  • Giving customers too long to pay money that they owe
  • Owners taking too much money out of the business for personal use eg drawings
  • Badly planned capital expenditure eg purchasing new expensive equipment in one payment
  • Not having enough time to pay bills from suppliers
• Solutions to Cash flow Problems

  • Carrying out additional advertising to increase amount sold - adapt the marketing mix
  • Offer discounts to customers to encourage them to pay quicker
  • Reduce the amount of drawings taken by the owner
  • Spread the cost of large capital purchases by purchasing through hire purchase or leasing equipment
  • Reduce level of trade credit given to customers
  • Sell debts to debt factoring companies
  • Arrange alternative finance eg bank loan, overdraft, trade credit , increase capital
• Gross Profit


  Profit made from buying and selling goods before expenses are deducted
• Profit for the Year


  Final profit once all overheads/expenses have been deducted
• Income Statements


  • Calculate 2 types of profit: Gross Profit (revenue - cost of sales) and Profit for the Year (gross profit - expenses)
• Trading Account


  Used to calculate Gross Profit
• Income Statement


  Used to calculate Profit for the Year
• FORMULAE TO REMEMBER: GROSS PROFIT = SALES (REVENUE) - COST OF SALES, PROFIT FOR YEAR = GROSS PROFIT - EXPENSES (OVERHEADS)
• Break-even point


  When sales = expenses, you neither make a profit or a loss at this point
• Types of Costs


  • Fixed Costs
  • Variable Costs
• Fixed Costs


  Costs that remain the same regardless of number of units produced
• Variable Costs


  Costs that change depending on how much is produced
• Total Costs


  Fixed and Variable costs added together
• Total Revenue


  Sales Revenue, money received from selling goods/services
• Break-even point occurs when: Total Costs = Total (Sales) Revenue
• Spreadsheets are used to record and edit numerical information like wages, stock values, profit statements, cash budgets
• Benefits of Spreadsheets


  • No arithmetical errors, formulae can instantly recalculate totals, can do "what if?" investigations, information can be presented in different ways like graphs, easy to make changes, save work and print
• Advantages of Online Banking

  • Available 24/7, no queues, online statements instantly, better rates for savings, transfer money between accounts, pay bills and set up direct debits, alerts to avoid overdraft charges
• Disadvantages of Online Banking


  • Security worries like hacking, worries about entering wrong details, technology problems can cause stress and confusion, some people prefer face-to-face banking especially for money matters, some problems are easier to explain face-to-face
• Banking Apps allow you to check accounts, set up and make payments, transfer cash between accounts, request overdraft extensions, locate nearest branches and ATMs