Finace

• Fixed Costs


  Costs which do not change with the number of goods made or sold
• Fixed Costs

  • Rent for the shop
  • Monthly lease on equipment and machinery
  • Payment of business rates on premises
• Variable Costs


  A cost that changes with the number of goods produced/sold/output
• Variable Costs


  • Raw materials
  • Electricity and gas
• Functions of the Accounts/Finance Department


  • Draws up financial tables (account/balance sheet/cash flow/budgets)
  • Deals with wages
  • Keeps financial records/accounts/"the books" (profit and loss)
  • Settles bills/pays creditors
  • Collects/chases up debt
  • Organises loans etc. → liaises with banks
• Turnover (Revenue)


  The amount of money taken in by a business when selling a good or a service
• Calculation of Turnover


  Selling Price x Quantity Sold
• Ways to improve turnover

  • Increase price → make more revenue per item sold
  • Reduce price → may create demand/sell more goods to increase total revenue
  • Increase promotion/advertising → may attract more customers/ sales
• Total Costs


  The full amount of money spent by a business when producing the goods sold in a particular period. It is calculated by adding its fixed costs to its variable costs.
• Calculation of Total Costs


  Fixed Costs + Variable Costs
• Factors a business will need to consider if it is trying to raise extra finance


  • Availability of finance → some banks may not lend
  • Willingness of banks to lend
  • Interest charged → will add to cost / may add to price
  • Time for repayment → to spread cost over time / lower repayments
  • Amount of money needed → banks not willing to lend large amounts / effect on interest
  • Effect on business ownership → more shareholders = less control
  • Administration charges → will add to costs
• Profit


  The difference between the total revenue of a business and the total costs of a business, when revenue is greater than cost
• Calculation of Profit

  Total Revenue - Total Costs
• Contribution


  The amount taken from the cost of selling every good used towards paying the fixed costs of producing that good. Contribution per good is selling price minus the cost of the good.
• Calculation of Contribution


  Selling Price - Variable Costs
• Internal Sources of Finance

  • Personal Savings/Owners' Capital
  • Retained profits
  • Sale of Assets
• External Sources of Finance - Short Term

  • Overdraft
  • Trade Credit
  • Hire Purchase
  • Leasing
• External Sources of Finance - Long Term

  • Bank Loan/Mortgage
  • Loans/finance from family or friends
  • Government Assistance (Grants)
  • Share Capital Issue
  • Take on a Partner
  • Venture Capital
  • Business Angels
• Breakeven:


  Occurs where the total amount of money taken in by a business is the same as the amount of money paid out. Neither a profit nor a loss is made where total revenue equals total costs.

  
• Personal savings / Owners capital?


  Money that is put into a business by its owner or owners.
• Retained Profits?


  Profits that are kept within a company for reinvestment or future use rather than paid out to its owners.
• Sale of assests?

  Items of property owned by the business that are sold to raise funds.
• E-ST

  Overdraft?


  A form of short-term loan provided by banks to cover cash-flow difficulties of a business.
• E-ST

  Trade Credit?


  A system of interest free short-term credit for the purchase of non-durable goods.
• E-ST

  Hire Purchase?


  A system where goods are rented but will eventually be owned by the business.
• E-ST

  Leasing?


  A system of renting an asset to a business. The asset remains the property of the company renting out the good.
• E-LT

  Bank loan/ Mortgage?


  long to medium term loans that can be used to buy producer goods.
• E-LT

  Loans from friends or family ?


  Raising finance by borrowing from friends or family.
• E-LT

  Government Grant?


  Funds given by charities or the government to help businesses get started.
• E-LT

  Share Capital/Issue?


  Funds raised by issuing shares in return for cash.
• E-LT

  Take on a partner?


  Funds raised by inviting an individual to join the business who then invest money.
• E-LT

  Venture Capital?


  Involves private investors providing capital to new or small business which have the potential for growth.
• E-LT

  Business Angels?


  Wealthy individuals who invest their private capital into start-up businesses in return for a share in the business.
• Advantages and Disadvantages of Personal savings/ Owners capital?

  Advantages: Control, flexibility, no interest payments. Disadvantages: Limited funds ( may not have enough), personal liability, potential strain on personal finances.
• Advantages and Disadvantages of using Retained profits?

  Advantages: No repayment required, flexibility in use. Disadvantages: Once money has been used it is gone, Owners may want these as their income.
• Advantages and Disadvantages of sales of assets ?

  Advantages: raises large sums of money immediately Disadvantages: Loss of things that could have potential to help the business in the future .
• Advantages and Disadvantages of an Overdraft?

  Advantages: Flexibility - allows business to take out more money than it has and overdraft will be cleared when money is put back into the account. Disadvantages: High fees - interest
• Advantages and Disadvantages of using trade credit ?


  Usually 30 days to pay back

  Advantages: Financing without interest, builds relationships with suppliers. Disadvantages: Potential strain on cash flow, dependency on supplier's terms.
• Advantages and Disadvantages to hire purchase?

  Advantages: Good become property of business once final payment is made, Useful for purchasing machinery which can be obtained quickly

  Disadvantage: Interest rates are high, Items can be legally repossessed if business falls behind on payments.
• Advantages and Disadvantages of Leasing?

  Advantages: Lower initial costs, maintenance and repair bills are met by the leasing company, easier to upgrade equipment. Disadvantages: Higher overall costs, no ownership at the end.