Unit 3 Finance

• Capital Expenditure


  Business spending on fixed assets or capital equipment
• Revenue Expenditure


  Business spending on its everyday and regular operations
• Internal Sources of finance

  • Personal Funds
  • Retained profit
  • Sale of assets
• External Sources of finance

  • Share capital
  • Loan Capital
  • Crowdfunding
  • Leasing
  • Microfinance
  • Business Angels
  • Trade Credit
  • Overdraft
• Loan Capital


  Money borrowed from financial lenders typically for a return with interest
• Share capital


  Money raised through the sale of stock
• Trade credit

  Allows businesses to purchase resources with credit, to pay at a later date, improving cashflow
• Factors affecting sources of finance

  • Short vs Long term
  • Size of business
  • Purpose
  • Amount
• Subsidies: Money given to an individual or business by the government, in order to stabilise prices
• Cost: Sum of money incurred by a business in the production process
• Direct Costs: Costs which are specifically attributed to the production or sale of a particular good or service
• Indirect Costs (overheads) : Costs that are not directly related to the production of a product or service. E.g. rent, lighting , cleaning staff, etc.
• Fixed costs: Do not vary with the level of output
• Variable costs: Costs of production which are proportionate to the level of output
• Semi-Variable Costs: Elements of both fixed and variable costs e.g. electricity
• Revenue: Quantity Sold * Unit cost
• Revenue stream: Various sources of finance for a business such as:

  Interest earnings, Memberships, Royalties, Subscription Charges, Sales Revenue, Brokerage fees
• Dividend: A distribution of profits from a business to its shareholders
• Break-Even point: The point in time which total costs = total revenue
• Break-Even Quantity: The amount of units needed to be sold to break even
• Margin of Safety (MOS) : Difference between a firms level of demand and its break even quantity.
• Contribution per unit: Price - Avg Variable Cost
• Total Contribution : Contribution per unit * Units sold
• Gross Profit: Revenue - COGS
• Final Accounts: Published annual financial statements which all limited liability companies are legally obligated to report. I.e. Profit&Loss accounts and balance sheets
• Balance Sheet: Also known as statement of financial position. Shows the assets, liabilities, and owner's equity of a business at a specific point in time.
• Intangible assets: Fixed assets which do not exist in a physical form
• Reducing balance method: Depreciation by the same percentage each year
• Straight line method: Depreciation where the asset is depreciated at the same rate each year
• Gross Profit Margin: Measures the percentage of sales revenue that turns into profit e.g. 20% gross profit margin means that 20% of the sales revenue is turned into gross profit
• Net profit margin: Profitability ratio which portrays the percentage of sales revenue which turns into net profit (i.e. profit after all direct/indirect costs have been paid)
• Capital Employed: The total value of all long-term sources of finance for a business.
• Return on Capital Employed (ROCE) = How much operating income is generated per dollar of capital invested (%)
• Debtor days ratio: measuring how quickly cash is being collected from debtors
• Gearing: Percentage of a firm's capital employed which comes from external sources (long-term liabilities) such as mortgages and debentures.
• Insolvency: When a firm's working capital is insufficient to meet its current liabilities. Will lead to creditors taking legal action to recover their money
• Net Present Value (NPV) : Determines if a project is profitable or not, if the NPV is positive, it is a profitable venture and vice versa
• Present Value = Future Value / ( 1 + r )^n

  where r is the discount rate

  and n is the current year
• SMART Budgets: Specific, Measurable, Agreed, Realistic, Time-Constrained
• Contingency Funds: Reserve budget set for emergency use and unforseen costs