Finance

• Turnover (Revenue)


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


  Fixed Costs + Variable 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: Profit


  Total Revenue – Total Costs
• Break-Even


  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 cost.
• Calculation: Break-Even


  Fixed Costs / Contribution per unit (Contribution = Selling Price – Variable Costs)
• Break-even point is where Total Revenue (TR) = Total Cost (TC)
• Margin of Safety is the difference between the full capacity output and the break-even output
• 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: Contribution


  Selling Price – Variable Costs
• 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.
• Cash Flow

  The money that flows into and out of a business on a day-to-day basis
• Turnover (Revenue)


  The value of sales / income / revenue of a business / money made from selling goods or services
• Calculation: Selling Price × Quantity Sold
• Variable Costs


  • raw materials
  • electricity and gas
• Ways to Improve Cash Flow Position

  • Reducing staff
  • Buying cheaper materials
  • Delaying payment to creditors
  • Chasing up bad debtors
  • Increasing promotions
  • Raising finance/from bank/selling assets
  • Increase/reduce price
• Factors a business will need to consider if it is trying to raise extra finance

  • Availability of finance
  • Interest charged
  • Time for repayment
  • Amount of money needed
  • Effect on business ownership
  • Administration charges
• Net Cash Flow


  Another word for predicted 'profit' on a cash flow forecast
• Personal Savings / Owners' Capital

  Money that is put into a business by its owner or owners.
• Calculation: Net Cash Flow = Total Inflow – Total Outflow
• Advantages of Personal Savings / Owners' Capital

  • Not an inexpensive source of finance but requires no interest or repayments
  • May not have the required amount, for example, expansion plans are likely to require a considerable sum of money
• Closing Balance


  Cash remaining in a business at the end of a month
• Retained profits


  Profits that have been kept in the business rather than paid out to its owners.
• Calculation: Closing Balance = Opening Balance + Net Cash Flow
• Opening Balance


  The cash available to a business at the start of a month, carried over from the closing balance of the previous month
• Advantages of Retained profits

  • Cheaper than taking out a loan
  • Business has the flexibility to decide how much is used and when
• Expenses of a Business

  • rent
  • salary
  • wages
  • utilities
  • tax
  • fuel
  • insurance
  • marketing
  • telephone
  • broadband
  • business rates
• Cash Flow Forecast


  Sets out a business' expected inflows and outflows of cash over a period of time
• Disadvantages of Retained profits

  • Once the money has been used it is gone
  • Owners or shareholders may want the retained profit as their income
• Why are cash flows important

  • May be part of a business plan when a business wants to borrow money
  • Forewarns about future possible cash flow problems helps a business to put a plan in place
  • Helps bank decide whether to give loan suggests ability to repay
• Sale of Assets

  Items of property owned by the business that are sold to raise funds.
• Advantages of Sale of Assets

  • If the assets are no longer required, this could raise large sums of money
• Disadvantages of Sale of Assets

  • All assets are likely to be essential to the business ➔ once sold they are no longer available for use
• External events which may result in the actual cash flow being different from the forecast

  • Increased/decreased taxes
  • Interest rates
  • Legislation
  • Weather
  • Increase in costs
  • Inflation
  • Competition
  • Breakage of equipment
• Overdraft


  A form of short-term loan provided by banks to cover cash-flow difficulties of businesses.