paper 2

• capital expenditure = spending on resources that can be used repeatedly eg. car
• types of internal finance

  • retained profit = put back into the business
  • sale of assets
  • owner capital
• advantages of internal finance is that capital is available instantly and is cheaper due to no interest

  disadvantages include that it can be limited eg no profit of assets to sell and there can be conflict within shareholders
• external sources of finance include

  • business angel - invest money early on in return for a share
  • crowdfunding - large groups of people who invest small amounts
  • loans - (morgages secured by assets and debentures with a fixed rate of return by a date)
  • share capital
  • venture capital - investment in exchange for shares
  • overdraft
  • leasing resources
  • trade credit - buy and pay at a later date
  • debt factoring = selling debt to third party at a discount
  • grants - government support
• unlimited liability has no real difference legal between the business and the owner (unincorporated)
• limited liability means the business had a separate legal identity from the owner (incorporated)
• 4 questions to ask when deciding on a finance method

  • is it long or short term
  • financial position of the business?
  • what is the finance for
  • how much will it cost
• why create a business plan

  • helps financial provider assessment
  • provides a target to measure success
  • helps analyse market
  • outlines opportunities and risks
• net cash flow = inflow - outflow
• advantages of cash flow forecast

  + supports when applying for finance

  + identify timings of shortages and surplus

  + enhances the vital business plan

  + helps monitor and prepare
• disadvantages of a cash flow forecast

  x sales may be lower than expected

  x customers or debts may be left unpaid

  x economy etc is unpredictable

  x cash flow can mean customers and actual sales are forgotten about
• sales forecasting = a projection of future sales revenue
• sales forecasting it done to see if production capacity, work force or promotional activity needs to increase or decrease
• factors impacting sales forecasts include

  • trends
  • economic variables
  • competition actions
• difficulties of sales forecasting

  • historical data may not reflect future performance
  • seasonality and natural disasters may cause a fluctuation in demand
  • new businesses don't have the data to create one
• sales revenue = money into the business via sales
• sales revenue = price x quantity sold
• fixed costs do not vary with the level of output of sales eg. rent
• variable costs vary due to the level of output of sales
• break even is the point at which revenue is equal to cost so the business is at neither a profit or a loss
• contribution = how much profit is made from each unit
• contribution = selling price - variable cost per unit
• break even = fixed costs/contribution
• margin of safety = the difference between break even point and current output
• total revenue line starts from 0

  total costs line starts from fixed costs line
• limitations of break even

  • assumes all made products are sold
  • cost may increase eg. of raw materials
  • in some businesses fixed costs are shared eg. a bakery
• budget = an allowance of estimated expenditure of money over a set period of time
• why create a budget

  • planning, motivation (shows importance), decision making and control
• two types of budgets

  zero based = based on potential performance

  historical figures= based on last years sales

  however a business is dynamic so figures may be wrong
• variance analysis = analysing the budget figures against what actually happens

  favourable =underspent

  adverse = overspent
• difficulties of budgeting

  • often annually fixed despite dynamic market
  • Time consuming to create and monitor
  • unrealistic budgets can be demotivating
  • can make people care less about customers/quality and more about achieving budget
  • some industries like farming can be difficult to plan ahead
• gross profit = sales revenue - variable costs
• operating profit = gross profit - fixed costs
• net profit = operating profit - interest
• gross profit measures performance whereas net profit measures how well expenses are controlled
• profit margin = the profit/sales revenue x 100
• ways to lower costs = cheaper raw materials, upgrade machinery, redundancies and cheaper places
• ways to increase revenue = raising prices and increasing advertisement
• profit = recorded straight away and not needed to trade
• cash is not recorded till paid out or recieved - a profitable business can go bust if having cash issues