Finance

• Finance is important because:

  • ensures funds are available to the organisation to achieve its objectives
  • Ensures costs are monitored and controlled
  • Ensure there is adequate cash flow
  • Maximise and maintain profit levels
  • Generate appropriate financial information for managers and decision makers
• Sources of Finance used by large organisations:

  • debt factoring
  • leasing
  • retained profit
  • Crowdfunding
  • Bank loan
  • Hire purchase
  • Government grant
  • Debentures
  • Share issue
  • Venture capital
  • sales and lease back
  • Mortgage
• Debt Factoring- Involves the firm selling its debts to a factor for less than face value
• Leasing- Where the business can rent equipment or vehicles instead of buying them themselves
• Retained Profit- Where profits are kept back from previous years to put back into the business
• Crowdfunding- When individuals and organisations invest in or donate to crowdfunding projects in return for a potential profit or reward
• Bank loan- Where the bank agrees to lend a certain amount for a specific purpose for a specific amount of time with agreed amounts to pay back each month.
• Hire purchase- Where vehicles can be purchased by paying for them over a number of years in inslallments
• Government grant- A sum of money given to an organisation to help create jobs in a deprived area
• Debentures- PLCs can borrow money buy selling debentures which are long term IOUS. Debentures receive interest payments annually and the firm must repay the loan at the end of the specified time period.
• Share Issue- A company can issue more shares to raise money for the business
• Venture Capital- Provides loans to businesses that a bank or other lender consider to be too risky. In return for lending money they usually acquire a share in the business.
• Sale and leaseback- The business sells assets and then leases them back from the company they sold them to.
• Mortgage- Borrowing money to buy premises. Interest is added to the loan at the beginning and the whole amount is usually repaid in equal monthly repayments over a time period usually 25 years.
• What is a cash Budget?

  It is a statement of future expectations. It covers a specified time period eg a month, quarter or a year
• What is a cash budget used for?

  • Lets managers compare actual budgets with planned budgets and if there are any differences they can analyse why
  • Highlights periods where a negative cash flow is expected and take corrective action in advance of cash deficit
  • Highlights when expenses are high so can take action to control spending
  • Can be used to set targets for individual departments to achieve which can motivate staff
• Reasons for cash flow problems:

  • bad debts
  • low sales
  • Repayment of loans
  • lack of forward planning
  • Tying up too much cash in stock
  • purchasing fixed assets eg machinery
• How to solve cash flow problems:

  • Owners draw less cash
  • Sell unnecessary assets
  • Cutting costs
  • Arrange cheaper finance
  • discounts offered to encourage cash sales
  • Debt factoring
  • arrange cheaper suppliers
  • Promotions to reduce stock levels
• What do final accounts consist of?

  Income statement

  Statement of financial postion
• Sales/ Turnover

  • the revenue the business receives from selling the goods and or services to its customers
• Cost of sales

  • the cost of purchasing goods from a supplier or cash and carry
• Gross profit/loss

  • difference between sales revenue and the cost of sales
• Expenses

  • All necessary expenses incurred by the organisation eg electricity lighting
• Profit of the year

  • the money that the organisation has left once all the expenses have been deducted from the gross profit
• What are non-current assets?

  Items which the business owns and will keep for more than a year
• Current assets:

  • Items which the business owns and will keep for less than a year
• what are current liabilities?

  Items which the business owes and will pay for in the short term
• What is the purpose of the statement of financial position?

  • to state the value/net assets of the organisation
  • It is a legal requirement
  • shows the working equity figure
  • Informs decision making
• Trade receivables:

  • are customers who have received goods from the firm but not yet paid for them
• Trade Payables:

  • Are suppliers who have sold goods to the firm (YOU OWE MONEY)
• Working equity

  • The difference between current assets and current liabilities. can you meet short-term debts
• Equity

  • money invested by the owners into a business. They money is owed back to the owners
• Drawings

  • funds taken out by the owner for the firm for her/his own personal use
• Non-current assets

  • Items valued by the organisation for more than a year that the business depends on in order to operate
• current assets

  • Items owed by the organisation that will be used up,sold or converted into cash within a year
• Non-current liabilities

  
  

  • Debts of the business that are not due to be repaid for more than 12 months
• current liabilities:

  • Items which the business currently ownes
• Profitability ratio:

  Gross profit ratio

  gross profit/sales(turnover) x 100
• Profitability ratio:

  Profit of the year ratio

  profit of the year/sales x 100
• Profit markup:

  gross profit/costs of goods sold x 100/1