business

• Capital expenditure


  To purchase fixed assets: properties and equipment; intended for business operations
• Revenue expenditures


  Payments for daily operations (direct and indirect costs)
• Internal sources


  • Personal funds – savings, family, friends
  • Retained earnings – income after taxation and dividends
  • Sale of assets – selling of dormant or non-performing assets (liquidation)
• External sources - Short term (0-12 months)


  • Business angels
  • Debt factoring
  • Donations
  • Government grants and subsidies
  • Hire purchases
  • Leasing
  • Overdrafts
  • Sponsorships
  • Trade credit
  • Venture capitalists
• External sources - Medium term (1-5 years)


  • Business angels
  • Government grants and subsidies
  • Hire purchases
  • Leasing
  • Loan capital
  • Sponsorship
  • Venture capitalists
• External sources - Long term (>5 years)

  • Business angel
  • Debentures
  • Government grants and subsidies
  • Hire purchase
  • Leasing
  • Loan capital
  • Share capital (preferred stock vs. commons stock)
• Government grants


  • Difficult to apply for grants, as governments seek benefits from their spent cash (since this is not repaid)
  • Businesses can gain capital easily
  • Governments can benefit from the boosted economy
• Venture Capitalists


  • Individuals who invest large amounts of money in startups for shares
  • Has some control over the business to guarantee return of investment
  • Venture capitalists guide the businesses, in it for the money (for profit)
• Business angels


  • Individuals who invest large amounts of money in startups for shares
  • Not as involved in the decision making processes of the business
  • Can be risky as business may fail or their equity might be bought out
  • Businesses can raise capital easily while retaining control
  • For altruism
• Crowdfunding


  • Soliciting funds from the general public
  • Businesses have to find ways to attract funding (e.g. incentives)
  • Businesses may not receive anything
  • Businesses can raise capital at little cost and can raise more than needed
  • Funders can receive incentives or opt to give only a little money
• Factors to consider when choosing sources of finance

  • Purpose of finance (why is the money needed?)
  • Cost (how much will it cost?)
  • Amount required (how much should be bought/spent?)
  • Time (how long before we pay?)
  • Status/size of firm (are we big enough for the loan?)
  • Financial strength (are we credible?)
  • External factors – state of economy, interest rates, etc. have an impact of loan availability
• Types of costs


  • Fixed – costs that do not increase or decrease based on quantity of goods produced or capacity of production
  • Variable – costs that increase as more products are produced or if a service is at a higher capacity of production
  • Semi-variable – costs that contain both fixed and variable cost elements
• Types of costs (examples)

  • Fixed - Rent, electricity, utilities
  • Variable - Food, paper bags, utensils
  • Semi-variable - Salaries (fixed = regular hours, variable = overtime hours)
• Types of costs


  • Direct – costs that can be directly attributed to the production of a good or service in a specific aspect or department; can be fixed or variable
  • Indirect/Overhead – costs that aren't directly part of the product or process of the product/service being sold; can also be fixed or direct
• Examples of direct costs

  • Direct (fixed) – salary of chickenjoy fryer
  • Direct (variable) – cost of raw chicken
• Total revenue


  Total amount of sales generated through different product lines/services offered, without subtracting any costs
• Revenue streams


  • One source of sales or revenue that a business has
  • A business can have several revenue streams
• Example of revenue streams


  payment from franchisees, revenue from company owned stores
• Total contribution


  Total revenue – Total variable cost
• Contribution per unit


  Price per unit – Variable cost per unit
• Break-even point


  Intersection of Total Cost and Total Revenue in a Break Even Chart
• Margin of safety


  • Shows how much demand exceeds or fails to exceed BEQ
  • Sales volume (Projected Demand) – BEQ
  • Evaluate degree of risk based on demand for a product
  • Can be expressed as a percentage of demand
• Target profit and revenue

  • Can be used to calculate level of sales needed to attain a certain profit
  • Ignores other factors that affect profit: Different pricing throughout time, Level of demand is subject to change, Profit depends on risk, Innovation and luck – prediction aren't always followed
• Break-even is when


  Total revenue = Total fixed cost + [Total variable cost x Quantity]
• Break-even quantity


  Minimum level of sales before the firm could break even
• Break-even chart


  • Title : Break Even Analysis for Company XYZ
  • X-axis is output
  • Y-axis is Revenue/Cost (label currency as well)
  • Determine max. output and mark it, as well as revenue from this level of output
  • If maximum isn't given, make it twice the BEQ
  • Determine BEQ and draw a vertical line at that point
  • Mark the revenue gained from this quantity on the line (Break Even Point)
  • Draw Total Fixed Cost line
  • Draw Total Cost line starts at TFC at x=0, intersects the BEP
  • Draw Total Revenue line starts at (0,0), intersects BEP
• Limitations of break-even analysis

  • Makes several assumptions: Fixed costs must be paid regardless of output, Variable cost increases linearly, Ignores economies of scale, Sales revenue increases linearly, Ignores discounts for large orders and price discrimination, Assumes only one product is sold, Every unit of output is sold, Selling price is constant regardless of units sold
  • Provides a static model (e.g. production costs can change)
  • Depends on reliability of data
  • Other factors can have an effect (e.g. competitors, staff motivation)
  • Only suitable for single product firms
• Current assets


  • Liquid assets are assets that are easily turned into cash
  • Aside from cash, includes Debtors – money owed to the company, Stocks – unsold inventory
  • Current assets = Cash + Debtors + Stocks
• Current liabilities


  • Money owed by the business, must be paid by 12 months
  • Includes Overdrafts – short term loan to cover cash problems, Creditors – money owed to suppliers for goods bought on credit, Tax
  • Current liabilities = Overdrafts + Creditors + Tax
• Working capital


  • Money needed by the business for its daily operations (running costs)
  • Also known as net current assets
  • WC = Current assets – Current liabilities
  • Working capital is needed as buffer for expected shutdown in cash flow
• Principles and ethics of accounting practices


  • General rules and concepts that govern the field of accounting
  • Failure to uphold accounting ethics in businesses can result in legal challenges
• Window dressing


  • Also called creative accounting; legal way of manipulating financial statements
  • Manipulations include: Different stock valuation (FIFO/LIFO Pricing), Unrealistic valuation of intangible assets, Classifying current liabilities as long-term liabilities, Sale of fixed assets to improve working capital, Debtors may be included to boost profit
• Profit and loss account/income statement

  Shows the trading position of the business over a period of time, determining the income, profit or loss
• Parts of an income statement

  • Heading: Profit and loss for (company name) for year ended (date)
  • Trading account – shows the difference between sales and direct costs
  • Profit and loss account – Shows operating or net profit after deducting operating expenses and interests
  • Appropriation account – shows how net profit is distributed to tax, dividends and retained earnings
• Trading account


  • Shows Gross Profit = Sales revenue – Cost of sales
  • Revenue = amount earned from sales
  • Cost of Sales/Goods Sold = Value of inventory + Purchases – Closing Stock OR Variable cost x Quantity sold
  • Remember: not all sales are from cash; sales revenue is not the same as cash received by the business.
• Profit & loss account

  Deduct overheads from gross profit to get operating profit (or net profit before tax and interest)
• Appropriation account


  • Interest subtracted
  • Net profit before tax
  • Taxes – Compulsory income tax (levy on profits)
  • Net profit after tax
  • Subtract Dividends – share of profits distributed to shareholders
  • Retained Profit – how much of the profit is left in the business for future development
• Balance sheet


  • Shows the overall value, thus financial position of a company at a specific date
  • Includes value of assets, liabilities, and capital employed
  • Shows where a firm's money came from and how it was spent
  • Balance sheets are useful if there's a prior balance sheet to compare with
  • Net assets = Liabilities + Owner/Shareholder's equity
• Balance sheet components


  • Assets - Fixed (Tangible, Intangible, Investments), Current assets
  • Liabilities - Current liabilities
  • Capital and reserves (shareholder's equity) - Share capital, Retained profits, Reserves
  • Loan capital
• Types of intangible assets

  • Trademarks
  • Copyrights
  • Patents
  • Utility model
  • Branding
  • Goodwill