topic 5

• why businesses need finance

  start up capital

  working capital

  growth

  special situations
• short term finance

  money required for short period of time of up to one year
• long term finance

  money required for more than one year
• difference between cash and profit


  cash: needed to keep and operate the business on a daily basis successfully

  profit: how much money is left over after you've paid all your expenses, major indicator of business overall success
• profit


  surplus after total costs have been subtracted from revenue
• liquidity


  the ability of a business to pay off its short-term debts
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• working capital


  the day to day expenses of a business

  -needed to pay wages, obtain inventory, remain liquid.

  -a high working capital can be a disadvantage as there is an opportunity cost of having too much capital tied to inventories
• working capital= current assets (assets that are cash or are likely to be turned into cash within a year) - current liabilities (debts that have to be paid within a year)
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• • capital expenditure: Purchase of non-current assets that are expected to last for more than 1 year -machinery,buildings
  • revenue expenditure: Spending on all costs and assets other than fixed assets -wages, salary's
• smaller businesses have higher interests rates and have less access to sources of finance
• Internal finance

  finance that is obtained from within the business itself
• external finance


  finance that is obtained from sources outside of and separate from the business
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• factors influencing the choice of source of finance


  -cost

  -flexibility

  -need to retain control

  -level of existing debt
• cash flow


  The net balance of cash moving in and out of the business at a specific point in time.
• insolvent


  when a business cant meet its short term debts
• cash flow forecasts

  an estimate of the future cash inflows and outflows of a business
• purpose of cash flow forecasts

  -identify period of shortfall

  -identify opportunities for expenditure

  -helps in obtaining loans and other sources of finanace

  -starting a business
• Closing balance = opening Bal + net cashflow
• Net cash flow = Total inflows – total outflows
• methods of improving cash flow


  -managing trade receivables

  -delay capital expenditure

  -sources of finance

  -managing trade payables
• overtrading

  expanding a business rapidly without obtaining all the necessary finanace
• cash flow cycle

  This is the time (in days) it takes from when

  cash leaves business to pay for supplies till it

  returns when customers pay for goods sold.
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• the need of accurate cost information

  -calculation of profit or loss

  -pricing decisions

  -measuring performance

  -setting budgets
• fixed costs: costs that do not vary with output

  variable costs: costs that vary with output
• Cost centers are like money trackers within a business. Even though they don't bring in money directly, they help keep an eye on where money is going. This helps the business know how much it's spending on different things and if it's spending wisely.
• direct costs: expenses that are directly associated with the production of goods or services.

  indirect costs: the general expenses necessary to keep a business operating.
• profit cetres

  a section of a business to which both costs and revenues can be allocated, so profit can be calculated
• overheads

  indirect expenses, loans, rent, etc
• average costs: totals costs divided by the number of units produced

  
  

  average cost= total costs/output
• full costing: a method of costing in which all indirect and direct costs are allocated to the products, services or divisions of a business

  -method of allocating indirect costs has to be used

  -method not change over time or cost

  comparisons will be difficult

  -indirect costs can be fount using seval methods:

  • proportion of total factory space taken up by each product
  • proportion of total labour costs
  • proportion of total direct costs
  • proportion of out of each product to total output
• budgeting


  planning future activities by establishing performance targets, especially finance ones
• without a plan


  -no direction or purpose

  -unable to allocate scarce resources

  -demotivated employees

  -unable to measure progress by performance against plans