Unit 5

• Income Statement states the company’s revenues and expenses during a period
• Balance Sheet provides an overview of a company's assets, liabilities and shareholders' equity in a snapshot of time
• Cash Flow Statement states the net amount of cash flowing into and out of a company
• Cash flow is all the money flowing into and out of a business over a period of time
• Gross profit = Revenue / Cost Of Goods Sold
• Operating profit = Gross profit - operating expenses
• Profit Before Tax = Operating Profit - Net Interest
• Profit for the year = Profit Before Tax - Tax
• Retained Profit is profit retained within the business as a source of savings
• Distribution is profit distributed to owners
• Key financial indicator objectives: Revenue, Costs, Profits, Cash flow
• ROI =         (Operating profit / Capital invested) x100
• Capital structure refers to the way in which a business has raised the capital it requires
• Budgets are financial plans that forecast revenue from sales and expected costs over a future time period
• The three types of budgets are Income budget, Expenditure budget, Profit budget
• Income budget sets out the agreed, planned income for a business
• Expenditure budget sets out the agreed, planned expenditure of a business
• Profit budget sets out the agreed, planned profit of a business
• Why is it difficult to produce budgets: It is difficult to forecast sales, the impact of decisions made by governments, setting a budget can be time consuming
• Variance = budget figure – actual figure
• Closing Balance = Opening Balance + Net Cash Flows
• Insufficient liquid cash funds might mean inability to meet short term debts (insolvency)
• Causes of cash flow problems: Overtrading, Credit sales, Seasonality
• Improving cash flow: Overdraft, Short-term loan, Debt factoring, Sale and Leaseback
• Improving cash outflows: Delaying payment to suppliers, Stock management, Cut unnecessary expenditure
• Difficulties improving cash flow: Potential damage to the firm’s reputation, Potential loss of customers, if payment terms affect competitiveness
• Total costs start at the fixed cost point on the y axis and total costs slope upwards
• What is contribution: First, to pay for its own variable costs, Secondly, to contribute towards the fixed costs, Thereafter, once fixed costs are covered, to contribute to profit
• Contribution = selling price - variable cost So at breakeven, Contribution = Fixed costs
• Break-even is the level of output at which a business is not making a profit or a loss
• Margin of Safety = actual output level – break-even level of output
• Benefits of Break-even analyses: Helps businesses determine the minimum level of sales needed to survive, Helps firms determine the sales needed to launch a new product successfully, Helps firms plan the ‘capacity’ they need in their factories or stores
• Profitability is the efficiency of a business at generating profit in relation to the size of the business
• Gross Profit = Profit/Revenue x100
• Gross Profit Margin = Gross Profit/Revenue x100
• Operating Profit Margin = Operating Profit/ Revenue x100
• Difficulties improving profit: Costs of implementing the methods, Impact on brand image, Reaction of customers
• Internal sources of finance already exist within a business
• External sources of finance are funds from outside the business
• •External sources of finance: Equity – share of ownership, Debt – paid before equity, contracted returns, lower investor risk