Business Studies Finance

Created by: myer
Created on: 22-04-13 10:37

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Business Studies Finance
- Why do large businesses need finance?
  - new property.. e.g. offices, shops
  - machinery, equipment and vehicles
  - recruiting and training new employees
  - raw materials
  - deveploping new goods and services
  - introducing new methods of production
  - to pay for major marketing campains
- sources of finance for large and growing businesses
  - selling unwanted assests
    - advantages
      - no intrest payments
      - may keep assests if leased back
    - disadvantages
      - many businesses do not have sustainable assets
      - leasing assets back means regular payments
  - a loan or mortage
    - adavantages
      - can be arranged quickly
      - allows repayment over a long period of time
    - disadvantages
      - intrest has to be paid
      - banks may require an asset as collateral
  - using retained profits
    - advantages
      - no intrest payments
      - can be arranged immediatly
    - disadvantages
      - only avaliable to profitable businesses
      - shareholders may oppose to the decision
  - selling more shares
    - advantages
      - no intrest payments
    - disadvantages
      - the owners may loose control of the company
      - only avaliable to companies
- why do businesses prepare finacial statements?
  - the law
  - to help the business managers
  - to guide investors
- profit and loss key terms
  - revenue
    - income recieved by a business from selling its goods and services
  - cost of sales
    - these are the cost involved in directly supplying the good or service, this includes: wages, raw materials and energy costs
  - gross profit
    - this is the revenue minus the cost of sales
  - over heads
    - these are the costs that do not alter when the level of production changes. this includes: saleries of managers, insurance costs, intrest on loans
  - net profit
    - this is calculated by taking overheads away from the gross profit
- balance sheet
  - this sets out the assets and liabilities that a business has on a particular day. it shows where the business's money is coming from and how the business has spent the money that it has raised.
    - assets- an asset is anything that is owned by a business.
      - fixed assets- a business will normally keep this type of asset for many years.
        E.g. shops and vehicles
      - current assets- these are assets that the business only expects to have for a short time usually less than a year
        E.g. cash, stocks of raw materials
        
        current assets are used by the business to settle debts such as paying for raw materials
  - liabilities- liabilities are the amounts owed by a business to other businesses and inderviduals.
    - current liabilities- debts that a business will pay within a year.
      - E.g. money owed to suppliers and that the business has to pay
    - long- term liabilities- debts that will be paid back over many years.
      - E.g. bank loans
  - total equity
    - total equity is part of a companys money that belongs to sheholders.
- ratios- ways to judge whether the business is sucsseful
  - Gross profit margin- this compares the business's gross profit for a trading period with the revenue figure for the same period
    - net profit margin(%)= gross profit / revenue x100
  - net profit margin- this compares a business's net profit for a trading period with the revenue figure for the same period
    - net profit margin(%)= net profit / revenue x100
  - current ratio- this ratio compares the value of the current assets that a business has with the figure for its current liabilities. this will help you to see whether a business has enough assets that it may sell for cash to enable it to pay its short-term debts.
    - current ratio= current assets / current liabilities
  - acid test ratio- the current ratio is not always a good guide to whether a business can pay its short term debts as it includes a figure for stock. stock is not always easy to sell quickly
    - acid test ratio= current assets-stock / current liabilities