BS Finance SB

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  • Created by: zuljupri
  • Created on: 12-04-17 13:18

Sources of Finance

Retained Profit- profit going into company capital after paying themselves a dividend. An internal source of finance. No one to pay back. No interest payments. Immediantly available. Disatisfied owners. Affects abiltiy to deal with cashflow problems.

Sell Shares- limited company issues new shares and sells them to raise finance. An external SoF. No one to pay back. No interest payments and no application process. Brings new skills from new owners. Dilution of ownership of existing owners. Less dividends per owner. Not easy to sell if company is doing bad. Other directors have to agree.

Trade Credit- agreement with supplier for paying for equipment later. An external SoF. Helps relive cashfow problems and freeze up money for other things. No interest payments. Ability to sell before paying back. Bill still needs to be paid. May be charged a fee from supplier. May miss chance of an early payment discount.

Overdraft- agreement with bank to take out more money than you have. An external SoF. Allows you to cope with short term cashflow problems. Flexibility of limits. Expensive way of borrowing .

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Sources of Finance

Bank Loan- borrow a set amount upfront and pay back in installments with interest added on. An external SoF. Recieve money upfront allowing you to start trading to earn back money for bank. Pay it back over installments. May need a business plan. Interest rates are charged on top. Could damage relationship with supplier.

Personal Savings- the independant savings of the owner. An external SoF. No one to pay back. Immediantly available. Offers flexibilty. No interest payments. May not be enough for major investments. No support/advice given. Loss of personal wealth.

Joint investors- when a sole trader finds a partner to invest or when an existing partnership adds an additional partner. An external SoF. No interest payments. New skills/experience brought in. Lose control of decision-making. Possible conflict of interest. Dilution of ownership & profit.

Venture capitalists- people who invest in start-up business and look for a quick return on their investment. An external SoF. Willing to lend money. Offer business experience, advice, contacts. Large dilution of ownership. Loss of decison-making control. Not in it for the long term.

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Financial Calculations

Sales Revenue-  amount of money made from selling products/services before subtracting costs.

Formula: Selling price x Number of products sold.

Fixed Costs- Costs that don't alter with the level of output.

Variable Costs- Costs that directly alter with the level of output.

Formula: Variable cost per unit x no. of units.

Total Costs- The sum of all expenses incurred when providing and selling a product.

Formula: Fixed Costs + Variable Costs

Profit- the money left over from revenue once all costs have been subtracted.

Loss- the amount of money still to be paid in costs once revenue has been recieved.

Formula (both): Revenue - Cost

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Improving Profit

Increasing Revenue:

  • Advertising/Sponsorships
  • Improve Quality/Rebrand/Product Range
  • Increase price (inelastic)/Decrease price (elastic).
  • Sales Promotions/Direct Selling.

Decreasing Costs:

  • Cheaper Supplier/Renegotiate Loans
  • Redundancies/Pay Freeze/Ban Overtime.
  • Decrease wastage
  • Cheaper Rent/Increase Energy Efficiency.

Profit Margin- amount of profit made on a single unit.

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Cash Flow

Cashflow- the amount of money coming in and out of the business at a particular time period.

Cashflow forecast- a prediction of the cash coming into and leaving the business in the future.

Cashflow Record- a record of money coming into and leaving the business in the past.

Cash inflow- Money coming into the business within a particular time period.

Cash outflow- Money coming out of the business within a particular time period.

Net cashflow- the change to business' cash position within a certain period of time.

Formula: Cash inflow - Cash outflow.

Opening balance- Amount of cash a business has at the start of a time period. Must be equal to closing balance of previous time period.

Closing balance- Amount of cash a business has at the end of the time period.

Formula: Opening balance + Net cashflow.

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Cash Flow Problems

When there is more money going out of the business than there is money coming in- often leads to not being able to pay for day to day bills.

Problems:

  • Seasonal Sales
  • Poor Customer Awareness.
  • Quaterly payments.
  • Stock piling
  • High interest rates
  • New competitor.

Solutions:

  • Overdrafts
  • Cheaper Supplies/Renegotiate Loans
  • Reduce Labour cost
  • Expand Product Range/Product Quality
  • Expand/Relocate to Cheaper Area
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