FinanceNational 4/5 Business Management

Learning Outcomes 2.1 – Sources of Finance (costs & benefits)

2.2 – Breakeven Charts

2.3 – Cash Budgets (cash flow issues and solutions)

2.4 – Profit & Loss statement

Contents Role of Finance Department Sources of Finance Break-even Charts Break-even definitions Cash Budgets Cash Budget –problems and solutions Profit Statement Profit Statement – problems and solutions Role of Technology

Role of Finance Department The Finance Department are responsible for the following

roles:

Payment of Invoices and Wages Preparing Financial Accounts Interpreting Financial Accounts

Sources of Finance

Learning Outcome 2.1

Sources of FinanceSource of Finance

Description Advantage Who

Bank Loan

Money borrowed and paid back in set instalments

Does not have to be paid back all at once

All Private Sector

Bank Overdraft

Arrangement to go below your bank balance

Good when in need of quick finance

All Private Sector

Grant Given for new business or a needed business

Does not need to be repaid

All Private Sector

Hire Purchase

Used for buying capital goods e.g. Vehicles. Paid in instalments

Does not need repaid all at once

All Private Sector

Shares People give money to own a percentage of the business

Large amounts of finance raised without repaying all at once

PLC and LTD

Sources of FinanceSource of Finance

Description Advantage Who

Trade Credit

Credit offered by suppliers giving you more time to pay for goods

Can improve cash flow, if you can sell goods before paying for them

All Companies

Debenture A loan that is secured on the business assets

Can be paid back over a very long period of time – low interest rates

PLC

Owners Money (capital)

Money invested by the owner

Does not need to be paid back

All Private Sector

Reinvest Profits

Money paid back into business from previous profits

Does not need to be paid back

All Companies

Taxes Money collected from taxpayer e.g. Council Tax

Large sums of money can be collected

Public Sector

Break-even ChartsLearning Outcome 2.2

Break-even Charts A break-even chart is crucial to an organisation as it shows

how many units must be sold before the company stops making a loss and begins to make a profit.

The point on the chart where the company does not make a loss or a profit is known as the break-even point.

0.00

2000.00

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18000.00

20000.00

0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300

£

No of units

FIXED COSTS

VARIABLE COSTS

TOTAL COSTS

SALES REVENUE

Sales Revenue

Total Costs

Variable Costs

Fixed Costs

Break-even Chart

BREAK EVEN POINT PROFIT

LOSS

Break-even - Definitions

Fixed Costs costs which remain constant even when the volume of production

changes. These must be paid even if no sales are made e.g. rent, insurance

Variable Costs costs which vary directly with the volume of production e.g. raw

materials, wages.

TOTAL COSTS = FIXED COSTS + VARIABLE COSTS

Break-even - Definitions

Sales Revenue The total money as business has made from its sales, this will

increase as more products are produced

Break-even Point This is reached when total costs = sales revenue. At this point

neither a loss nor a profit is being made.

Cash BudgetsLearning Outcome 2.3

Cash Budget A financial statement which shows the amount of cash

flowing in and out of a business over the course of a set time period.

Cash Inflows Cash Outflows

Cash Budgets

Cash Sales Credit Sales Other income (rent etc)

Wages Rent Utilities Purchases (raw materials)

Cash Budgets - Importance

New businesses aim to simply cover costs in the initial period of their business.

They need to forecast their costs and income in advance.

They need to be able to calculate if they can cover their costs and if not, what to do about it.

It allows for greater control of the business

Less uncertainty and fear about the future

Provides targets for staff to work towards

Cash Budget - example

CASH FLOW STATEMENT FOR BRIAN JONES

July August September October November December£ £ £ £ £ £

Opening Balance 500 325 185 30 -30 55

ReceiptsCash Sales 3,500 3,700 4,000 4,230 4,900 3,500

Total Receipts 4,000 4,025 4,185 4,260 4,870 3,555

PaymentsPurchases 2,500 2,600 2,890 3,000 3,500 3,000Wages 450 450 450 450 450 450Rent 500 500 500 500 500 500Other Expenses 225 290 315 340 365 390

Total Payments 3,675 3,840 4,155 4,290 4,815 4,340

Closing Balance 325 185 30 -30 55 -785

Cash Budget - example

What does this show?

Brian’s Cash Budget has highlighted that he will be short of money in October and December (both figures have negative balances).

Brian and any other business owners with such shortages should take immediate action to avoid running out of cash.

Problem Solution

Cash Budgets – problems and solutions

decreased cash sales

decrease in debtor receipts

increase in raw material costs

Increase sales (promotions, price)

decrease time for debtor repayment (credit terms, offers)

decrease raw materials (negotiate with supplier, find new supplier)

Problem Solution

Cash Budgets – problems and solutions

increase in utility costs or increase in other expenses

purchase of fixed asset

Increased loan repayments

decrease other expenses (new utility provider, become more economical)

decrease purchase of fixed assets (hire purchase)

decrease loan repayments (negotiate terms, find new provider), sell fixed assets.

Profit StatementLearning Outcome 2.4

Profit Statement This is the account that is used to calculate the profit made

by a business over a period of time, usually a year.

Profit Statement - exampleFUTURA COMPUTER SUPPLIES TRADING, PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2008

£ £

Sales 60,000

Less Cost of Sales

Opening stock 9,600

Add Purchases 35,400

45,000

Less Closing stock 6,000

COST OF SALES 39,000

GROSS PROFI T 21,000

Less Expenses

Rent 1,400

Electricity 1,900

Gas 1,100

Telephone 1,400

Advertising 500

Salaries 5,700 12,000

NET PROFIT 9,000

Trading Account

Profit and Loss

Account

Profit Statement - definitions

Sales/Turnover Income received from the customers from sales of products

Less Cost of Sales The cost of buying in the stock sold during the year. Opening Stock – Stock in the business at the start of the year Purchases – Stock that is bought in during the year Closing Stock – Stock left over at the end of the year

Gross Profit = Sales – Less Cost of Goods Sold This is known as the Trading Profit, the money made solely from

trading activities.

Profit Statement - definitions

Gross Profit

Less Expenses Other expenses that have to be paid for other than stock. This

might include Wages, Rent, and Electricity etc.

Net Profit = Gross Profit – Expenses Final profit left after taking all expenses from Gross Profit

Problem Solution

Profit Statement – problems and solutions

Decrease in Sales

Increase in Cost of Goods Sold

Increase in Expenses

Increase selling price

find new supplier; negotiate a better deal with the supplier

reduce expenses through better deals or becoming more economical.

Job Cost Statements Job costing is a method used to add up costs.

Work consists of a number of separate jobs, each of which is completed to a customer’s specific requirement.

The idea of job costing is simple, direct costs are collected and charged to each job.

This is then charged to the customer plus a percentage for profit.

Main items in a job costing statement are: Materials, Labour, Factory overheads, and selling/admin costs.

Job Costing Example

Role of Technology

Role of Technology in Finance - Spreadsheets

The most common software to use in the Finance Department is Microsoft Excel.

This software allows the Department to complete their accounts using Spreadsheets.

Role of Technology in Finance - Spreadsheets

Why use a Spreadsheet to create accounts?

Once a formula is entered, calculations are done automatically.

A Spreadsheet can be easily edited. When figures are altered, totals will be updated

automatically. Can use ‘What if?’ scenarios. Many copies can be printed out easily.