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Business Finance (Key financial terms (Net cash flow and profit (Profit…

- - - - E.g. rent, office salaries, advertising, insurance, depreciation
      - Costs that have to be paid even if the business sells/produces nothing
    - - If output doubles then so do variable costs
      - E.g. direct labour, raw materials, packaging, royalties paid
      - Costs that vary with the level of output
  - - - Include all receipts of money
      - Examples include
        
        Commission received
        
        Rent received
        
        Loan receipts
        
        Cash received from selling products/services
    - - Include all payments made by a business
      - Examples include
        
        Loan interest
        
        Payments to suppliers
        
        Insurance
        
        Wages
  - - - Difference between the cash inflow and the cash outflow
    - - The surplus left over from revenue after paying total costs
      - Businesses use profits to:
        
        Reward owners in dividends and drawings
        
        Invest for future growth
        
        Save for contingency
      - Profit = revenue - costs
    - - Insolvent - when a business is unable to pay its debts
      - Business owners have to stop trading or raise finance
      - A cash flow forecast can be constructed to plan ahead and identify when funding may be needed
  - - - How far output can drop before business begins to make a loss
      - margin of safety (units) = actual output in units - break-even output in units
    - - When costs equal revenue
      - Used to:
        
        Calculate the level of sales and unit price of each item needed to cover total costs
        
        See how changes in sales/costs affect profits
      - When making profit, the output level is higher than break-even output level
      - break even output = fixed costs / (selling price - variable costs)
- - - - Expenses - operating costs of a business e.g. wages, heat and light, rent, advertising etc
      - Revenue - money that comes into a business
      - Gross profit
        
        Deduct cost of sales from revenue
      - Net profit
        
        Selling and administrative expenses are deducted from gross profit
  - - - The two sides must always balance
    - - Resources owned by a business
      - Non-current assets
        
        Likely to be used for a considerable amount of time e.g. 12months+
        
        E.g. motor vehicles, premesis
      - Current assets
        
        Part of a businesses operating cycle
        
        Likely to be converted to cash within 12 months
        
        Five main categories
        
        Prepayments (Advance payment e.g. rent)
        
        Inventory
        
        Trade receivables (debtors; people who owe money)
        
        Cash in hand
        
        Cash in bank
    - - Represent debts owed by an organisation
      - Current liabilities
        
        Amounts falling due within a year that arise in day-to-day trading
        
        E.g. overdraft, trade payables (people who the business owe money to), corporation tax and dividends payable
      - Non-current liabilities
        
        Amounts falling due after one year
        
        Sources of long term borrowing e.g. mortgages
        
        Will appear in a number of consecutive statements of financial position
    - - Another name for capital
      - How much a business is worth
      - Represents how much owners have invested in the business
  - - - Will show when cash is expected to come in and go out of a business
      - A maagement accounting document and a form of budget
      - Has three sections:
        
        Net cash flow - difference between receipts and payments
        
        Gives an indication of money remaining at the end of each month
        
        Payments - Money a business expects to spend
        
        Receipts - money a business expects to receive
      - Doesn't inform managers about profit/profitability
      - Helps businesses to:
        
        Plan how to use excess cash
        
        plan a project with minimal borrowing
        
        Identify problems before they happen
        
        Support an application for finance
    - - Actual cash inflows and outflows
      - Owners can compare statement to forecast to identify problems
      - Cash flow problems can be identified and sorted by:
        
        Reducing costs
        
        Selling non-current assets e.g. old computers
        
        Increasing sales levels
        
        Improving credit control - reducing credit period allowed to customers, chasing non-paying customers
        
        Holding less inventory within the business