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Finance and accounting (Forecasting and Managing Cashflows (Ways to…
Finance and accounting
Sources of Finance
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Working capital: the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers.
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Costs
Accurate cost data is important so that accurate profits and losses can be calculated, for pricing decisions, helps set budgets for the future, helps in decision making. If businesses do not keep an accurate record of their costs they will not be able to make effective and profitable decisions.
Types of costs
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Direct costs: Costs that can be clearly identified with each unit of production and can be allocated to a cost centre.
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Break even analysis
Break even point of production: the level of output at which total costs equal total revenue, neither profit or loss is made
Margin of safety: the amount by which the sales level exceeds the break-even level of output. Production/break even point.
Advantages: Charts are relatively easy to construct and interpret. Analysis provides useful guidelines to management. Comparisons can be made between different options. Assists managers when making important decisions.
Disadvantages: The assumption that costs and revenues are always represented by straight lines is unrealistic. Not all costs can be classified into variable or fixed costs. It is assumed that all units are produced and sold.
Accounting Fundamentals
Income statement: records the revenue, costs and profit of a business over a period of time, this information helps compare businesses, banks will need this data in order to lend money, measure performance
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Gross profit: the profit a company makes after deducting the cost of making and selling the products
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Retained earnings: the profit left after all deductions, including dividends have been made
The statement of financial position: an accounting statement that records the values of a business's assets, liabilities and shareholder's equity at one point in time
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Profitability ratios
Gross profit margin: (Gross profit/revenue)*100. How effectively managers have added value to the cost of sales.
Operating profit margin: (Operating profit/revenue)*100. How well the business is turning revenue into profit, before tax and dividends.
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