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Topic Three: Finance and Accounts - Coggle Diagram
Topic Three: Finance and Accounts
3.7 Cash Flow
3.3, 5.5 Break Even Analysis
How to construct a break even chart
Total fixed costs
Total costs
Break even quantity
Margin of safety
Total revenue
3.1 Introduction to finance
What is capital expenditure
Capital expenditures
are investments in fixed assets that are not for sell in the short term such as land and property
Features of capital expenditure
⇒ beneficial for a company in the long term
⇒ determines the size of the organization in the long term
⇒ usually financed from long-term sources of finance as the products are usually quite costly and expensive
Why do we have capital expenditure?
To add more production opportunities
To replace or renew the worn out/outdated/obsolete capital equipment such as machinery in the company
New products such as IT technology can increase productivity in production
It helps comply with the legalization and regulation changes such as green technology
What are some challenges faced by capital expenditures
They are often quite costly and there is a limited amount of finance to support it
Despite the different opportunities, some investments are NOT FEASIBLE
Risk management must be taken into account and the return on investment should be calculated using investment appraisal methods such as PPB (payback period) ARR (Average rate of return) and NPV (net present value)
What is revenue expenditure
Revenue expenditure
is financial investments spent on daily operations including indirect costs.
what are some features of revenue expenditure
helps enhance business performance in the present time instead of long term
Businesses incur expenses as a result of producing goods and services therefore it should be appropriately managed in order to generate revenue and profit
Why do we have revenue expenditure?
Helps to motivate the workforce and increase worker loyalty and productivity
Ensures that the business is actively running and producing goods and services
What are some challenges faced by revenue expenditure?
Only displays the expenses of a company in the current period, therefore, cannot be used to determine the financial position of the company and does not give a clear picture of an organization’s financial position.
3.2 Sources of finance
Internal sources of finance
Personal Funds
is the use of an entrepreneur’s personal money.
Retained Profits
is the money that the company keeps from its profit after interest and tax to use within the organisation
The sale of assets
is the money that the company makes from selling its dormant assets (unused)
External sources of finance
Share capital
is the money that is raised from selling shares of the company in a limited liability company.
ONLY for publically listed companies can raise a large sum of money but can loose control
Long term source of finance
Loan capital
is the Medium- to long-term sources of finance obtained from commercial lenders such as banks
medium to long-term finance, have to be paid back
Debentures
long-term loans issued by a business. Debenture holders receive interest payments even if the business makes a loss and before shareholders are paid any dividends.
(+)
Provides long term source of finance without loosing control in the business
(-)
companies have to pay the dividends despite business downturn so it can compromise business growth
Mortgages:
secured loans for the purchase of property (real estate) such as land or buildings.
Business development loans:
highly flexible loans are catered to meet the borrower's specific needs to develop aspects of their business such as start-up, expansion, and replacement equipment.
Overdrafts
is a financial service that allows a business to temporarily overdraw on its bank account
recommended for minor cash flow problems, also suitable for businesses that have sold products on trade credit (see below) and are awaiting payments from their customers.
Crowdfunding
is a way of raising finance from a large number of individuals for a small amount of money to finance a new business venture or project.
relies on social media and the internet or traditional methods such as family and friends for start up businesses
Trade credit
allows a business to postpone payments or to ‘buy now and pay later’where although a sale has been made, the cash can be due within 30 - 60 days
the companies that offer trade credit can be called the “creditor”
can be bad for a business’ cash flow and liquidity position as there might be insufficient cash
Leasing
a form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee). The lessee pays rental to the lessor for its assets.
it can be cheaper to rent machinery or equipments such as computers and buildings in the middle-short term
in the long term the costs of leasing can be more costly than purchasing
Microfinance providers
are aimed at entrepreneurs who are of small businesses where microfinance providers enable disadvantaged members of society to gain access to essential financial services to eradicate
creates job opportunities, improved accessibility for those in poverty
it provides limited finance and is eligible to a limited amount of people
Business Angels
extremely wealthy individuals who choose to invest their own money in businesses that offer high growth potential such as high risk high return companies
likely to take a proactive role in the business start up, so the founder may loose some control
Sources of fiance
is the general term used to refer to where or how businesses obtain their funds. These can be categorized as internal or external
3.4 Finance and Accounts
Balance sheet
Depreciation
Profit and loss account
What is the purpose of final accounts?
to account for the distrubution of money within the organisation and to ensure that all payments and receipts of the company have been accounted to ensure transparency in the use of a company's funds
Why would stakeholders be concerned about the financial accounts?
3.5 Profitability and Liquidity Ratios
3.6 Efficiency Ratio analysis
3.8 Investment Appraisal
3.9 Budgets
Cost centre
is a unit of a business to which the costs can be allocated for accounting purposes. The idea behind creating cost centres is to see which parts/units of the business generate costs and how large these costs are.
Why do we need profit/cost centres?
managers can see which function of the business is the most demanding in costs and which makes the most money
see how efficiently costs are minimised and profits are maximised in different business parts.
What is the role of profit/cost centres?
monitor efficiency
facilitate decision making and planning
analysis and forecasting
They can act as a motivator for staff to focus on maximising profits and less costs
Can be too stressful for employees
qualitative factors are ignored
Not always feasible since indirect cost can not be allocated to one part of the company
Profit centre
is a unit of a business to which costs and profits can be allocated for accounting purposes. The idea behind creating a profit centre is to see which parts/units of the business are the most efficient at maximising profits and how large these profits are.
