Business Studies Unit 8 Finance Part 1

Why does a growing business need finance?
1. To expand and have new stores
2. To bring out new products
3. To diversify
4. To pay off debts
Sources of finance for a Growing Business
1. Retained profit
  Nota:
  - Adv - no interest and doesn't have to be repaid - no loss of control to new owners/shareholders Disadv - Many businesses may expand but still not be very profitable - When profits are low this is not available
  1. Used for long-term expansion
2. Selling unwanted assets
  Nota:
  - Adv - No interest paid, finance doesn't have to be repaid - No loss of control of the business Disadv - The asset is no longer owned - The asset might still be needed leading to leasing costs
  1. To pay for expansion or for long-term debts
3. Issuing new shares
  Nota:
  - Adv - No interest has to be paid - Doesn't have to be repaid Disadv - Dividends will be expected by shareholders - May lead to loss of control for the original owners
  1. To pay for long-term expansion, ie acquisitions
4. Loan
  Nota:
  - Adv - Overdraft is very flexible - No loss of control by existing owners - Lower interest rate Disadv - High interest costs - Must be repaid - could be at short notice - Property is used as security
  1. For long or short-term purposes, ie to buy machinery or to pay for increases in stock
Cash Flow Forecasts
1. Predicts whether a profit or loss will be made at the end of the month
2. Opening balance, cash in, cash out, net cash flow, closing balance
3. The figures are based on sales and costs from a year ago, or similar selling months
4. Important as it allows businesses to check if they have enough money available that month, and where they need to cut down
5. Can be used to persuade the bank to lend the business money
Cash Flow Statements
1. A historical document that shows how well the business has done over a period of time
  1. Can be used to create cash flow forecasts for the future
Profit & Loss Account
1. Contains 5 important pieces of information
  1. Sales revenue
    1. This will increase when the number of units sold increases
  2. Cost of sales
    1. The bought-in value of the goods sold by the business + labour costs needed to make the product/provide the service
  3. Gross Profit
    1. Increased either by raising sales revenue or reducing the cost of sales
  4. Expenses or Overheads
    1. Include the fixed costs of the business
  5. Net Profit
    1. Very important calculation
      1. Shows how successful the managers have been at making a profit once the total costs of the business (cost of sales + overheads) have been subtracted from sales revenue
2. Shows whether a business has made a profit or loss over the last period
Balance Sheet
1. Lists the value of a companies assets and liabilities, thereby showing what the company is worth
2. What does it involve?
  1. Fixed Assets
    1. Items owned by the business with a lifespan of more than 1 year
      1. Buildings, equipment and machinery
  2. Current Assets
    1. Assets owned by the business that are either in cash form or likely to be turned into cash in under a year
      1. Stock, debtors and cash
  3. Current Liabilities
    1. Short-term debts of the business that have to be repaid within a year
      1. Creditors and overdraft
  4. Net Current Assets
    1. If the business has short term debts greater than current assets, can't pay debts
  5. Net Assets
    1. Value of assets after all liabilities have been subtracted

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Business Studies Unit 8 Finance Part 1

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