UNIT 7 Revision

Sources of Finance

Source of financeWhat this source of finance is, it’s advantages and disadvantages….. Owner’s funds Retained profits Sale of assets Loans and Mortgages Bank overdraft Leasing Trade credit Increasing the number of owners Venture capital Issuing shares Government grants

Break-even How many products do we need to sell so that we neither make a profit or loss.

Break-even analysis – key words Break-even analysis Fixed costs Variable costs Semi variable costs Margin of safety Contribution Break-even formula What to do if costs rise or the break-even point rises

The break-even calculation: Fixed costs = Break Even Selling price – variable cost per unit The difference between the selling price and the variable cost per unit is called the CONTRIBUTION. Copy this formula into your exercise books. Businesses can calculate which products earn them the most contribution and then focus on selling these products.

Cash flow forecasts Have you enough cash to pay the bills?

The calculations Income (receipts) – Expenditure = Net cashflow Opening balance + net cashflow = closing balance

Tasks: Using page 226 and 227, making two headings – ‘cash inflows’ and ‘cash outflows’. Now list as many items under each heading as you can. When you finish, you should find out what is meant by the following terms: 1.Solvency 2.Variance 3.Favourable variance 4.Business plans Make a table that explains how a business can increase cash inflows when they FORECAST a deficit. Page 230 will help but it must be IN YOUR OWN WORDS! Explain what each of these words mean in your exercise book…

Profit and Loss How much profit did we make last year? What is our profitability (profit margins)?

Use the books to find out what is meant by: 1.Sales revenue 2.Cost of sales 3.Gross profit 4.Expenses 5.Net profit 6.Gross profit margin 7.Net profit margin 8.ROCE 9.Why would a bank want to look at a business profit and loss account?

Balance Sheets Have we enough current assets to pay current liabilities? How much is our business worth?

Balance Sheet – key terms 1.Fixed asset 2.Current asset 3.Current liability 4.Long term liability 5.Working capital or net current assets 6.Net assets 7.Capital employed? 8.Liquidity 9.Current ratio 10.Acid test ratio

Current ratio Measures liquidity (have you enough current assets to pay your bills?) Current assets=? Current liabilities More than 2 – wasting assets Less than 1.5 – danger of cash flow crisis….

Acid Test (great clothes…) Also measures liquidity, but removes stock to give a more immediate picture. Current assets - stock=? Current liabilities A result of 1 is considered ideal. Less than 1 – danger of cash flow crisis….