Unit 5 Management of Finance 1 N5 BUSINESS MANAGEMENT

List of Topics 2 Break-even different types of fixed and variable costs understanding profit and how to calculate it producing and interpreting break-even charts Profit statement producing a profit statement interpreting a profit statement to identify loss, profit, identifying reasons for loss Technology in Finance (see Operations) Use of EPOS (electronic point of sale) Benefits of Spreadsheets Sources of finance sources of finance suitability of different types of finance Cash budgeting how businesses generate cash what businesses spend cash on why businesses must have enough cash why cash flow problems may occur how cash flow problems can be resolved producing a cash budget interpreting a cash budget and identifying any cash flow problems justifying suitable solutions to cash flow problems

To open the business To expand To buy supplies To buy stock To manage cash flow To pay debts Business need to have finance sources

Private Sector Finance 4 Sole Traders – are usually financed by the owner’s savings Partnerships – are financed by partners contributing their savings to the business (between 2 and 20 partners) Private Limited Companies – are financed bu selling shares to family and friends

Sources of Finance for the Private Sector 5 SourceDescriptionAdvantagesDisadvantages Loan from family/friends Often this doesn’t need to paid back or perhaps at a low interest rate over a long period of time May be interest freeMay cause arguments about repayment Bank LoanA loan of money repaid over time with interest Quick to organise Can be repaid over a long period Interest may have to be paid Bank overdraft Taking more money out of a bank account than is available Easy to arrange with the bank for a short period of time Usually only a small amount of money is available Daily interest charge so quite expensive MortgageLoan from a bank/building society to buy property over a long period of time Can be repaid over many years (25) Interest rates can rise over time

Sources of Finance for the Private Sector (cont) 6 SourceDescriptionAdvantagesDisadvantages Government grantsMoney from the government that does not have to be paid back Does not need to be repaid Usually has conditions attached Can take time to set up Princes TrustThe Princes Trust will provide start-up capital for young entrepreneurs Does not have to be repaid Usually has conditions attached Age conditions Issue SharesPrivate Ltd companies can sell more shares Can raise large amounts Dividends must be paid to shareholders Hire PurchaseBuying an item now and paying for it at a later date Can receive the item immediately Interest rates can be really high Item does not belong until last payment has been made

Public Sector Finance 7 Public sector organisations obtain their finance in different ways. The government raises money through different types of taxes eg income tax, corporation tax, VAT. Local government raises money through council tax. This finance is then allocated to the public sector according to planned budget spending eg to NHS, armed forces. The Scottish government funds education in Scotland.

Third/Voluntary Sector Finance 8 Third sector organisations get funding in different ways Sponsorship by businesses and individuals – eg Oban Saints sponsored by ? Fundraising activities – eg coffee morning to raise money for Cancer Research Trading activities – eg Atlantis and Phoenix cinema sell products/services

CASH FLOW 9 Cash flow is the movement of money into or out of a business How do businesses generate cash? They do this by selling products or services to customers. What do they spend cash on? All business must pay for raw materials and staff wages. They will have many other expenses like lighting and heating, insurance, petrol, rates …

Credit 10 However, many businesses offer CREDIT to their customers – this means they are allowed to buy now and pay later. Many businesses fail because they run short of cash. They may have allowed too many customers a long credit period but in the meantime have to pay bills of their own. Planning and anticipating can help businesses take action and deal with such problems.

CASH BUDGET 11 A Cash Budget can help a business anticipate when cash flow problems may occur. It identifies expected income from sales and also bills which must be paid in the near future

12 What does a Cash Budget look like? Can you see any possible problems? Closing Balance Van 300 Wages 1100 Heat and Light 2000 Rent Purchases Payments Sales Receipts Opening Bal MarchFebruaryJanuary CASH BUDGET FOR FIONA’S FLOWER SHOP

13 What could Fiona do about the February cash flow problem? Arrange a bank loan Arrange an overdraft - when there is a negative balance in the bank account. Buy the van on Hire Purchase Try to increase sales Find a cheaper supplier or ask suppliers for credit Raise more capital eg take on a partner Encourage customers to pay on time, eg by offering discounts

14 Using a Spreadsheet for Budgets Can perform calculations (formula) Can run scenarios (what ifs?) Can display results on charts

BREAK EVEN 15 COSTS are the bills that businesses need to pay on a regular basis. Some bills will change while others stay the same. The Break even point is the point where sales and costs are the same – the business is not making a profit

16 Importance of Planning and Control Businesses must cover costs or they will make a loss Some new businesses will aim to only cover costs or break- even (ie not make a loss) in the first few years - to get established Profit is the amount made after costs are paid. Forecasting income and costs allows businesses to make decisions and plans eg – get a loan or overdraft in a month where income is low.

17 Types of Costs Fixed Costs are those costs which stay the same irrespective of how much you sell or produce (eg rent for premises, insurance premiums) Variable Costs are those costs which increase directly as sales or production increases (eg power to machines, some wages [where workers are paid according to how much they produce])

18 Costs & Revenues (£) Quantity Sales Revenue Fixed Costs Total Costs Break-even point Value of Sales and Costs No of Items Sold

19 Costs & Revenues (£) Quantity Break-even point For an explanation of the shaded areas see next slide Area of loss Area of Profit BREAK-EVEN CHART

20 The green shaded area (to the left of BEP) shows the losses made at the appropriate levels of sales since Total Cost is greater the Sales Revenue. The blue shaded area (to the right of BEP) shows the profits made at the appropriate levels of sales since Sales Revenue is greater the Total Cost. Therefore the BE chart allows you to calculate whether a profit or loss will be made at any level of sales.

21 Fixed or Variable? Rent Chocolate Staff wages Packaging Icing sugar Coffee Electricity Ribbons Flour Advertising material Insurance Lolly sticks Ice cream Tea Milk Website designer

PROFIT STATEMENTS 22

TECHNOLOGY 23 See Operations powerpoint