1. Business finance

2. On this chapter Understand why business activity requires finance
Recognise the difference between capital and revenue expenditure and different needs for finance these create
Understand the importance of working capital to a business and how this can be managed
Analyse the different sources of long, medium and short term finance, both internal and external
Understand the role played by the main finance institutions
Select and justify appropriate sources of finance for different business needs
Analyse the factors that managers consider when taking a finance decision

3. Why business activity requires finance
Start-up capital = capital needed by an entrepreneur to set up a business
Working capital = the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms working capital = current assets – current liabilities
Capital and revenue expenditure
Capital expenditure = involves the purchase of assets that are expected to last for more than one year, such as building and machinery
Revenue expenditure = is spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock
Working capital – meaning and significance
Liquidity = the ability of a firm to be able to pay its short-term debts
Liquidation = when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
How much capital is needed?
Where does finance come from?

4. Internal source of finance
Profits retained in the business
Sale of assets
Reduction in working capital
External source of finance
Bank overdrafts
Trade credit
Debt factoring
Overdraft = bank agrees to a business borrowing up to an agreed limit as and when required
Factoring = selling claims aver debtors to a debt factor in exchange for immediate liquidity-only a proportion of the value of the debts will be received as cash
Sources of medium-term finance
Hire purchase and lasing
Medium-term bank loan

5. Other sources of long-term finance
Long term loans
Debentures, also known as loan stock or corporate bonds
Long-term loans = loans than do not have to be repaid for at least one year
Equity finance = permanent finance raised by companies through the sale of shares
Long-term bonds or debentures = bonds issued by companies to raise debt finance, often with a fixed rate of interest
Rights issue = existing shareholders are given the right to buy additional shares at a discounted price
Other sources of long-term finance
Grants
Venture capital = risk capital invested in business start-ups or expanding small business that have good profit potential but do not find it easy to gain finance from other sources
Raising external finance – the importance of a business plan
Business plan = a detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business
Making the finance decision

6. Forecasting cash flow

7. On this chapter Understand the importance of cash to business
Explain the difference between a firm’s cash flow and its profit
Structure a cash-flow forecast and understand the source of information needed for this
Evaluate the problems of cash-flow forecasting
Analyse the different causes of cash-flow problems
Evaluate different methods of solving cash-flow problems

8. The importance of cash flow
Cash flow = the sum of cash payments to a business (inflows) less then sum of cash payments (outflows)
Liquidation = when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
Insolvent = when a business cannot meet its short-term debts
Cash and profit – what’s the difference?
Cash inflows = payments in cash received by a business, such as those from customers (debtors) or from the bank, e.g. receiving a loan
Cash outflows = payments in cash made by a business, such as those to suppliers and workers
How to forecast cash flow
Forecasting cash inflows
Debtors = customers who have bought products an credit and will pay cash at an agreed date in the future
Forecasting cash outflows

9. The structure of cash-flow forecasts
Cash-flow forecast = estimate of a firm’s future cash inflows and outflows
Net monthly cash flow = estimated difference between monthly cash inflows and outflows
Opening cash balance = cash held by the business at the start of the month
Closing cash balance = cash held at the end of the month becomes next month’s opening balance
What uses does this type of financial planning have?
Cash-flow forecasting – what are the limitations?
The causes of cash-flow problems
Credit control = monitoring of debts to ensure that credit periods are not exceeded
Bad debt = unpaid customer’s bills that are now very unlikely to ever be paid
Overtrading = expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops
Ways to improve cash flow

10. COSTS

11. On this chapter
Explain the different classifications given to production costs
Understand the uses to which cost data can be put
Analyse which costs of production are likely to vary with output and witch will not
Use costs of production in brak-even analisys
Apply break-even analisys in simple business decision- making situations
Evaluate the usefulness of brake-even analisys
Understand the different costing methods
Apply different costing methods to operation- management decisions
Evaluate the relative usefulness of these costing methods for decision making

12. What are the costs of production?
Who needs cost data?
What are the costs of production?
Direct costs = these costs can be clearly identified with each unit of production and can be allocated to a cost centre
Indirect costs = costs that cannot be identified with a unit of production or allocated accurately to a cost centre
How are costs affected by the level of output?
Fixed costs = costs that do not vary with output in the short run
Variable costs = costs that wary with output
Marginal cost = the extra cost of producing one more unit of output
Problems in classifying costs
Margin of safety
Margin safety = the amount by which the sales level exceeds the break-even level of output
Contribution per unit = selling price less variable cost per unit
Evaluation of break-even analysis

13. Introduction to cost methods
Cost centre = a section of a business, such as a department, to which costs can be allocated or charged
Profit centre = a section of a business to which both costs and revenues can be allocated – so profit can be calculated
Full – or absorption – costing technique
Full/absorption costing = a method of costing in which all fixed and variable costs are allocated to products or services
Marginal-costing or contribution-costing approach
Marginal-costing or contribution-costing = costing method that allocates only direct costs to cost/profit centers not overhead costs
Should a firm stop making a product?
Contribution costing
Evaluation of the costing approaches

14. ACCOUNTING FUNDAMENTALS

15. On this chapter
Understand why keeping business accounts is so important
Analyse the main users and uses of business-accounting records
Identify and understand the main components of an income statement (profit and loss account)
Identify and understand the main components of a balance sheet
Analyse business accounts by using ratio analisys – liquidity and profit-margin ratios
Evaluate the limitations of ratio analisys and of published accounts

16. Why keep accounting records?
Internal and external users of accounting information
Limitations of published accounts
Are the published accounts really accurate?
Window dressing = presenting the company accounts in a favorable light – to flatter the business performance
Management and financial accounting
Foundations of accounting – accounting concepts and conventions
The main business accounts
Income statement = records the revenue, costs and profit (or loss) of a business over a given period of time
Gross profit = equal to sales revenue less cost of sales
Sales revenue (or sales turnover) = the total value of sales made during the trading period = selling price * quantity sold

17. The balance sheet – what it shows about a business
Cost of sales (or cost of goods sold) = this is in the direct cost of purchasing the goods that were sold during the financial year
Net profit (operating profit) = gross profit minus overhead expenses
Profit after tax = operating profit minus interest costs and corporation tax
Dividends = the share of the profits paid to shareholders as a return for investing in the company
Retained profit = the profit left after all deductions, including dividends, have been made. This is ‘ploughed back’ into the company as a source of finance
Low-quality profit = one-off profit that cannot easily be repeated or sustained
High-quality profit = profit that can be repeated and sustained
The balance sheet – what it shows about a business
Non-current assets = assets to be kept and used by the business for more than one year. Used to be referred to as ‘fixed assets’
Intangible assets = items of value that do not have a physical presence, such as patents and trademarks
Current assets = assets that are likely to be turned into cash before the next balance-sheet date
Inventories = stocks held by the business in the form of materials, work in progress and finished goods
Accounts receivables (debtors) = the value of payments to be received from customers who have bought goods on credit. Also known as ‘trade receivables’
Balance-sheet formats

18. Balance-sheet formats Non-current or fixed assets
Accounts receivables (debtors) = the value of payments to be received from customers who have bought goods on credit. Also known as ‘trade receivables’
Current liabilities = debts of the business that will usually have to be paid within one year
Accounts payable (creditors) = value of debts for goods bought on credit payable to suppliers. Also known as ‘trade payables’
Non-current liabilities = value of debts of the business that will be payable after more than one year
Balance-sheet formats
Non-current or fixed assets
Goodwill = arises when a business is valued at or sold for more than the balance-sheet value of its assets
Cash-flow statement = record of the cash received by a business over a period of time and the cash outflows from the business

19. Limitations of ratio analysis
Profit margin ratios
Gross profit margin (%) = gross profit / sales revenue * 100
Net profit margin (%) = net profit / sales revenue *100
Liquidity = the ability of a firm to pay its short-term debts
Current ratio = current assets / current liabilities
Acid-test ratio
Acid test ratio = liquid assets / current liabilities
Liquid assets = current assets – inventories (stocks) = liquid assets
Limitations of ratio analysis

20. BUDGETS

21. On this chapter Understand why financial planning is important
Analyse the advantages of setting budgets – or financial plans
Examine the importance of a system of delegated budgeting
Analyse the potential limitations of budgeting
Use variance analysis to assess adverse and favorable variances from budgets

22. Advantages of setting budgets
Budget = a detailed financial for the future
Budget holder = individual responsible for the initial setting and achievement of a budget
Variance analisys = calculate differences between budgets and actual performance, and analysing reasons for such differences
Key feature of budgeting
Delegated budgets = giving some delegated authority over the setting and achievement of budgets to junior managers
The stages of preparing budgets
Setting budgets
Incremental budgeting = uses last year’s budget as a basis and an adjustment is made for the coming year
Zero budgeting = setting budgets to zero each year and budget holders have to argue their case to receive any finance
Flexible budgeting = cost budgeting for each expense are allowed to vary if sales or production vary from budgeting levels

23. Potential limitations of budgeting
Budgetary control – variance analysis
Responding to variance analysis results
Budgets and budgetary control – an evaluation
Adverse variance = exists when the difference between the budgeted and actual figure leads to a lower – than – expected profit
Favourable variance = exists when the difference between the budgeted and actual figure leads to a higher – than – expected profit

24. Contents of published accounts

25. On this chapter
Make simple amendments to balance sheets and profit and loss accounts from given data
Understand the importance of accounting for the depreciation of fixed assets and apply the strength-line method to simple problems
Draw up balance sheets and profit and loss accounts from given data
Explain the significance of goodwill, net realisable value of stock and depreciation to the final accounts of a business

26. Amending income statements
Amending balance sheets further amendments for published accounts
Goodwill = arises when a business is valued at or sold for more than the balance-sheet value of its assets
Intellectual property = an intangible asset that has been developed from human ideas and knowledge
Market value = the estimated total value of a company if it were taken over
Capital expenditure = any item bought by a business and retained for more than one year, that is the purchase of fixed or non-current assets
Revenue expenditure = any expenditure on costs other than non-current assets expenditure
Depreciation = the decline in the estimated value of a non-current asset over time

27. How depreciation is calculated
Straight-line depreciation = a constant amount of depreciation is subtracted from the value of the asset each year
= (original cost of asset – expected residual value) / expected useful life of asset (years)
Net book value = the current balance-sheet value of a non-current asset
= original cost – accumulated depreciation
Net realisable value = the amount for witch an asset (usually an inventory) can de sold minus the cost of selling it. It is used on balance sheet when NRV is estimated to be below historical cost

28. Analysis of published accounts

29. On this chapter Calculate the return on capital employed ratio
Calculate the gearing ratio, the financial efficiency rations and investment ratios
Analyse ratio results and evaluate ways in which these results could be improved
Assess the practical use of ratio analysis

30. Interpreting company performance
Return on capital employed (%) = net or operating profit / capital employed * 100
Capital employed = the total value of all long-term finance invested in the business. It is equal to (non-current assets + current assets) – current liabilities or non-current liabilities + shareholders’ equity
Inventory (stock) turnover ratio = cost of goods sold / value of inventories
Days’ sales in receivables ratio = accounts receivable * 356 / sales turnover
Dividend = the share of the company profits paid to shareholders
Share price = the quoted price of one share on the stock exchange
Dividend yield ratio (%) = dividend per share * 100 / current share price
Dividend per share = total annual dividends / total number of issued shares
Dividend cover ratio = profit after tax interest / annual dividends
Price/earnings ratio = current share price / earnings per share
Earnings per share = profit after tax / total number of shares
This is the amount of profit earned per share
Gearing ratio (%) = long-term loans / capital employed * 100
Ratio analysis of accounts – an evaluation

31. Investment appraisal

32. On this chapter
Understand what investment means and why appraising investment project is essential
Recognise the information needed to allow for quantitative investment appraisal
Assess the reasons why forecasting future cash flows contributes a considerable element of uncertainty to investment appraisal
Understand and apply the payback method of investment appraisal and evaluate its usefulness
Understand and apply the average rate of return method of investment appraisal and evaluate its usefulness
Analyse the importance of qualitative or non-numerical factors in many investment decisions
Understand and apply the net present method of investment appraisal and discounted playback and evaluate their usefulness
Understand and apply the internal rate of return method of investment appraisal and evaluate its usefulness.

33. What is meant by investment?
Investment appraisal = evaluating the profitability or desirability of an investment project
Quantitative investment appraisal –what information is necessary?
Forecasting cash flows in an uncertain environment
Annual forecasted net cash flow = is forecast cash inflows – forecast cash out flows
Quantitative techniques of investment appraisal
Payback period = length of time it takes for the net cash inflows to pay back the original capital cost of the investment
Average rate of return = measures the annual profitability of an investment as a percentage of the initial investment
ARR (%) = annual profit (net cash flow) / initial capital cost * 100
Discounting future cash flows

34. Discounting – how is it done?
Net present value (NPV) = today’s value of the estimated cash flows resulting from an investment
Internal rate of return (IRR) = the rate of discount that yields a net present value of zero – the higher the IRR, the more profitable the investment project is
Criterion rates or levels = the minimum levels (maximum for payback period) set by management for investment – appraisal results for a project to be accepted
Qualitative factors – investment decisions are not just about profit