Finance

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  • Finance
    • Revenue,costs and profits
      • Revenue-cost=profit
      • Revenue=quantity sold X selling price
      • Indirect costs are the general expenses of running the business
      • Variable costs are costs that will increase as the business expands this is a direct example
      • Direct costs are expenses that can be attributed to making a particular product
      • Total cost/output=average cost
    • Break-even anaysis
      • Break-even output=fixed costs/contribution per unit
    • Sources of finance
      • Small firms have 5 main sources of start-up costs: grants, trade credits, overdraft, loans and venture capital
      • Large firms have 4 main sources of start-up costs: retained profits, fixed assets, shares and debentures
    • Cash flow
      • Cash flow is the flow of money into and out of the business
      • Net cash flow is the difference between cash inflow and cash outflow over a period of time
      • Poor cash flow means there isn't enough money in the business
      • A cash flow forecast is a good way of predicting when the firm might face a liquidity problem(lack of cash). It lists all the inflows and outflows of cash in the budget
      • Credit terms tell you how long after agreeing to buy a product the customer has to pay
      • To improve cash flow: businesses can give their customers less generous credit terms or insist they pay by cash, give better credit terms for their suppliers and sell more unsold products, by destocking the cash inflow will be the same but cash outflows will be reduced as less will be spent on raw materials
    • Profit and loss account
      • Turnover is another word for revenue. It records the value of all products sold during the year. Costs of sales records how much it costs to make the products
      • Revenue-direct costs=gross profit
      • Profit and loss account shows how well a business is doing. It is useful because: existing shareholders are usually entitled to a share of the profits, potential shareholders will look at how much profit the business makes to help them decide if the business is wort investing in, shareholders may use this account to assess the performance of the directors who are responsible for running the business, employees will want to know if the business is making a profit or loss- this may mean a pay rise or lose their jobs and the government receives corporation tax from the business. It is used to calculate how much tax the business needs to pay
    • Balance sheets
      • Balance sheets show the value of assets and capital on a particular data
      • The liquidity of an assets tells you how easy it is to convert into money
      • Current assets-current liabilities= Net current assets
      • The net current assets is also called working capital
      • Net current assets + fixed assets=net assets or net worth. This is the amount the firm would make if it sold all its asset
      • Share capital is the money put into the business when shares were originally issues
      • Retained profit and reserves show all profit that the firm has made and has decided to retain
      • Balance sheets are useful because: stakeholders use the balance sheet to assess the financial health of a business, the net assets figure from the balance sheet can show this. A business whose net assets are growing each year is healthy because it is increasing the value of its fixed assets
    • Profitability ratios
      • Gross profit margin is the fraction of every pound spent by customers not used to make a profit
      • Net profit margin is the fraction of every pound spent by customers that the company gets to keep
      • Gross profit/sales(turnover)= Gross profit margin
      • Net profit margin=net profit/ sales(turnover)
      • ROCE is a measure of how good a business is at turning invested money into net profit. It shows how much profit is made as a proportion of the capital that has been invested in the business. A high ROCE is good for investors
    • Liquidity ratios
      • Liquidity ratios tells you how easy it is for a business to pay off a year’s current liabilities using their current assets
      • The current ratio compares a firms current liabilities with its current assets. It shows whether the firm has enough money in the business
      • If the acid ratio is above 1 there’s too much cash. If below 1 then there isn’t enough
      • Current assets/current liabilities= current ratios
      • Acid test ratio=(current assets-stock)/current liabilities

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