Day to day running costs = the cost of running the business everyday
Working capital = money available to pay for day-to-day running costs
Business must make sure there’s always enough money available to make payments
New businesses will need money to pay for start-up costs.
Creditors: People who are owed money by the business e.g. supplier
Payable: money owed by the business to the creditors
Debtors: people who owe the business money
Receivables: the money owed to the business by debtors
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Ideal Cash Flow
Where there’s a short period of time between money going out and money coming into the business:
From the start of production to the sale of goods,
Where the business is given a longer credit period to pay its payable by its creditors
Where the business gives a shorter period of time to get it’s receivables from its debtors e.g. customers
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Businesses try to control their cash flow by using
Budgets show the amount of money that managers expect to flow into the business and flow out of the business over a period of time in the future.
A budget is a forecast (prediction) of what the business is planning on making and spending usually over an annual period
Businesses use this financial plan as a target of what the business need to achieve to make a profit
Established forecasts on past experiences of how they’ve performed in previous periods
New firms have no past data, so their forecasts should consider the businesses capacity, customer trends shown by market research and what similar businesses experience.
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What's included in the budget?
Profit = revenue – total costs
Revenue – the amount money made of sales (also referred to as sales or turnover)
Costs – can be fixed costs where amount doesn’t change or variable costs where amount rise or fail depending on how much it’s used
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Taxation
VAT: tax that is applied to certain goods and services
On all the invoices you issue and receive
Income Tax
Tax you pay on your income (includes if you are self-employed)
Payslips, NI contribution, PAYE records
P45s are delivered when you leave a job, it gives you have much you were payed, how much you were taxed
Corporation Tax
On profits from doing business as a limited company
Corporation tax records e.g., income statement
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Income Statements and Balance Sheets
Important financial statements used for reporting company’s financial performance over a specific accounting period
Must be produced in annual report (legal requirement for limited companies)
Income statements: show company’s profit or loss, also called profit and loss accounts (PnL), detail revenue, profit and expenditures, shows tax paid
Balance sheets: reports a company’s assets, liabilities and shareholder's equity, takes into account depreciation of assets, shows how much the company is worth, only truly effective on the day it is reduced
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