FINANCE

REVISE THESE NOTES REGULARLY.

FIXED COSTS - costs that DO NOT change with output

VARIABLE COSTS - costs that DO change with output

START UP COSTS - costs that MUST be paid before a business starts up

RUNNING COSTS - costs that you MUST pay daily

TOTAL COSTS - FIXED COSTS + VARIABLE COSTS

INDIRECT COSTS (OVERHEADS) - costs that ARE NOT directly involved with the production process

DIRECT COSTS (COGS) - costs that ARE directly involved with the production process

REVENUE - number of sales x price per unit

REVENUE EXPENDITURE - money spent on an indivual business' day to day costs

CAPITAL EXPENDITURE - money spent on long term assets

PROFIT - Total Revenue - Total Costs= TR>TC

LOSS - TR<TC; if TR=TC then the business is in breakeven

BREAK EVEN POINT OF SALE is where TR(PxQ) = TC (FCxVC)

BREAK EVEN FORMULA - Fixed Costs/(Price per unit - VC per unit)

MARGIN OF SAFETY - amount of sales above the BeP of sale which a business experiences

THE BeP OF SALE GRAPH -  a graph to show how the BeP of sale can be calculated and offers a visual representation of profit, loss or breakeven

CASHFLOW - the amount of cash flowing in and out of a business each month

TOTAL INFLOWS - all the cash flowing into a business ie. sales revenue, loans

TOTAL OUTFLOWS - all the cash flowing out of a business ie. supplier costs, loan repayments

NET INFLOWS - Total Inflows - Total Outflows

OPENING BALANCE - The money left brought over from the month before (could be negative)

CLOSING BALANCE - Cash Flow + Opening Balance

ADVANTAGES

• It shows when a business is making enough money to cover all their costs.
• It is needed to know how much to sell to enable the business to make a profit.
• To identify and track costs (fixed and variable)
• It can help businesses identify where they can change their costs, for example, buying cheaper materials or finding a cheaper supplier.
• It is needed to highlight the margin of safety.

DISADVANTAGES

• It is only as accurate as the forecasts of costs and prices.
• It assumes all outputs are sold. In reality, this is unlikely.
• It is difficult to use with more than one product.

GROSS PROFIT - Revenue - Costs of Sales (COGS)

NET PROFIT - Gross Profit - Indirect costs

FIXED ASSETS - Assets which are needed for a business to trade

CURRENT ASSETS - Assets which are easily converted into cash

DEBTORS - Customers who owe the business money

CREDITORS -  People who the business owes money to

WORKING CAPITAL - Current Assets -Current Liabilities (Net Current Assets)

TOTAL ASSETS - Fixed assets +current assets

NET ASSETS -  Total assets - current liabilities

LONG TERM LIABILITIES - things like bank loans

CAPITAL EMPLOYED - all capital ie. bank loans and share capital (must balance with net assets)