Business Section 3 - Finance 1

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  • Created by: ryyansb
  • Created on: 24-03-15 20:49

Business Costs

Revenue is the income earned by a business

Revenue = sales x price

Costs are the expenses paid out to run the business

Direct Costs - expenses attributed to a particular product - e.g. factory labour, raw materials

Indirect costs - general overheads of running the business - e.g.  salaries, telephone bills, rent

Fixed costs - do not vary with output - have to be paid even if the firm produces nothing - indirect

Variable costs - increase as the firms output increases - mostly direct costs

Profit = revenue - costs 

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Sources of finance

Businesses need finance for various reasons:

  • 1. Start up capital to buy assets needed to run the business
  • 2. Finance the poor initial cash flow
  • 3. Working capital - enough cash for day to day running of the business
  • 4. Finance needed to cover delayed customer payments
  • 5. Finance to fund expansion

Small firms have 5 main sources of start up finance:

  • 1. Grants - often given to new firms e.g. in areas of high unemployment
  • 2. Trade credits - issue with an invoice to pay in 30 days for example
  • 3. Overdrafts - let firms take more money out of the bank but high interest rates
  • Loans:
    • Bank loans - quick and easy to take out
    • Friends and family
    • Mortgages - long term loans which are mainly for buying property 
  • Venture capital - money from specialists at investments 
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Cash flow

Cash flow is the flow of money in and out of a business

Net cash flow is the difference between cash inflow and outflow

Cash flow forecasts are a good way of predicting liquidity problems 

Poor cash flow means you have big problems:

  • 1. Poor sales - less money coming in
  • 2. Overtrading - firms takes too many orders so orders too many materials
  • 3. Poor business decision - making wrong decisions

Ways to improve cash flow:

  • 1. Give customers less generous credit terms
  • 2. Reschedule payments to suppliers
  • 3. Destocking unsold products
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