Finance

• When total costs = total of sales income
• Shows amount of goods that need to be sold in order to cover costs and go on to make a profit - minimum point of survival.
• Used to set price of product
• Assesses impact of planned price changes
• Assesses how changes in fixed / variable costs may affect profit

Break even = Total fixed costs ÷ (selling price per unit - variable cost per unit)

Fixed Costs:

• Don't change with output
• Have to be paid regardless of items produced
• Rent, rates, insurance

Variable Costs:

• Do change with output
• Vary according to number of items produced
• Raw materials, production wages, transport of goods

• The amount which a business sells in excess of its break-even point
• Margin of safety measured in units and £s

Margin of safety = Current level of output - level of output at break-even point

• A cash flow forecast is a prediction of the money likely to come into and go out of a business over a period of time.
• It ensures business survival
• Ensures income for business
• Ensures money is available to pay bills at the right time - prevents shortages
• Identifies times when businesses may need to find a source of finance.

• Cash flow forecasts are an essential part of a business plan
• To help plan expenditure
• To show periods of likely surplus and deficit
• To keep track of spending
• To set targets for businesses to work towards

• Used to interperate the accounts of a business
• Used by managers, banks, and tax authorities

There are four main ratios:

• Net profit percentage
• Stock turnover rate
• Return on capital employed
• Working capital ratio

Net profit percentage = (Net Profit ÷ Sales) x 100

• Shows net profit as a percentage of sales
• The higher the percentage the better
• Can be compared with previous years, targets, competition / similar firms

Stock turnover rate = Cost of goods sold ÷ Average stock

• Shows the number of time a business sells the value of its average stock.
• Rates of stock will depend on the type of business.
• A firm selling higher value goods has a lower rate of stock turnover than one that sells lower valur goods.

Return on Capital Employed = (Net profit ÷ Capital employed) x 100

• Shows return received on the money invested by the owner.
• The higher the percentage the better.
• Can be compared with previous years, return from an alternative investment.
• Targets set by owners

Working capital ratio = Currents Assets ÷ Current Liabilities

• Shows the firm's ability to pay its current debts
• Ideal ratio is 2:1 - twice as many current assets as current liabilities

Current assets - Items owned that can be quickly exchanged for cash e.g. stock.

Current liabilities - Amount that company owes to creditors due within a year.