Unit 2.3

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Why do expanding businesses require Capital?

- more transport costs.

- need more employees - have to cover wages.

- may need a larger building to work in.

- need to buy more supplies.

- spend mre on promotion

- Updated machinery - technology advances 

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How does a business raise extra finance?

-Retained Profit - investing profits back into the business rather than giving it to shareholders

- Selling unwanted assets - Such as land or old machinery to raise capital. therefore the business won't have any debts however these assets may be needed by the business.

- Issuing new shares - this is done to raise more capital generally for an expansion, however dividends will be expected by shareholders.

- Loan - Borrowing from a bank or another finacial institution, this doesn't use up profits that could have been invested to the shareholders. however interest rates may be high, also property is used as security so it could be taken if the loan isn't repaid.

- Mortgage - A long term loan used to buy property such as a factory or and office space.

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What do the accounts of a business show?

1. is the business making a profit or loss. This is shown in a document called a profit and loss account.

2. How much is the business worth? This is shown n a document called a balance sheet.

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How do you improve the profits of a business?

Improvng Sales Revenue...

- Decrease price to increase demand

- Sell more (promotional offers)

- Increase price for more profit. You could then target other markets if they think its more expensive, then they may also think it is better quality.

Improving Gross Profit...

- Reduce Costs

  - find a cheaper supplier

  - take advantage of economies of scales and bulk buy

  - however quality could decrease and therefore reputation

  - relationships with the supplier isn't as strong

Improving Net Profit...

- Lower expenses

  - spending less on marketing or training employees, which could lead to poor staff with lower effieciency.

  - Competitors may have better advertisements, this depends on which industry they're in.

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What are Gross and Net profit margins?

Gross Profit Margins... (%)

This shows the percentage of a businesses sales revenue that ends up becoming gross profit.                           

Gross Profit    x 100                                                                                                                                Sales revenue         

Net Profit Margins... (%)

This shows the percentage of a company's sales revenue that is left over as net profit. The higher the percentage the better.

Net Profit       x 100                                                                                                                                  Sales revenue

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What kind of assets might a business have?

- Vehicles

- Stock

- Facilities/Property

- Cash

- Equipment

- A debtor - A customer that owes you money

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What might a businesses labilities be?

Current Liabilities...

- Creditors - the business owes money to

- Overdraft - short term surce of finance

Long Term Liabilities...

- Bank loan - minimum of 12 months

- Mortgage

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What is an Acid test and Current ratio?

Current Ratio = Current Assests / Current Liabilities

This examines whether a business has enough current assests to cover all of its current liabilities but it doesn't count stock as a current asset, incase the business cannot count on selling it quickly enough.

 (debtors + Cash) / Current liabilities

however if the answer is too high then this might indicate that the business is keeping too much cash in the bank to cover their debts. This monay may be of more value if it was installed into the business.

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