Applied Business Unit 3 - Finance Exam

Budgets are a prediction of the costs and or revenues of a business. budgets are only a prediction of what you think your going to use! they are not always accurate.

Variances are the difference between budget figures and actual figures.

Positive variances are the difference between the budgeted figures which is an advantage to the business. these are also called favourable variances.

Positive variances are often called favourable. 

Negative variances are often called adverse

Formulas:

Revenue = Selling Price x Output

Contribution = Selling Price – Variable Costs

Total Costs = Fixed Costs + Variable Costs

Breakeven = Fixed Costs ÷ Contribution

Net Cash Flow = Inflows – Outflows

Closing Balance = Net Cash Flow + Opening Balance

Lease: A lease is a contract for the user to pay the owner for use of an asset.

Mortgage: A mortgage is a loan you take out to buy property.

Bank loan: Bank loans are amounts of money borrowed from a bank usually for a stated purpose.

Overdraft: Overdrafts are short term loans, where a business will be able to withdraw more money from the bank than it actually has.

Retained profit: retained profit is the business’ savings.

Divorce of ownership and control – as businesses get bigger, the ownership may become separate or divorced. This may be because the shareholders may not have the money, time or skills to run a business. So the running of the business is then down to the board of directors, who are employed for their skills by the shareholders. The shareholders are then “divorced” from the business.

Ownership of a Public limited company – The owners of a plc are the shareholders; however there is a board of directors that make the decisions. The directors are appointed by the shareholders. The shares are sold on the stock exchange and anyone can buy them.

 Control of a Public limited company – The owners are the shareholders however the decisions are not made by them but by the board of directors.

 Financinga Public limited company – The government pays for the business and well as loans and sometimes government grants.

Advantages of a Public limited company - The company’s name is protected, continues even if someone dies, easier to get loans, easy to get investors.

Disadvantages of a Public limited company  – don’t know who buys the shares, less control and harder to make decisions,  the accounts can be seen by everyone whenever they want, expensive to start up, decision making takes a long time. Original owners may lose control. 

Ownership of a Private limited company – the owners of a Ltd. are the shareholders. The shares are sold to family and friends. There is usually a board of directors who make all the decisions. They have limited liability which means if the business has debts the board of directors and the shareholder do not have to pay off the debts, the shareholders only lose the money they put in to the business nothing more.

 Control of a Private limited company – the board of directors control the business and make all the decisions. The owners are the shareholders however they don’t make the decisions about the running of the business.

 Financing a Private limited company – the money comes from loans or government grants to start up the business and the profits are used to improve the business.

Advantages of a Private limited company – the shareholders only lose the money that they put in; the debts are not paid off by the shareholders or the board of directors. The company name is protected. Flexible borrowing powers. Appointment, retirement or removal of board directors is easy. It is easy to get new shareholders and investors because they sell their shares. Stable structure.

Disadvantages of a Private limited company – the shareholders have a share of the profits; can only sell shares to certain people. Growth may be limited. Only up to 50 shareholders.

Ownership of a partnership – in a partnership there is 2 or more partners that own the business and they have to share out the profits made and they can employ workers and also sell the shares of the business to others.

 Control of a partnership -  Partnerships are usually quite big companies so it would be hard to make quick decisions also the decision making has to be shared between the partners so making decisions would be slow and a long process.

 Financing a Partnership - the partners have to put in their own money to set up the business and they are responsible for the debts and if they business goes bankrupt they have to share out the debts between the partners.

Advantages of a partnership – a new partner may have more skills than a sole trader would, which can strengthen the business and which could also allow more products/services on to be offered. A number of people can put more money in to finance the business, rather than one person alone. With the new skills and increased labour the business will have a bigger potential to grow or expand.

 Disadvantages of a partnership – the profits will have to be shared between all of the partners, which can lead to arguments on ‘fair’ distribution of profits and work load between owners. Multiple partners means that it will be harder to make decisions about the business, because everyone has to agree which will make it much slower. The partners have to share out the debts of the business and have unlimited liability meaning the money comes from the partners own pocket.

Ownership of a sole trader – a sole trader is an individual own their own business and they keeps the profit for themselves. The owner can employ workers or can work on his/her own. The owner has unlimited liability for the debts of the business meaning that if the business has any debts, the owner pays them with their own money.

Control of a sole trader – a sole trader has complete control over all the decisions that are made within the business, so they can decide if the workers would get a pay rise and decisions about the day-to-day running of the business.

Financing of a sole trader – a sole trader sets up the business using their own money, the accounts of the business are not published so only the owner will see them, and the owner gets to keep all the profit made (unless they give out wages) to use in the business to buy new equipment or advertising.

Advantages of a sole trader – Sole traders are usually small businesses so it is really easy to make quick decisions, the owner keeps all the profit made, the owner is more likely to get to know employees and customers on a personal basis and have close contact with customers which could help the company survive when the company faces competition.

 Disadvantages of a sole trader – The owners would have to work long hours and it would be harder for them to take holidays, also if the sole trader dies, then the business dies too.

Costs: Any expenses a business has to pay out.

Price: How much the business charges.

Variable Cost or Direct Cost: An expense that changes directly with output.

Fixed Costs/Overheads/Indirect Costs: An expense that doesn’t change directly with output.

Output: The quantity of items made/sold.

Revenue: Money received from the sale of goods or services.

Profit: The amount left over after costs have been paid.

              (Total revenue – Total costs)

Breakeven point: When total revenue equals total costs.

Losses: When total revenue is smaller than total costs.

In a shirt factory the variable cost of every shirt is £6.00 so if the company makes 10. The total variable costs are therefore [10 shirts x £6] = £60.00

Work out the following variable costs:

3. Sport shoes with variable costs of £10 and an output of 3500

             3500 shoes x £10 = £35,000

4. Namib’s tyre factory with variable costs of £5 and output of 6000.

                     6000 tyres x £5 = £30,000