AQA Applied Business Unit 3 - Financial Planning and Monitoring

AQA AS

Applied Business Studies BS03

Unit 3: Financial Planning and Monitoring

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  • Created by: charlotte
  • Created on: 07-01-13 18:01

Sources of finance

Owners funds : money put into the business by the owner

Retained profits : money kept in the business by the owners

Sale of assets : items owned by the business are sold for finance

Overdraft : the bank allows the business to draw more money than they have

Trade credit : items are bought on a 'buy now pay later' basis

Debt factoring : the business sells a debt they are owed to a factoring company

Leasing : the business rents the item from the owner

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Sources of finance cont.

Debentures : long term borrowing with a fixed period of time and interest

Bank loan : money is borrowed then paid back over time with interest

Issuing shares : a share in the business is sold to another

Mortgage : long term loan from the bank to buy property

Government grants : money given by the government

Hire purchase : an item is bought on finance and is payed off monthly

Venture capital : venture capitalists invest in small risky business

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Legal forms of business

Sole trader : a business is owned by one person

  • financial records kept private
  • easy to set up
  • keep all of the profits
  • unlimited liability and unincorporated
  • limited finance
  • all losses paid by the owner

Partnerships : a group of 2-20 people who contribute capital and expertise

  • shared responsibility
  • more access to finance
  • synergy (people do what they're good at)
  • unlimited liability and unincorporated
  • decision making is harder and takes longer
  • less profit each
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Legal forms of business cont.

Private limited company : owned by invited shareholders who run it too

  • limited liability and incorporated
  • easy and cheap to establish
  • raise finance by selling shares
  • must publish some information
  • cant sell additional share without the approval of current shareholders

Public limited company : anyone can own shares, run by a board of directors

  • limited liability and incorporated
  • raise large sums selling shares on stock market
  • benefit from public profile and media
  • must publish detailed financial information
  • anyone can buy shares
  • easy to loose control of ownership if too many shares are sold
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Business plans

Executive Summary

Objectives / Aims

Finance : cashflow + breakeven forecast, trading account, balance sheet, 

Market Research : competition, target market

Legal Identity

Location

Machinery, Equipment + Staff

Marketing

External Environment

Product / Service

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Resource Management

Human Resources:

  • the people who work within an organisation; including office staff, operational and shop floor employees, and managers.

Physical Resources:

  • an organisation's fixed assets such as premesis and vehicles, as well as tangible items such as raw materials, components and finished goods.

Financial Resources:

  • a business's cash and capital resources. An assesment of a business's financial resources involves examining profits and profitability, as well as cashflows, working capital requirements and company financing.
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Business Software

To obtain accurate and up-to-date info, businesses rely on software applications:

Databases

  • employee details
  • stock records
  • fixed asset schedule
  • customer records
  • supplier records

Spreadsheets

  • records of sales and expenditure
  • budgets
  • cashflow forecasts
  • year-end accounts
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Costs and revenues

Fixed Costs: costs which dont vary with the level or output. Fixed costs exist even if a business isnt producing any goods

Variable Costs: vary directly with output. They include labour, fuel and raw materials

Semi Variable Cost: expenses incurred by a business, which can have both fixed and variable elements

Total Cost: the sum of fixed costs and variable costs

Revenue: the income a business earns from selling its goods and services

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Contribution

Contribution per unit

  • selling price - variable costs per unit

Total Contribution 

  • total revenue - total variable cost
  • contribution per unit x output

Contribution Pricing: some businesses use contribution when setting their price, this involves setting a price which exceeds the variable cost. It is often used when fixed costs are low.

  • this allows the business to charge different prices
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Profits and Breakeven

Profit: this arises when a firms revenue is greater than its total costs. A loss occurs when revenue is less than total costs.

  • revenue - total costs
  • total contribution - total fixed costs
  • margin of safety x contribution per unit

Breakeven: the point at which a business sells exactly the right number of products so that its revenue = costs.

  • BEP unit = total fixed costs / ccontribution per unit
  • BEP revenue = breakeven point per unit x selling price

can estimate levels of output needed

asses impact of price changes

allows managers to model 'what if' situations

must be redone everytime a factor changes

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Cash Fow Forecasting

Cash Flow: the money going in (inflow) and out (outflow) of the business

Cash Flow Forecast: a predicition of the money coming in and out of the business

Net Cash Flow: cash inflow - cash outflow

Closing Balance: opening balance + net cash flow


  • highlights problems in the future -> can do something about it
  • can be used hen applying for finance
  • shows how much is needed -> borrow correct amount
  • only a prediction
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Cash Flow problems

Causes of Cash Flow Problems:

  • unexpected expenses
  • late payments
  • innacurate predicitions
  • external influences

Solutions to Cash Flow Problems:

  • rescheduling payments -> large payments = several smaller payments
  • selling fixed assets
  • extending trade credit
  • buying and handling fewer stocks
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Budgets

Budget: an agreed financial plan

  • Income Budget
  • Expenditure Budget
  • Profit Budget

Methods of Setting Budgets:

  • company objectives: more ambitious objectives = higher budget
  • competitors spending: match their spending to stay competitive
  • percentage of sales revenue
  • zero based: set on the expected outcome, good = high budget
  • historical: based on previous budget + inflation

Advantages / Disadvantages:

  • Motivate Staff
  • Helps to aid communication throughout a business
  • Time consuming
  • Can lead to inflexibility in decision making
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Variance Analysis

Variance Analysis: compares the actual performance with the predicted performance. This highlights areas of good and poor performance.

  • allows managers to build on areas of strength and remedy areas of weakness

Favourable Variance: occurs when results are better than expected

Adverse Variance: occurs when results are worse than budgeted

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Comments

amrit bath

What are potential Questions which may come up in relation to the pre-release 2013 summer applied business AQA?

Joanne.B

Possibly something like:

a) Explain the actions that Jem might take to improve the cash flow position of MTLtd. Make a justifcated recommendation as to which of these actions Jem should use

b) Analyse the case for and against the proposed expansion in 20 acres of land as well as the necessary specialist equipment. you should advise whether or not Jem should invest in the expansion.

These were my mock exam questions for the per-examination research questions

chantalle

Really helpful, thank you :)

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