AQA Applied Business Unit 3 - Financial Planning and Monitoring

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

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

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

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

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

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.

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

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

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

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

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

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

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

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