Finance

Question 1

Business costs

• revenue is the income earned by a business
• Revenue =Sales x price

Costs are the expenses paid out to run the business
-costs can be direct/indirect
Total costs=direct costs + indirect costs

And fixed variable
-total costs=variable costs + fixed costs

Average cost= how much each product cost to make

• average cost=total cost÷ output
• profit=revenue-costs

Answer 1

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Question 2

Sources of finance
Firms need finance for various reasons
1.new firms need start-up capital to buy assests
2.new firms also need to finance their poor initial cash flow
3.working capital=all firms need enough cash to meet day-day running of the business
4.some customers delay payment-finance is needed to cover this shortfall in liquidity
5.firms may need finance-they may be moving to larger premises

Small firms have five main sources of start-up finance:

1. grants
2. trade credit
3. overdrafts
4. loans
5. venture capital

Answer 2

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Question 3

Starting a business-help and support

The goverment gives a lot of help

Private firms also offers support

• E.g banks:they help businesses by:
• offering financial support in the form of overdrafts/loans
• giving new businesses advice on how to manage their finances,calculate taxes,keep records
• Many banks have small business advisors to talk to potential entrepeneurs and offer them advice
• sometimrs they will put new businesses in contact with suppliers/potential customers

Banks do this for two main

A few charities offer advice an money

• Help people start new businesses
• E.g princes trust

Chambers of commerce give help to local firms

-chambers of commerce=groups of business people in a city/town who work together to look after interests of local business -they provide information and support for small companies and act as an important link between local business and central government

Answer 3

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Question 4

Cash flow

• more important than just profits
• cash flow=all money into and out of the business
• net cash flow=difference between cash inflow and cash outflow over a period of time
• cash flow -important because if there’s not enough money flowing in,you don’t have enough to pay your bills

Cash flow forecasts help firms to anticipate problems
1.cash flow =good way if predicting when the firm might face a liquidity problem(lack of cash)-lists all inflows/outflows that appear in the budget

2. the firm will see when an overdraft/other short-term finance might be needed
3. the forecast needs to be watched carefully -to monitor the impact of unexpected cash flow

Bank balance at end of month= bank balance at start of money + net cash flow

Answer 4

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Question 5

Cash flow-credit

Cash flow can affect cash flow :
Credit terms=tell you how long after agreeing to buy a product thr customer has to pay
This can affect the timings of their cash flow

Answer 5

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Question 6

Cash flow-problems

Poor cash flow means you’ve got big problems:
1.poor cash flow=means there is not enough cash in the business to meet its day-to-day expenses-there is a lack of working capital

2. staff may need to get paid on time-will cause resentment/poor motivation
3. some suppliers offer discounts for prompt payment of invoices-the business will not be able to take advantage of these
4. creditors may not get paid on time-they may insist on stricter credit terms in future
5. some creditors may not wait for payment-they might take legal action to recover the debt

Three main reasons for poor cash flow:

1. poor sales
2. overtrading
3. poor business decisions

And three ways business can improve cash flow

1. business could “reschedule their receipts of income”
2. could try to reschedule the payments they make to their suppliers
3. most firms carry s stock of unsold products -they could simply sell these instead of making more.
   - by destocking:cash inflows will be the same
   - however, eventually they’ll run out of stock.At this point, they’ll have to start paying out money to make more products

Answer 6

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