Unit 3: Sources of finance Flashcards
what is break even point?
when the business isn’t making a profit or a loss
total sales = total revenue
how to work out total revenue?
revenue (selling price) x quantity sold
formula for break even
break even = fixed costs/contribution
break even = fixed costs/(selling cost per unit - variable costs per unit)
total costs
fixed costs + total variable costs
how to work out profit or loss?
total revenue - total cost
what do we need to know to do a break even analysis?
fixed costs
total variable costs
unit price
estimated sales
what is break even analysis?
it is used to look at costs and revenue to see when the business becomes financially liable
what is a products contribution?
unit selling price - unit variable cost
the amount each sale contributes towards fixed costs
what is an internal source of finance?
money coming from within the business
what is an external source of finance?
money coming from outside the business
3 reasons why a business may require finance?
taking over another company
relocating to bigger premises
cash-flow problems
what are business costs?
the costs a business must pay in order to function
what is break even point?
where total costs = total revenue
what are fixed costs?
costs which don’t change depending on output
what are variable costs?
costs which do change depending on output
2 examples of fixed costs
salary
rent
2 examples of variable costs
postage and packaging
raw materials
what is total variable cost?
the total amount of variable charges
how to work out total variable cost?
quantity sold x variable cost per unit
what is the total cost of a business?
the total sum of its fixed and variable costs
what are average costs?
the cost for each unit a business sells
how to find average cost?
total cost/amount sold
what are economies of scale?
an increase in output leads to a decrease in average costs
what are purchasing economies?
buying in bulk is cheaper
what are marketing economies?
costs for marketing are spread over more products
what are financial economies?
large business have more assets so are lower risk = cheaper loans
what are diseconomies of scale?
when business get too big and it leads to an increase in average costs
3 reasons for diseconomies of scale?
motivation, communication and organisation problems
why can no motivation be a cause of diseconomies of scale?
demotivated employees leads to a fall in productivity
why can organisation problems lead to diseconomies of scale?
if a business is too large and lacks a clear organisational structure, this can lead to jobs not being done and the business can’t operate successfully
why can communication problems lead to diseconomies of scale?
could be due to language/cultural barriers or if the business is too large and it has too many departments/managers etc
economies of scale and GG toys
If GG Toys plc reduces the range of toys they produce this would lead to them increasing the number of toys in the smaller range – E.G Stop producing train set and double the number of Georgie Girl dolls. This would result in them requiring double the number of raw materials to produce the dolls. Purchasing double the amount of materials like plastic pellets would result in GG Toys benefiting from purchasing economies (buying in bulk) which would reduce the average cost of production and therefore increasing their profit.
profit as a reward for risk taking
the higher the risk, the greater the potential financial reward
what are the four lines to include on a break even graph?
total revenue
total cost
fixed costs
total variable costs
what is the y axis on a BE graph?
cost/revenue
what is the x axis on a BE graph?
quantity
what is the margin of safety?
the difference between break even quantity and target sales
what is cash in bank
the money business has invested in a bamk
what is retained profit?
built up profits to finance projects
what is sales of assets?
a company sells equipment/sales etc to raise money
what is owners investment?
when the owners invests money to finance a project
what is share capital?
money invested by share holders
how to work out a product’s contribution?
unit selling price - unit variable cost
5 examples of internal sources of finance:
owners investment cash in bank sale of assets retained profit share capital
9 sources of external finance
overdraft mortgage bank loan new partner trade credit sale of assets grants hire purchase lease
what is an overdraft?
a business takes out more money than available and repays in instalments
what is trade credit?
suppliers deliver goods but are willing to wait for payment
what is a bank loan?
bank gives a business an agreed sum and it is paid back over time
what is leasing?
regular payments made for the use of a warehouse etc
what is a mortgage?
used for buying property, payments spread over agreed time period
what is hire purchase?
regular payments made for the use of equipment/machinery
what is a grant?
money given to a business by the government to get started
what is a new partner as a source of finance?
when a new partner joins, they will often invest money into the business
what is selling shares a a source of finance?
a plc/ltd sells shares in exchange for money
what is gg toys proposing to do in their new warehouse?
automate it
benefits of automation 3
no holiday/sick pay more efficient - times down by 1 hour - and reliable cost effective (no wages)
disadvantages of automation 3
expensive initial cost
any break will lead to drop in productivity
skilled workers needed to operate machinery
what is a cash flow forecast?
predicting money flowing into/out of a business
what should you never mention with cash flow?
profit
what is liquidity?
the ability to have access to cash to pay bills
cash inflows for tom’s toys 2
sales revenue
grants
cash outflows for tom’s toys
wages
expenses
what is net cash flow?
difference between inflows and outflows
benefits of retained profit 3
flexible - owners have complete control over when it is to be repaid
another person doesn’t need a share of the company
money is often already there
disadvantages of retained profit 3
slow
hard for smaller businesses to create enough profit to finance it
other projects may have to be sacrificed to pay for this one
advantages of a grant 3
no added cost for the business
normally large sums of money
increases jobs in the area
disadvantages of a grant 3
fierce competition
normally short term
normally terms and conditions
advantages of leasing 3
no huge upfront cost
if online selling isn’t a success, it doesn’t have to be permanent
less threat of going into debt
disadvantages of leasing 3
no control
threat of eviction
short term
advantages of a bank loan 3
negotiable time to repay money
money is guaranteed
instantaneous
disadvantages of a bank loan 3
interest must be paid
often difficult to obtain - strict requirements
harder for small businesses
2 ways to resolve cash flow problems
increase profit
decrease expenditure
advantages to doing a BE analysis? 2
illustrates how long until a profit is made
helps GG Toys see how risky the proposition is
disadvantages to doing a break even analysis? 2
it is only an estimate
variable costs often change
why would you do a cash flow forecast? 3
identifies potential problems in advance
pleases stakeholders
ensures business can afford payments
Problems with a cash flow forecast? 4
Doesn’t take into account activity of competitors
Time consuming
Based on predicted figures
Doesn’t take changes in economy into account
How can the UK government influence the toy market? 3
Income tax rates
Business taxes
Safety standards
