Transcript N5 BUSINESS MANAGEMENT

N5 BUSINESS MANAGEMENT
Unit 5
Management of Finance
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List of Topics
Sources of finance
 sources of finance
 suitability of different types of
finance
Cash budgeting
 how businesses generate cash
 what businesses spend cash on
 why businesses must have enough
cash
 why cash flow problems may occur
 how cash flow problems can be
resolved
 producing a cash budget
 interpreting a cash budget and
identifying any cash flow problems
 justifying suitable solutions to cash
flow problems
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Break-even
 different types of fixed and variable
costs
 understanding profit and how to
calculate it
 producing and interpreting break-even
charts
Profit statement
 producing a profit statement
 interpreting a profit statement to
identify loss, profit, identifying reasons
for loss
Technology in Finance
 Use of EPOS (electronic point of sale)
(see Operations)
 Benefits of Spreadsheets
Business need to have finance sources
 To open the business
 To expand
 To buy supplies
 To buy stock
 To manage cash flow
 To pay debts
Private Sector Finance
 Sole Traders – are usually financed by
the owner’s savings
 Partnerships – are financed by partners
contributing their savings to the
business (between 2 and 20 partners)
 Private Limited Companies – are
financed bu selling shares to family and
friends
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Sources of Finance for the
Private Sector
Source
Description
Advantages
Disadvantages
Loan from
family/friends
Often this doesn’t need to paid
back or perhaps at a low interest
rate over a long period of time
May be interest free
May cause arguments
about repayment
Bank Loan
A loan of money repaid over time
with interest
Quick to organise
Can be repaid over a
long period
Interest may have to
be paid
Bank
overdraft
Taking more money out of a bank
account than is available
Easy to arrange with the
bank for a short period
of time
Usually only a small
amount of money is
available
Daily interest charge
so quite expensive
Mortgage
Loan from a bank/building
Can be repaid over
society to buy property over a long many years (25)
period of time
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Interest rates can rise
over time
Sources of Finance for the
Private Sector (cont)
Source
Description
Advantages
Disadvantages
Government grants
Money from the
government that
does not have to be
paid back
Does not need to be
repaid
Usually has
conditions attached
Can take time to set
up
Princes Trust
The Princes Trust will
provide start-up
capital for young
entrepreneurs
Does not have to be
repaid
Usually has
conditions attached
Age conditions
Issue Shares
Private Ltd
companies can sell
more shares
Can raise large
amounts
Dividends must be
paid to shareholders
Hire Purchase
Buying an item now
and paying for it at a
later date
Can receive the item
immediately
Interest rates can be
really high
Item does not belong
until last payment
has been made
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Public Sector Finance
 Public sector organisations obtain their finance in
different ways. The government raises money through
different types of taxes eg income tax, corporation tax,
VAT. Local government raises money through council
tax.
 This finance is then allocated to the public sector
according to planned budget spending eg to NHS,
armed forces.
 The Scottish government funds education in Scotland.
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Third/Voluntary Sector Finance
 Third sector organisations get funding in different ways
 Sponsorship by businesses and individuals – eg Oban Saints
sponsored by ?
 Fundraising activities – eg coffee morning to raise money for
Cancer Research
 Trading activities – eg Atlantis and Phoenix cinema sell
products/services
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CASH FLOW
 Cash flow is the movement of money into or out of a
business
 How do businesses generate cash? They do this by
selling products or services to customers.
 What do they spend cash on? All business must pay
for raw materials and staff wages. They will have
many other expenses like lighting and heating,
insurance, petrol, rates …
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Credit
 However, many businesses offer CREDIT to their
customers – this means they are allowed to buy now
and pay later.
 Many businesses fail because they run short of
cash. They may have allowed too many customers a
long credit period but in the meantime have to pay
bills of their own.
 Planning and anticipating can help businesses take
action and deal with such problems.
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CASH BUDGET
 A Cash Budget can help a business anticipate when
cash flow problems may occur. It identifies expected
income from sales and also bills which must be paid
in the near future
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What does a Cash Budget look like?
CASH BUDGET FOR FIONA’S FLOWER SHOP
Can you see
any possible
problems?
January
Opening Bal
February
March
1900
5500
-1900
12500
14000
15200
14400
19500
13300
Purchases
5500
8000
9200
Rent
2000
2000
2000
Heat and Light
1100
1100
1100
Wages
300
300
300
Receipts
Sales
Payments
Van
Closing Balance
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10000
8900
21400
12600
5500
-1900
700
What could Fiona do about the
February cash flow problem?
 Arrange a bank loan
 Arrange an overdraft - when there is a negative

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balance in the bank account.
Buy the van on Hire Purchase
Try to increase sales
Find a cheaper supplier or ask suppliers for credit
Raise more capital eg take on a partner
Encourage customers to pay on time, eg by
offering discounts
Using a Spreadsheet for Budgets
 Can perform calculations (formula)
 Can run scenarios (what ifs?)
 Can display results on charts
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BREAK EVEN
 COSTS are the bills that businesses need to pay on a regular
basis. Some bills will change while others stay the same.
 The Break even point is the point where sales and costs are
the same – the business is not making a profit
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Importance of Planning and Control
 Businesses must cover costs or they will make a loss
 Some new businesses will aim to only cover costs or break-
even (ie not make a loss) in the first few years - to get
established
 Profit is the amount made after costs are paid.
 Forecasting income and costs allows businesses to make
decisions and plans eg – get a loan or overdraft in a month
where income is low.
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Types of Costs
Fixed Costs are those
costs which stay the
same irrespective of
how much you sell or
produce (eg rent for
premises, insurance
premiums)
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Variable Costs are
those costs which
increase directly as
sales or production
increases (eg power to
machines, some
wages [where workers
are paid according to
how much they
produce])
Costs &
Revenues
(£)
Break-even
point
Sales
Revenue
Total Costs
Value of Sales
and Costs
Fixed Costs
Quantity
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No of Items
Sold
BREAK-EVEN CHART
Costs &
Revenues
(£)
Break-even
point
Area of
Profit
Area of
loss
Quantity
For an explanation of the shaded areas see next slide
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The green shaded area (to the left of BEP) shows
the losses made at the appropriate levels of sales
since Total Cost is greater the Sales Revenue.
The blue shaded area (to the right of BEP) shows
the profits made at the appropriate levels of sales
since Sales Revenue is greater the Total Cost.
Therefore the BE chart allows you to calculate
whether a profit or loss will be made at any level
of sales.
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Fixed or Variable?
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 Rent
 Flour
 Chocolate
 Advertising material
 Staff wages
 Insurance
 Packaging
 Lolly sticks
 Icing sugar
 Ice cream
 Coffee
 Tea
 Electricity
 Milk
 Ribbons
 Website designer
PROFIT STATEMENTS
All businesses have to prepare statements to show how much
profit or loss thay are making.
Profit is the difference between how much is received from
sales and how much is spend making (or buying) the products.
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Two Types of Profit – Gross and Net
 GROSS PROFIT
 NET PROFIT
 This is the amount made
 This is the profit made
from selling the product
(sales revenue) less the
amount spent on buying or
making the products
after all the business
expenses have been
deducted from the Gross
Profit
Both profit figures are calculated in the same
statement – see over
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TRADING ACCOUNT
Example Profit Statement
Brucie’s Profit
Statement
£
£
Sales (Revenue)
35,000
Less Cost of Goods Sold
18,000
GROSS PROFIT
17,000
PROFIT AND LOSS
ACCOUNT
Less Expenses
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Wages
2,000
Rent
1,750
Advertising
750
Electricity
500
NET PROFIT
Sales (or Revenue) – this
the amount received from
customers buying the
business products eg cakes
Cost of Goods Sold – how
much the business paid for
the goods it sold, eg flour,
eggs etc
Gross Profit – Sales minus
Cost of Sales
Expenses – these are other
costs the business has to pay
eg electricity, rent etc. They
are not directly associated
to the product but are
necessary.
5,000
12,000
Net Profit – this is the
profit made after all
expenses have been
deducted
Why are these Figures Important?
ITEM
WHY IS IT IMPORTANT?
Sales (or
Revenue)
This figure should be carefully monitored – is it increasing or falling
from one year to the next. Changes in price charged would affect the
sales figure
Cost of Sales
(or Cost of
Goods Sold)
Gross Profit
This figure is determined by the supplier/s – if the cost of sales figure
is high it may be worth trying to find a cheaper supplier – this would
increase the Gross Profit figure
Expenses
If expenses rise or fall the Net Profit will be affected. Does the
business have to reduce unnecessary expenses, find cheaper
premises for example.? Or do they have to increase the product price?
Net Profit
Net profit is important because it shows how successful the business
has been over the year. It is also the figure on which tax is calculated.
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This is important because is shows how successful the business has
been in buying and selling stock. Price charged, cost of stock or raw
materials, wasteage etc will affect this figure
Oban Chocolate Factory
From this list, decide which items would add to Cost of
Sales and which would be Expenses
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 Butter
 Chocolate
 Rent
 Electricity
 Gas
 Window cleaning
 Sugar
 Staff wages
 Coffee
 Flour
 Advertising
 Website production
 Tea
 Eggs
Oban Chocolate Factory
Answers
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 Butter
 Rent
 Sugar
 Gas
 Coffee
 Advertising
 Tea
 Electricity
 Chocolate
 Window cleaning
 Flour
 Staff wages
 Eggs
 Website production
Using the data below, prepare Jamie’s
Profit Statement for last year
 Sales £300,000
 Heating £10,000
 Wages £30,000
 Advertising £5,000
 Insurance £6,000
 Purchases £40,000
Answer the following questions:
1. Has Jamie made a Profit or a Loss?
2. Suggest 2 ways Jamie could improve the situation
3. Suggest some other expenses Jamie might have
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TECHNOLOGY –
what it could be used for
 A spreadsheet package (eg Microsoft Excel) can be used to
record and edit numerical information. It could be used to
 Record costs and calculate break-even
 Prepare cash budgets and run “what if ” scenarios ie what will
happen if a particular figure changes
 Calculate profit figures
 Prepare graphs and charts which are easier to read and interpret
than lots of figures
 On line banking allows businesses to make payments
quickly
 Online access to accounts, eg telephone, can allow
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businesses to keep a check on expenses
TECHNOLOGY - Advantages
 Entering numbers is faster than writing them out by hand
 There is less chance of error as formulae can be used to carry
out automatic calculations
 Mistakes can be easily changed without having to rewrite the
whole document
 “What-if scenarios” can be run to see the effect of possible
changes
 Can be used to produce graphs or charts which are easy to
read
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