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Unit 3 Finance and accounts

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  1. 3.1 Introduction to finance

    1. 3.1.1Role of finance

      • Analyse the role of finance for businesses • Finance supports investment, operations, survival, growth, liquidity, and strategic decision-making

    2. 3.1.2Capital and revenue expenditure

      • Distinguish capital expenditure and revenue expenditure • Capital expenditure buys long-term assets; revenue expenditure covers day-to-day operating costs

  2. 3.2 Sources of finance

    1. • Apply personal funds, retained profit, and sale of assets • Internal sources avoid external obligations but may be limited or reduce business capacity

    2. • Apply share capital, loan capital, overdrafts, trade credit, crowdfunding, leasing, microfinance providers, and business angels • External sources vary in cost, risk, control, availability, repayment, and suitability

    3. • Evaluate appropriateness of short-term or long-term sources of finance for a given situation • Match finance source to purpose, amount, duration, risk, cost, and ownership impact

  3. 3.3 Costs and revenues

    1. • Apply fixed, variable, direct, and indirect/overhead costs using examples • Cost classification supports pricing, budgeting, break-even, and profitability decisions

    2. • Apply total revenue and revenue streams using examples • Revenue analysis considers price, sales volume, and different income sources

  4. 3.4 Final accounts

    1. • Analyse the purpose of accounts for different stakeholders • Accounts inform owners, managers, employees, lenders, investors, suppliers, government, and competitors

    2. • Prepare and interpret profit and loss accounts and balance sheets • Final accounts summarize financial performance and financial position

    3. • Analyse different types of intangible assets • Intangible assets include brand value, goodwill, patents, trademarks, copyrights, and intellectual property

    4. • Apply straight line method and units of production method • Depreciation allocates non-current asset cost across useful life

    5. • Evaluate appropriateness of each depreciation method • Suitability depends on asset use pattern, simplicity, accuracy, profit impact, and stakeholder interpretation

  5. 3.5 Profitability and liquidity ratio analysis

    1. • Calculate and interpret gross profit margin, profit margin, and return on capital employed (ROCE) • Profitability ratios evaluate efficiency in turning sales, costs, and capital into profit

    2. • Evaluate possible strategies to improve profitability ratios • Strategies include raising prices, reducing costs, changing product mix, improving productivity, and better asset use

    3. • Calculate and interpret current ratio and acid test or quick ratio • Liquidity ratios measure ability to meet short-term liabilities

    4. • Evaluate possible strategies to improve liquidity ratios • Strategies include tighter credit control, reducing stock, delaying payments, selling assets, and raising finance

  6. 3.6 Efficiency ratio analysis

    1. • Calculate and interpret stock turnover, debtor days, creditor days, and gearing ratio • Efficiency ratios evaluate working capital management and financing structure

    2. • Evaluate possible strategies to improve efficiency ratios • Strategies may target stock control, credit terms, debt collection, supplier payment, and capital structure

    3. • Distinguish insolvency and bankruptcy • Insolvency means inability to meet debts; bankruptcy is a legal status or process

  7. 3.7 Cash flow

    1. • Distinguish profit and cash flow • Profit records financial performance; cash flow tracks timing of cash inflows and outflows

    2. • Analyse working capital • Working capital supports daily operations and short-term liquidity

    3. • Analyse liquidity position • Liquidity position reflects ability to pay short-term obligations when due

    4. • Prepare and interpret cash flow forecasts • Forecasts identify expected cash shortages, surpluses, opening balances, and closing balances

    5. • Analyse the relationship between investment, profit, and cash flow • Investment can reduce short-term cash while supporting long-term profit potential

    6. • Evaluate strategies for dealing with cash flow problems • Strategies include reducing costs, improving receivables, delaying payables, arranging overdrafts, selling assets, and revising stock levels

  8. 3.8 Investment appraisal

    1. • Evaluate investment opportunities using payback period and average rate of return (ARR) • Investment appraisal supports decisions about project risk, return, liquidity, and strategic fit

    2. • Evaluate investment opportunities using net present value (NPV) • NPV accounts for time value of money and discounted future cash flows

  9. 3.9 Budgets

    1. • Distinguish cost centres and profit centres • Analyse roles of cost and profit centres • Centres support accountability, control, budgeting, and performance monitoring

    2. • Construct a budget • Budgets plan expected revenue, costs, cash flows, and resource use

    3. • Calculate and interpret variances • Variances compare budgeted figures with actual outcomes

    4. • Analyse the importance of budgets and variances in decision-making • Budgets guide planning, control, accountability, motivation, and corrective action