3 - Business finance

The need for finance:

• short-term needs
• long-term needs
• to start up or expand.

Internal sources of finance:

• personal savings
• retained profit
• selling assets.

External sources of finance:

• overdraft and trade payables
• loan capital, share capital, including stock market flotation (public limited companies)
• venture capital
• crowdfunding.

The importance of cash to a business:

• to pay suppliers, overheads and employees
• to prevent business failure (insolvency)
• the difference between cash and profit.

Calculate and interpret cash-flow forecasts: cash inflows, cash outflows, total revenue, total costs, net cash flow, and opening and closing balances.

Understand and calculate revenue, fixed costs, variable costs, total costs, profit and loss. Use revenue = selling price × quantity sold, total costs = fixed costs + variable costs, and profit = revenue − total costs in business contexts.

The concept of break-even and calculation of break-even (from formula or diagram):

• break-even level of output.

Interpretation of break-even charts:

• the impact of changes in revenue and costs
• limitations of break-even charts.

The purpose of statements of comprehensive income:

• main features – sales, cost of sales, gross profit, expenses, operating profit
• the use of statements of comprehensive income in decision making (learners will not be required to construct an income statement)
• the nature of profit and its importance.

The purpose of statements of financial position:

• main features – current and non-current assets, current and non-current liabilities, capital employed
• interpret a statement of financial position (learners will not be required to construct a statement of financial position).

Calculate and analyse gross profit margin, operating profit margin, markup, return on capital employed (ROCE), current ratio and acid test ratio. Use gross profit = revenue − cost of sales; operating profit = gross profit − other operating expenses; gross profit margin = gross profit ÷ revenue × 100; operating profit margin = operating profit ÷ revenue × 100; markup = profit per item ÷ cost per item × 100; ROCE = operating profit ÷ capital employed × 100; current ratio = current assets ÷ current liabilities; acid test ratio = (current assets − inventory) ÷ current liabilities. The examination provides these formulae.

Liquidity:

• the concept and importance of liquidity
• comparisons with previous years and/or with other business organisations.

The use of financial documents:

• assess the performance of the business
• inform decision making.