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3 - Business finance

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5 topics · 13 learning objectives

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  1. 3.1 Sources of business finance

    1. 3.1.1Need for finance

      The need for finance: • short-term needs • long-term needs • to start up or expand.

    2. 3.1.2Internal sources of finance

      Internal sources of finance: • personal savings • retained profit • selling assets.

    3. 3.1.3External sources of finance

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

  2. 3.2 Cash flow forecasting

    1. 3.2.1Importance of cash to a business

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

    2. 3.2.2Calculating and interpreting cash-flow forecasts

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

  3. 3.3 Costs and break-even analysis

    1. 3.3.1Revenue, costs, profit and loss

      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.

    2. 3.3.2Break-even analysis

      The concept of break-even and calculation of break-even (from formula or diagram): • break-even level of output.

    3. 3.3.3Interpretation of break-even charts

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

  4. 3.4 Financial documents

    1. 3.4.1Statements of comprehensive income

      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.

    2. 3.4.2Statements of financial position

      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).

  5. 3.5 Accounts analysis

    1. 3.5.1Calculating and analysing accounting ratios

      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.

    2. 3.5.2Liquidity

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

    3. 3.5.3Use of financial documents

      The use of financial documents: • assess the performance of the business • inform decision making.