3.1 Sources of finance
This is funding a business receives from outside the organization, often from banks or investors. There are many examples of these sources including share capital, loan capital, trade credit, venture capital, subsidies, leasing etc..
What are external sources of finance?
When a businesses total revenue ($) exceeds its total costs($)
What is profit?
This is the quantity of output where total revenue ($) equals total costs ($) and the business makes no profit or loss
What is the break-even quantity?
These are assets used by the business for more than 12 months including land, buildings, machinery and equipment
What are fixed assets?
This is the difference between a firm's sales revenue and its cost of goods sold.
What is gross profit?
The cost of borrowing money from a bank or the rate of return from saving money with a bank
What is the interest rate?
Costs which vary according to output. The greater the output the higher these costs will be and vice versa. Example costs include raw materials, fuel, packaging and piece-rate wages.
What are variable costs?
Price - variable costs
What is the formula for calculating contribution per unit?
These are suppliers whom a business has purchased inventory (stock) from on credit. They are listed as a current liability on the Balance Sheet.
What are creditors?
This ratio reveals the degree to which a business is financed by loan capital by comparing loan capital to the total capital employed. In other words, it helps assess the risk of investing in/lending money to a business by measuring how much of the businesses total capital is owed to banks.
What does the gearing ratio show?
A long-term, external source of finance only available for a limited liability company. Can raise a very large amount of capital but it can mean a dilution (loss) of control over the ownership of the company.
What is share capital?
These are costs that cannot clearly be related to the output of a single product. They are also known as overheads. Examples of these costs include the salaries of administration and marketing employees, or the electricity bill.
What are indirect costs?
Total fixed costs / contribution per unit
What is the formula for calculating the break-even quantity?
This final account shows the value of a firm's assets and liabilities on a particular date. This document shows interested stakeholders the overall value of the business
What is a Balance Sheet?
This is a short-term liquidity ratio which calculates the ability of a business to meet its debts within the next 12 months. It ignores stock because some inventories (stock) are more difficult to turn into cash in a short time frame. It is calculated by: (current assets - stock) / current liabilities,
What is the acid test ratio?
An external, medium-term source of finance provided by the Government to support business investment and innovation
What is a subsidy?
What are revenue streams?
This is the difference between a firm's current sales volume and its break even quantity. It is calculated by the formula: Current output - Break-even quantity. It is drawn on a break-even chart because it shows how much a firm's sales could fall by before the firm begins to make a financial loss.
What is the margin of safety?
Opening stock + purchases - closing stock
What is the formula for calculating costs of goods sold?
Using improved promotional strategies to persuade more customers to buy its products; reduce the prices of products that are sold in highly competitive markets in order to attract more customers; search for and use suppliers who have cheaper raw material/stock prices.
What are some methods to improve a firm's gross profit margin?
The amount of finance needed; the time needed to repay the finance; the current level of gearing; the purpose of the finance; the level of retained profits the business does or does not have; the level of risk associated with investing in the business.
What are the factors affecting a businesses choice of source of finance?
Total fixed costs + Total variable costs / Output
What is the formula for calculating average costs?
Total revenue - total costs; Total contribution - total fixed costs; Margin of safety x contribution per unit
What are the three ways to calculate profit in break-even analysis?
Fixed assets + net current assets - long-term liabilities
What is the formula for calculating Net Assets?
Encouraging customers to pay by cash e.g. offering a cash discount; reducing the credit period offered to customers; offering credit only to customers with a good track record of paying their invoices on time
What are some methods to improve the debtor days ratio?