Total Costs = Fixed Costs + Variable Costs

IGCSE Business

Finance

Revision Booklet

1 Mr C.Dale 2 Break even is the point at which the sales are exactly the same as the costs.

Total costs = Fixed costs + variable costs

Sales revenue = Selling price x number of units sold

Profit = Sales revenue – total costs

To create a break even graph you first create a table based on the number of outputs (no. of products produced) like this example. Fill in the gaps in this table:

Output Fixed Variable Total Sales (No of costs costs costs revenue cricket bats) 1,000 £40,000 2,000 £40,000 3,000 £100,000 4,000 £140,000

You then create a graph using the table above. On the Y axis you put costs/revenue; on the X axis you put output. Have a go at plotting this chart

3 Mr C.Dale You then need to plot:

 Total Costs  Fixed Costs  Variable Costs  Sales Revenue

Remember you get marks for labelling the axis, total costs, fixed costs, variable costs, revenue, and break even point. You must also give your chart a heading ie Break Even Chart for ……………

Here is what the complete graph looks like:

The point where the Sales Revenue and Total Costs lines cross is Break Even

4 5 Mr C.Dale Fixed Assets - Fixed assets are possessions which are owned by the business, which they will own for more than a year, for example, furniture.

Current Assets/Assets - Asset or current asset is a possession owned by a company that they will not have for more than a year, for example, stock or petty cash

Liability - A liability is a debt that a business has ie bank loan repayment, or credit card bill

Have a go –

Which of these are Assets, Fixed Assets or Liabilities?

Computer Petty Stock of Credit Mortgage Cash crisps Card Bill

150 Filing Office Conveyor Debts to bottle cabinet building belt suppliers tops 200 Office Leased Fork lift Tax bill bottles of chair car truck coke

200 Printer Fax Bank loan Telephone sticky machine bill labels

Stakeholders are any groups of people who have an interest in a business. They include:

Stakeholder Reason for Interest in the Their Objective for the Business: Business:

6 Workers Without the business they For the business to survive wouldn’t have a job or get paid and make enough money to pay their wages Managers As above, plus managers are To make a profit – this may more involved within the cause conflict with workers business so the performance of as managers may have to the business reflects their reduce staff costs in order to abilities ensure a profit is made Owners They have invested money into Make a profit the business Customers The business fulfils the needs To grow in size (which will they have as consumers hopefully mean lower prices and more choice) Suppliers They receive custom from the To survive so that it business, without which they continues to place orders, and would not make as much money grow so that the orders get bigger Government Because the business will help To survive so that peoples keep people in employment, plus jobs are safe and to make a pay the government money in profit so that taxes are paid the form of taxes

Local Community Many local people may be To provide them with a employed by the business, plus service, to survive (and it may benefit the local safeguard jobs) and to economy operate ethically

7 Mr C.Dale Sources of finance are the methods businesses use to get money.

Owners’ funds – this could be the owners’ own savings. The good point about using this method is that the money can be repaid at leisure.

Profits – the profits of the business can be re-invested in the business. This type of finance does not have to be repaid

Loans – these can be long term or short term. The borrower usually pays interest on the loan, which is a percentage of the amount of the loan, e.g. 5%. The good point - money is available immediately, but the drawback is that the money is paid back, usually on a monthly basis.

Overdrafts – this is a very short-term loan, when a business can go overdrawn in the bank but will be repaid as soon as money is out into the account. It helps with short- term finance problems, i.e. paying the bills each month.

Hire Purchase – this is used to purchase equipment or machinery for the business. This allows the business to have immediate use of the equipment but have to pay each month for it, until they own the equipment. The main problem with this form of finance is that when the HP agreement has been met, the equipment could be out of date.

Leasing – this is similar to HP but the company will never own the equipment. They use the equipment and usually pay a monthly rental charge for it. The advantage to this is that equipment can be kept up to date and serving charges are usually included in the price.

Selling assets – the business could sell some of their assets to gain instant money for a new purchase. The downside is that they no longer own that asset but it does give instant cash.

Government Grants – the government may help a business by giving a grant to businesses that may locate in an area of high unemployment. A grant does not have to be paid back unless there is a breach of the terms of the grant agreement.

Shares – this allows people to buy into the company (shares) in return for a money reward out of the profits (dividend).

8 A Cheque is a document instructing a bank to pay money from one account to another.

Credit Notes are documents that tell customers that they need to pay less than they were previously asked to pay, or that a refund is due.

Delivery Note/Goods Received Note arrive with goods delivered and are signed by the receiver to confirm that the goods are correct and undamaged.

An Invoice is a request for payment, listing the products supplied and the amount owing, sent by a business to a customer.

Purchase Order are documents requesting businesses to supply goods and services to customers.

A statement of account is a document, sent to a customer listing all previous invoices and stating the amount t of money still owing

A Receipt is a document sent by a supplier to a customer to confirm that payment has been received.

Remittance Advice Slips are sent by the customers to confirm which invoices are being paid.

9 Mr C.Dale This shows all the inflows (money coming in) and outflows (money going out).

Total inflows = all the inflows added together Total outflows = all the outflows added together Net inflow/outflow = total inflow minus total outflow Closing Balance = net inflow/outflow plus opening balance Opening balance is the previous months closing balance

January February March April

Opening Balance 0 590 725 875

Inflows: Sale of Burgers 500 550 600 650 Enterprise grant 1000 0 0 0 Total inflows: 1500 550 600 650

Outflow: Cooker 500 Burgers 250 250 270 300 Rolls 100 100 110 120 Onions 60 65 70 75 Total outflows: 910 415 450 495

Closing balance 590 725 875 1030

10 The costs of a business fall into two areas:

START-UP COSTS – which are the costs that the business must meet before it starts producing and selling its products.

RUNNING COSTS – which are the costs that the business must meet in the course of the day-to-day process of producing and selling its products.

11 Mr C.Dale A simple profit and loss statement in standard format records:

• Sales Revenue – the money received from selling goods.

• Cost of Sales – the variable costs of raw materials and the wages of those employees directly involved in production.

• Gross profit sales revenue less the cost of sales, or profit before fixed costs is deducted.

• Overheads and Expenses – these can be shown in as much detail as the business requires for its own planning and monitoring purposes.

• Net Profit – that is the profit after variable costs and fixed costs have been deducted.

12 A BUDGET IS A FINANCIAL PLAN

The usefulness of Budgets

• Budgets help businesses set targets for revenues and profits.

• Managers can use budgets to decide if the business is performing as well as expected.

• By watching expenditure budgets, managers can check that a business does not spend more than it should.

The Importance of Budgets

Budgets help businesses manage their finances.

Budget holders are senior employees within a department of a business.They are the only employees allowed to spend money. Having people in different departments with this authority helps a business ensure they do not spend too much

Budget holders can stop the business from spending money on pointless items, such as very expensive cars for the sales managers.

Budgets stop fraud. For example, budget holders must make sure that employees do not buy items such as laptops for their personal use

REMEMBER

• What is the definition of a budget? • It is a Financial Plan

Profitability Ratios

These ratios tell us whether a business is making profits - and if so whether at an acceptable rate. The key ratios are:

13 Mr C.Dale Ratio Calculation Comments

Gross Profit [Gross Profit / This ratio tells us something about the business's Margin Revenue] x 100 ability consistently to control its production costs or (expressed as a to manage the margins its makes on products its percentage buys and sells. Whilst sales value and volumes may move up and down significantly, the gross profit margin is usually quite stable (in percentage terms). However, a small increase (or decrease) in profit margin, however caused can produce a substantial change in overall profits.

Operating [Operating Profit / Assuming a constant gross profit margin, the Profit Margin Revenue] x 100 operating profit margin tells us something about a (expressed as a company's ability to control its other operating costs percentage) or overheads.

Return on Net profit before ROCE is sometimes referred to as the "primary capital tax, interest and ratio"; it tells us what returns management has employed dividends made on the resources made available to them ("ROCE") ("EBIT") / total before making any distribution of those returns. assets (or total assets less current liabilities

Liquidity Ratios

Liquidity ratios indicate how capable a business is of meeting its short-term obligations as they fall due:

Ratio Calculation Comments

Current Current Assets / A simple measure that estimates whether the Ratio Current Liabilities business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time.

Quick Ratio Cash and near Not all assets can be turned into cash quickly or (or "Acid cash (short-term easily. Some - notably raw materials and other

14 Test" investments + stocks - must first be turned into final product, then trade debtors) sold and the cash collected from debtors. The Quick Ratio therefore adjusts the Current Ratio to eliminate all assets that are not already in cash (or "near-cash") form. Once again, a ratio of less than one would start to send out danger signals.

15 Mr C.Dale