Start-up capital Expansion Working capital Internal finance Capital expenditure Revenue expenditure Release working capital Advantages External finance Retain profits Sale of assets Short term Medium term Long term Legal structure Liquidity No direct costs Debt factoring Hire purchase Commercial mortgage Flexibility For expenses No increase debts Trade credit Leasing Sale of shares Overdraft Bank loan Grants Costs Scale of finance Venture capital Cambridge International AS and A Level Business Gearing Finance needs Unit 5 – Mind maps Financial influences Chapter 28: Business finance © Cambridge University Press 2014 Cambridge International AS and A Level Business Business finance Unit 5 – Mind maps 1 Direct costs Attributable to a particular product Indirect costs Not attributable to a particular product Fixed costs No change with output Break-even Variable costs Changes with output Marginal cost Cost of additional unit Costs = revenue Limitations Assumes output sold Assumes linear costs/ revenue Fixed costs/unit contribution Unit contribution = price − AVC Marginal safety Sales about break-even Break-even chart Usefulness Set targets Evaluate investment opportunities Sales revenue Costs and sales revenue ($) Classification BE 0 Break-even point } Profit at full capacity Total costs Variable costs Fixed costs Full Units of output capacity and sales Cambridge International AS and A Level Business Chapter 29: Costs © Cambridge University Press 2014 Cambridge International AS and A Level Business Costs Unit 5 – Mind maps 2 Windowdressing Users of accounts Managers Cash-flow statement Record of cash flows Elements of published accounts Income statement Balance sheet Income statement Trading account Profit and loss account Appropriation account Shareholder equity Long-term liabilities Current liabilities Fixed assets Current assets Tax Financial loans Overdraft Tangible Cash Chief executive's report Dividends Debentures Trade credit Intangible Debtors Government Auditors' report Retained profit Investors Balance sheet Banks Chairman's statement Creditors Workforce Local community Gross profit Net profit Inventory Cambridge International AS and A Level Business Limitations Chapter 30: Accounting fundamentals © Cambridge University Press 2014 Cambridge International AS and A Level Business Accounting fundamentals Unit 5 – Mind maps 3 Importance Cash and profit Causes of cashflow problems Structure Improving cash flow Estimation To secure finance Net cashflows = cash inflow − cash outflow Overtrading Cash inflows Unforeseen changes To avoid insolvency Profit = revenue − costs Unexpected events Cash outflows Overdraft Cut overheads Giving long credit periods Net cashflows Short-term loan Lease equipment Lack of planning Opening balance Leaseback Delay payments to suppliers Poor credit control Closing balance Sale of assets Cash-flow and new business Cash inflows Reduce credit terms Unit 5 – Mind maps Debt factoring Cash outflows Cambridge International AS and A Level Business Limitations Chapter 31: Forecasting and managing cash flows © Cambridge University Press 2014 Cambridge International AS and A Level Business Forecasting cashflows 4 Costing methods Concepts Cost centres Part of business that costs can be allocated to Profit centres Part of business that costs and revenue can be allocated to Overheads Indirect costs Unit cost Total cost/output Contribution costs Full costing Direct and indirect costs Aids price setting Focus on contribution Ignores overheads Positive contribution Price exceeds variable costs Uses Flexible pricing No costs ignored Dropping products Indirect costs arbitrarily apportioned Accepting orders Cambridge International AS and A Level Business Chapter 32: Costs © Cambridge University Press 2014 Cambridge International AS and A Level Business Costing methods Unit 5 – Mind maps 5 Budget holder Individual responsible for setting budgets Uses Limitations Planning Short-term focus Allocating resources Difficult to set for new projects Target setting May encourage unnecessary spending Coordination Monitoring and controlling Assessing performance Delegated budget Control given to less senior management Setting budgets Incremental Linked to last year's budget Variance analysis Zero Flexible Justify any finance Adjust cost budgets relative to output or sales Difference between budget and actual income Favourable Adverse Actual cost lower than budget Actual cost higher than budget Actual revenue exceeds budget Actual revenue lower than budget Cambridge International AS and A Level Business Chapter 33: Budgets © Cambridge University Press 2014 Cambridge International AS and A Level Business Budgets Unit 5 – Mind maps 6 Running costs Included on income statement Statements of financial position Capital expenditure Not part of income statement Purchase of fixed assets Valuing inventory Intangible assets Fixed assets Net realizable value Net of depreciation No impact on cashflow Goodwill Straight line Unsuitable for assets such as vehicles Original cost (residual value) Useful life of asset Copyright Patents Intellectual property Valuation Difficult to value Only recorded after takeover Cambridge International AS and A Level Business Revenue expenditure Chapter 34: Contents of published accounts © Cambridge University Press 2014 Cambridge International AS and A Level Business Contents and published accounts Unit 5 – Mind maps 7 Long-term loans/capital employed x 100 Interest cover ratio Operating profit/annual interest paid Dividend yield ratio Dividends per share/current share price x 100 Dividend cover ratio Profit after tax and interest/annual dividends Limitations (see further accounts analysis mind map 2) Price earnings ratio Current share price/earnings per share Financial efficiency ratios (see further accounts analysis mind map 2) Earnings per share Profit after tax/ number of shares issued Profitability ratios (see further accounts analysis mind map 2) Cambridge International AS and A Level Business Shareholder ratios Gearing ratios Chapter 35: Analysis of published accounts © Cambridge University Press 2014 Cambridge International AS and A Level Business Further accounts analysis Unit 5 – Mind maps 8 Cambridge International AS and A Level Business Chapter 35: Analysis of published accounts Further accounts analysis 2 Limitations Benchmarking Trend Quantitative Financial efficiency ratios Inventory turnover Cost of goods sold/stock Day sales in receivables Accounts receivable/sales turnover x 365 Inter-firm comparison Profitability ratios Return on capital employed Net profit/capital employed x 100 Improving Increase price Reduce overheads Reduce variable costs © Cambridge University Press 2014 Cambridge International AS and A Level Business Unit 5 – Mind maps 9 Cambridge International AS and A Level Business Chapter 36: Investment appraisal Investment appraisal Payback Qualitiative factors Discounted payback Internal rate of return Net present value Average rate of return Emphasis on speed of return Environmental impact Time taken to pay back capital More complex to calculate Difficult to predict later cashflows No % rate of return Focus on short-term Ethical considerations Discounted cashflows used Considers time value of money Measures profitability Time value of money accounted Time taken to pay back capital cost Planning permission Rate of discount yielding zero NPV Annual profit at % of capital cost Dependent on rate of discount chosen Useful when liquidity concerns Aims and objectives Enables comparisons of projects of differing costs Comparisons easy Considers timing of cashflow Profitability not measured Attitude toward risk Time value of money ignored Calculates today's value of estimated cashflow Ignores cashflow timing Employee impact Timing of cashflows ignored © Cambridge University Press 2014 Cambridge International AS and A Level Business Unit 5 – Mind maps 10
