Notesale: Turn your study into money

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PERSONAL AND
BUSINESS FINANCE
REVISION NOTES

FUNCTIONS OF MONEY
ROLE OF MONEY
PLANNING EXPENDITURE
WAYS TO PAY
CURRENT ACCOUNTS
BORROWING
SAVINGS
INSURANCE
FINANCIAL INSTITUTIONS
CUSTOMER COMMUNICATION
CONSUMER PROTECTION
CONSUMER ADVICE
ACCOUNTING
INCOME
CAPITAL EXPENDITURE
REVENUE EXPENDITURE
INTERNAL FINANCE
EXTERNAL FINANCE
CASH INFLOWS
CASH OUTFLOWS
CASH FLOW FORECASTS
COST AND SALES
BREAK-EVEN ANALYSIS
USING BREAK-EVEN
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF FINANCIAL POSITION
GROSS PROFIT AND MARK-UP
PROFIT MARGIN AND RETURN ON CAPITAL EMPLOYED
LIQUIDITY
EFFICIENCY
LIMITATIONS OF RATIOS

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FUNCTIONS OF MONEY
• Functions:

-Unit of Account

Money can be used to put a value on something
Exchange money for equivalent value in products/services
In UK it is shown as pounds and pence
-Means of Exchange
Money is used to buy/sell/trade things
Without it we would have to swap products/services (bartering)
-Store of Value
Money has a value, can be kept (eg in bank) to use in future
-Legal Tender
Legal means used to pay
Legal Tender = national currency
Official payment method
• Paying with Money:
-Money is universally recognised everywhere as a means of exchange of goods and services

ROLE OF MONEY
• Factors

Influencing Your View of Money:
-Personal Attitudes
Your attitudes towards risk and reward
How you balance borrowing, spending and saving
-Life Stages
Childhood, adolescence, young adult, middle age, retirement
Financial needs and priorities change
-Culture
Background and culture inc religion and ethical principles
-Life Events
Major life events like moving house and becoming redundant
-External Influences
Events outside your control like state of economy and job availability
-Interest Rate
Impact whether you save or borrow
Low interest rate - good for borrowing
High interest rate - good for saving

PLANNING EXPENDITURE
• Reasons

to Plan Expenditure:


- Control costs
- Avoid legal action and repossession of assets
- Remain solvent
- Maintain a good credit rating
- Avoid bankruptcy
- Manage money to fund purchases
- Generate income and savings
- Set financial targets and goals
- Provide insurance against loss or illness
- Counter the effects of inflation
- Avoid getting into debt

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• Benefits

of Planning:

-Careful planning helps ensure you have the money to meet future financial needs

Good credit rating — be able to borrow money to fund large purchases
Money not spent on essentials can be saved — generate an income through interest
Savings can be used to fund purchases or unexpected expenses
• Risks of Not Planning:
-Not controlling expenditure puts you at risk of
Getting into debt
Having insufficient funds for loan repayments
Having legal action taken against you for non-repayment of loans — losing assets
Poor credit rating — affects ability to borrow
Not being able to save for the future

WAYS TO PAY
• Ways

-Cash

to Pay for Products and Services:

Notes / Coins
Accepted in most places
Easily stolen or counterfeited
Can’t be used online
-Debit Card
Issued by banks
Payment taken directly from the account
Secure
‘Contactless’ up to £30
Risk of overspending
Used online
Card details may be hacked
-Credit Card
Issued by banks and financial companies
Goods and services paid for by card issuer
Short period of interest-free borrowing — issuer charges interest after this
Risk of overspending
Used online
Card details may be hacked
Retailers may charge a fee to make payments
-Cheque
Issued by banks
Written order to pay a sum into someone else’s bank account
Fairly secure (only payee can cash the cheque)
Takes at least three days for the amount to become available
Some retailers no longer accept them
-Electronic Transfer
Direct payment between accounts
Easy to set up and use
Transfer is instant
Bank details of third party must be correct
-Direct Debit
Instruction to a bank for the payee to collect varying amounts from the account
Simple to pay regular bills — automatically deducted
Amounts may vary — difficult to plan expenditure
Payer must have sufficient funds in their account

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-Standing Order

An instruction to a bank to make regular payments to a person or organisation
Payments don’t change — can plan expenditure
Payments are automatic until cancelled by the payer
Payer must have sufficient fund to cover the payment
-Prepaid Cards
Money is loaded onto a card which can be used to make purchases
Widely accepted
Can only spend the amount on the card — help control expenditure
If lost or stolen the money can’t be recovered
Some have set-up and transaction fees
-Contactless Cards
Payment made when card touches the terminal
Fast, easy and secure
Limit of £30
Easy to lose track of spending
-Charge Cards
Issued by financial companies
Short-term, interest-free loan
Cardholder buys things without paying immediately, balance must be paid in full each month
Annual fee is payable
Charge card companies need customers to have a certain level of annual income
-Store Cards
Issued by retailers, and only accepted by that retailer
Cardholders may benefit from loyalty schemes and discounts
Interest payable on balance unless paid in full each month
Risk of overspending
-Mobile Banking
Online banking using an app
Can check balances, make payments and transfers anywhere
Secure
Service limited compared to internet banking — may not access all services
-BACS and FPS
Bankers Automated Clearing Services (BACS) — takes 3 days to transfer payments
Faster Payment Service (FPS) — transfer takes place within 2 hours
Usually no fee
-CHAPS
Clearing House Automated Payment System (CHAPS)
Electronic payment from one account to another
Guaranteed same-day transfer if made by banks instructed time
Fee is charged

CURRENT ACCOUNTS
• Standard

Account:

-Customers must have a fair credit rating
-Features include:

No banking fees
Cheque book and bank card (usually contactless)
Can set up direct debits and standing orders to pay bills
Salary can be paid directly into the account
Overdraft facilities — usually high interest rates

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• Premium,

Packaged Account:

-Similar to a standard account but offers extra features for a monthly fee
-Extra features:

Packaged benefits (eg travel insurance or discounts) — have to pay even if you don’t use them
Interest on credit balances
Cash back on household bills paid via direct debit
Special interest rates on overdraft
• Student Account:
-Aimed at learners in higher education to help manage their finances
-Limited features:
Interest-free overdraft (to a certain limit) — high interest if you go over the limit
Debit card
Some may offer a free gift card or travel discounts
• Basic Account:
-No-frills account aimed at customers with a poor credit rating
-Similar to a standard account but with no overdraft facilities
-Features:
No banking fees
Debit Card
Facility to set up direct debits to pay bills

BORROWING
• Overdraft:

-Short-term loan which can be used to pay bills when you’re short of cash
-Can arrange with the bank to borrow up to an agreed amount when your balance reaches zero
-Advantages

Usually free to set up
Only pay interest on money you borrow
-Disadvantages
Interest is high
Charged a fee to use the overdraft
If you go over the limit or have an unarranged overdraft there will be penalty charges
• Personal Loan:
-Can be used to buy expensive items
-Borrow a fixed amount and pay it back in monthly instalments with fixed interest rate (1-5 years)
-Advantages
Monthly instalments allow you to plan expenditure
-Disadvantages
May be arrangement fees
If you fail to make the repayments on a secured loan you may lose the asset it was secured on
• Hire Purchase:
-You put down a deposit and pay monthly instalments
-Whilst making payments you are hiring the product, after the final payment you own it
-Advantages
Allows you to buy expensive items at an affordable amount
-Disadvantages
Can’t sell the item whilst making the payments — you don’t own it
If you fall behind on payments the lender may repossess the item

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• Mortgages:

-Loan taken out to buy a property
-Usually paid off in monthly instalments over 25 years
-Advantages

Allows you to buy a home and spread the cost
Fixed or tracked mortgage rates can help make payments affordable
-Disadvantages
An increase in interest rates may affect your ability to repay your mortgage
Property is used as security on the loan, if you don’t make repayments it may be repossessed
• Credit Card:
-You can use it to buy goods and services
-You can spend up to the limit on your card
-You get a statement at the end of the month saying how much you owe
-Advantages
If you pay the full amount each month you aren’t charged interest
-Disadvantages
If you only pay the minimum amount (shown on statement) you will be charged interest
Interest rates are higher than those on a personal loan
• Payday Loan:
-Short-term loan
-Usually for small amounts to pay bills between paydays
-Advantages
Can help with cash-flow problems
-Disadvantages
Very expensive form of borrowing

SAVINGS
• Individual

-Definition

Savings Accounts (ISAs):

An ISA allows you to save without paying tax on the interest or profits you earn
There is a limit on how much you can put into an ISA each year
May need to give a notice if you wish to make a withdrawal
-Types of ISA
Cash ISA — savings account where interest is paid tax-free, less risky than stock + share ISAs
Stocks and Shares ISA — funds are invested in shares or bonds, and profits/returns earned are
tax-free, have the potential for significant capital gains but could
result in financial losses, charge a management fee
Innovative Finance ISA — interest is earned from lending money to other people or
companies via peer-to-peer lending
Help To Buy ISA — launched in 2015 for first-time buyers to help them save to buy property
• Deposit and Savings Accounts:
-Savings Accounts
An easy access savings account allows you instant access to your savings
Other savings accounts may ask for notice to withdraw money, this type pays a variable
amount of interest which is taxable
-Deposit Accounts
A fixed deposit account pays a set amount of interest over a set period of time, you can’t
make withdrawals during this time
• Premium Bonds:
-Premium bonds don’t pay interest, instead savers get the chance to win a tax-free prize monthly
-Savings are secure but you will receive no return on your money unless you win a prize
-You can cash in your premium bonds when you no longer want them
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• Bonds

and Gilts:

-Fixed interest securities issued by companies (corporate bonds) and the government (gilts)
-Pay investors regular interest over a set period of time, as long as the issuer is able to pay
interest

-Value of bonds and gilts can fall
• Shares:

-Shares or equities give investors part ownership
-In return they get payments or dividends per share based on performance and profits
-Share value can go up or down
-Rewards may be good but if the business underperforms they may lose their investment
-Liability to the company debts is limited to the number of shares you have purchased
-Large dividend returns may be taxed

• Pensions:

-Pensions are long-term saving schemes to help save for retirement
-Employees pay into the state pension through National Insurance contributions
-Workplace pensions put a % of pay into a pension scheme and the employer also contributes
-Some people have private pensions which may include an option to take a lump sum

• Extra

Information:

-Protected Savings

The Financial Services Compensation Scheme (FSCS) guarantees deposits up to a set limit of
£85,000 (in 2017) per investor per bank or building society
-Returns and Risks
Saving money in UK banks is generally safe
Investing shares can be higher risk, as share value may fall and dividends depend on the
businesses performance
Returns for low risk investments are much lower than higher risk investments
Return on savings may be eroded if the interest rate on the account is below the rate of
inflation

INSURANCE
• Car

Insurance:
-Satisfies the legal requirement for car owners to have insurance
-Three levels of cover
Third Party
Third Party Fire and Theft
Fully Comprehensive
-Can build up a no claims discount
-Provides protection against liability claims of other drivers
-Expensive for new or young drivers
-Policy excesses can add to cost in the event of a claim
• Home and Contents Insurance:
-Covers the cost of rebuilding or repairs (in the event of a fire or natural disaster
-Covers loss or damage of personal possessions
-Additional security precautions can reduce the premium
-Doesn’t cover the market value
• Life Insurance and Assurance:
-Life insurance pays a sum of money in the event of death
-Life assurance is a mix of life insurance and investment
-Can be used as collateral
-Pay-out may be larger than the total paid
-Life assurance pay-outs are linked to the performance of investments
-Pre-existing medical conditions may not be covered

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• Travel

Insurance:

-Provides cover for delays, cancellations or curtailment (action or fact of reducing or restricting
something) of the trip

-Covers loss of personal possessions while on the trip
-Covers emergency medical expenses
-Pay-outs may not cover the full financial loss
-High-risk activities usually require an additional premium
-Pre-existing medical conditions aren’t covered
• Pet

Insurance:

-Vet bills can be expensive
-Can opt for lifetime cover for serious illnesses for an additional premium
-Covers personal injury or damage caused by the animal
-Pre-existing medical conditions aren’t covered
-Some policies will limit the amount of medical expenses covered
-Vaccinations are not covered

• Health

Insurance:

-Covers some or all private medical costs with convenient treatment times
-You can choose the types of illnesses and treatment you want to cover
-Pre-existing medical conditions aren’t covered
-Medical conditions which arise during the initial period of the policy may not be covered

FINANCIAL INSTITUTIONS
• Bank

of England :

-Uk’s central bank

Regulates and supervises banks, building societies, insurance companies, investment companies
and credit unions
-Responsible for maintaining the UK’s monetary and financial stability
-Sets interest rates
If the interest rate increases, the cost of borrowing will rise
-Issues legal tender
-Independent from government
• Banks:
-Owned by their shareholders
-Offers customers a range of financial services (eg current and savings accounts and loans)
-Reliable, secure and private
-May charge for certain accounts and services
-In the event of a bank failing savings deposits are only secure up to an upper limit of £85,000
• Building Societies:
-Owned by their members
-Provide financial services (eg savings accounts and mortgages)
-Can offer better interest rates and savings than banks
-Fewer branches leading to poorer access
• Credit Unions:
-Financial cooperatives owned and run by their members
-Not for profit organisations
-Offer members savings accounts, current accounts and loans
-More limited funds and opportunities than commercial banks and building societies
-Good cooperative and group feeling

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• National

Savings and Investments:

-Sells savings and investment products
-Money invested in products used to finance government activities
-Savings and investments are secure as government backed
-Poor interest rate, no interest payments on premium bonds
-Some of its services can be accessed from high street Post Offices

• Insurance

Companies:

-Offers policies which compensate you against personal injury, loss or damage to property and
other risks inc third party liability

-Also offers life insurance and pension plans

Provide financial security depending on the performance of investment funds
• Pension Companies:
-Businesses that sell policies to customers allowing them to save into personal pension schemes
in preparation for retirement
-Funds locked into the saving schemes have penalties when taken out early
-Projected income is based on figures which may alter
• Pawnbrokers:
-Individuals or businesses which loan money against the value of assets
-Interest is charged on loans for the period during which the money is borrowed
-Pawned items not bought back within a certain time can be sold so the pawnbroker covers debt
-Instant cash available for an asset with value
-Short-term cost is high and you risk losing the asset
• Payday Loan Companies:
-Businesses offering short-term loans to those requiring cash between paydays
-Immediate cash available even with a poor credit rating
-Very expensive, easy to get into deeper debt

CUSTOMER COMMUNICATION
• Bank

Branch:

-Customers visit the bank to carry out transactions
-Can seek advice on financial services and products
-Staff may try to sell them additional products
-Limited access
Short opening hours

-Full range of service offered
-Face-to-face contact
• Telephone

Not everywhere has branches

Have to travel

Banking:

-Customers can carry out simple transactions over the phone 24/7
-Services are automated

Some accounts allow you to speak directly to an adviser
Automated systems are very efficient but can be confusing
-Overseas call centres are not always able to meet customer requirements
• Online Banking:
-Allows customers to manage accounts via the internet
-More services available than mobile banking but still not all
-24/7 access
-May forget or share passwords
-Could be security issues allowing unauthorised access to accounts

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• Postal

Banking:

-Banks may send out paper statements (most are going ‘paperless’)
-Customers may pay bills with cheque through the post

May be delayed
Useful if you don’t have internet access and are unable to go into a branch
-Some savings accounts are only available via postal banking
• Mobile Banking:
-Manage accounts through an app on a mobile device
-24/7
-Similar to online banking (more restricted)
-Efficient
-Security concerns

CONSUMER PROTECTION
• Financial

Conduct Authority (FCA):

-The FCA regulates the conduct of financial service providers

Authorises businesses to trade, supervises work and changes poor practice via enforcement
Responsible for ensuring consumers are provided with a wide range of products and services
-Is an independent body funded by the organisations it regulates and accountable to parliament
• Financial Ombudsman Service:
-Where consumers can turn if they have an unresolved complaint about service received by a
financial services provider
The ombudsman gives advice or makes decisions based on the facts
An impartial service
-Set up by law as an independent public body
Not a regulator, can’t fine businesses
• Financial Services Compensation Scheme (FSCS):
-This fund can pay compensation to consumers for financial loss if a financial services business is
unable to pay claims against it
-The FSCS covers claims against businesses authorised by the FCA
-Independent of the government and the financial services industry
• Consumer Credit Legislation:
-The Consumer Credit Act (1974) regulates credit card purchases and gives consumers
protection when signing loan and hire purchase agreements
Covers interest rates, credit limits, cooling off periods and access to credit files
• Office of Fair Trading (OFT):
-Until April 2014 the OFT was responsible for protecting consumer interests
This part of its work is now the FCA’s responsibility

CONSUMER ADVICE
• Citizens

Advice:

-A charitable organisation providing free, confidential and impartial advice on financial and

non-financial issues
Helpful for low-income citizens
Useful first point of call
Advisors are volunteers — may not be financial professionals
May not be able to deal with complex financial problems
• Independent Financial Advisors (IFAs):
-Professional individuals providing independent advice and guidance on financial products
-Have to be qualifies and their conduct is subject to strict government regulation
Don’t receive a commission from any of the financial products they recommend
Charge for their services
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• Price

Comparison Websites:

-Websites which compare features and prices of different types of financial products provided by

a range of suppliers
Allows consumers to choose their most suited product
Free to access, interactive and personalised to the needs of the consumer
Requires internet access
Not all suppliers will be identified
Can sometimes be cheaper to purchase directly from the supplier
• Debt Counsellors:
-Specialist agencies or individuals providing financial advice to individuals struggling with debt
-Organisations like the charity National Debtline
-Provide debt advice and information and how to manage personal debt
Personalised advice on budgeting and dealing with creditors
Some offer online budgeting tools and a web chat service
Authorised by the FCA
Some individual debt counsellors may charge a fee for their service
• The Money Advice Service:
-Government agency providing free and impartial money advice to help improve your finances
Online tools, web chat and calculators to help budget
Need internet access to use the budgeting tools
Not all consumers will feel confident using the tools
• Individual Voluntary Arrangements (IVAs) and Bankruptcy:
-When a person is unable to pay all the money they owe to creditors their options are:
An IVA — an agreement that an individual undertakes with creditors to pay off all or part of
their debts
Declaring Bankrupt — have to use some of their assets to pay off their debts

ACCOUNTING
• Recording

Transactions:

-Accountants record all money coming into and going out of the business

Enables them to keep track of payments received and ensure bills and taxes are paid on time
• Management of Business:
-The manager of a business is responsible for:
Planning — foreseeing likely financial commitments
Monitoring — checking performance and spending
Controlling — to ensure sufficient funds are available to cover outgoings
• Compliance:
-All businesses have the responsibility to comply with financial reporting requirements in
accordance with laws and regulations
-Internal accounting controls help to combat fraud
• Measuring Performance:
-Accountants measure how well the business is performing financially through its:
Gross and net profit
Efficiency to collect money owed
Sales revenue
Expenditure and costs
• Control:
-Accounting also tracks:
Trade receivables — debts generated by the sale of products or services between businesses
Trade payables — debts created by purchasing products or services from other businesses

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INCOME
• Capital

Income:

-Money used to see up a business, a long-term investment
-Loan

Money lent to a business by an investor
Business will pay back the loan with interest, usually in monthly instalments over a few years
-Mortgage
Loan used to buy property
Secured against the property purchased
Business will pay back the mortgage with interest usually over 25 years
-Shares
Issued by the company who own the business
As investors the shareholders may receive a dividend
-Owner’s Capital
The owner invests their personal savings
Owner may be a sole trader or a partnership
-Debentures
Type of bond issued by large companies to raise money
Investors receive interest on their loan which is repaid in full on an agreed date
• Revenue Income:
-Income received by the business on sales of it’s goods or services
-Cash Sales
Through over the counter transactions
-Credit Sales
Through sales using a method of credit
-Rent Received
When a business rents out a property it owns
-Commission Received
When a business acts as an agent for another business and gets a % of every sale
-Interest Received
Money earned on savings or lending
-Discount Received
When a business pays a reduced price for goods or services

CAPITAL EXPENDITURE
• Capital

Expenditure:
-Assets (capital items) that the business plans to use over a long period of time
-Non-Current Assets
Land
Machinery
Vehicles
Buildings and Premises
Equipment
Fixtures and Fittings
-Intangible Assets
Goodwill
Patents
Trademarks
Brand Names
• Intangible Assets:
-Not physical items, may be difficult to value and sell
Goodwill is the additional value of a business, a measure of number customers and reputation
Patents, trademarks and brand names are a recognisable part of the business and have a value
• Depreciation:
-Some assets lose their value over time, depreciation is used to show the fall in value in accounts
Straight-line depreciation reduced the value of an asset the same amount each year
Reducing-balance depreciation shows the loss of value being the same percentage each year

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REVENUE EXPENDITURE
• Revenue

Expenditure:

-The day-to-day costs incurred in running a business
-Rates

Business tax on non-domestic property used to fund local council services

-Heating and Lighting

Payment for services like gas and electricity

-Water

Payment for supply of water to premises

-Insurance

Legally required to take out buildings, contents, public liability and employer’s liability insurance

-Administration

Paperwork required to run a business

-Telephone, Postage, Stationery and Printing
Administrative Costs

-Salaries

Annual sum of money, divided into equal monthly payments to the employee

-Marketing

Costs related to promoting and selling goods and services

-Reducing-Balance Depreciation
-Straight-Line Depreciation
-Wages

Hourly rate paid to an employee

-Bank Charges

Bank account fees payable on every transaction

-Interest Paid

Paid on mortgages and loans

-Discount Allowed

Customers receive money off goods either as an incentive to purchase or for bulk buying

-Inventory

Raw materials, finished products, supplies required to run a service business

-Rent

Only paid by businesses that don’t own their own premises

INTERNAL FINANCE
• Internal

Sources of Finance:
-Retained Profit
Some of the profits are reinvested in the business
Doesn’t have to be repaid and interest is charged
Not available to new businesses, many also won’t make sufficient profits
-Net Current Assets
Money that is immediately available to the business and can be used to cover day-to-day
expenditure
A quick way of raising money, selling off inventory reduces the costs related to holding it
May need to accept a lower price for its inventory
-Sale of Assets
Vehicles, buildings, machinery and equipment can be sold to give the business cash
May take time to sell assets and they may not receive the full value of the asset
A good way of raising funds from assets that are no longer needed
Not all businesses have surplus assets that they can sell
May be a slow method of raising funds

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• Formulae:

Profit =
Sales Revenue - Total Costs
• Problems

Net Current Assets =
Current Assets - Current Liabilities

with Internal Finance:

-Many aren’t available to new or small businesses

Not been running long enough to have retained profit
May lack cash and not have many assets to sell off

EXTERNAL FINANCE
• External

Sources of Finance:

-Owner’s Capital

Existing investors put more money into the business
Long-term option with few additional costs
If owned by shareholders they will expect bigger dividends in the future
-Loans
Money borrowed at an agreed rate of interest
Normally medium to long-term
Repayments are spread over a period of time, helping with budgeting
Interest can be high and lenders may want security on the loan
Two types — fixed-interest loans and variable-interest loans (where interest changes)
Loans increase the volume of outflows, impacting working capital
-Crowd-Funding
Involves raising funds online by asking people to invest small amounts of money
Rewards are offered or the investment is an advance discounted order for the product/service
Short-term source of finance
Funds may be promised but they aren’t always committed
-Venture Capital
Funds from a professional investor for a share of ownership
The investor can offer business guidance and support and may have good contacts
Will want to be involved in decisions, so other owners lose some control
May expect quick returns
Usually long-term investments
-Mortgages
A loan secured on property
The business owns the property once the final payment is made
Long-term source of finance
Immediate use of the property with payments spread over time
Expensive compared to cash and if repayments are missed the property can be repossessed
Needs to budget for the continuing maintenance of the property
-Debt Factoring
Involves selling the businesses invoices to a third party
The debtor owes money to the factor agency and they will pursue payment
Short-term
Negatively impacts profit margins
-Hire Purchase
Allows the business to obtain assets by making a deposit and regular payments
Asset is owned by the business once all repayments are made
Medium-term
Quite expensive compared to buying in cash
Increases volume of cash outflows, impacting working capital

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-Leasing

Allows the business to obtain assets without paying a large lump sum
Arranged through a finance company
Set repayments are spread out
Medium-term
Can have modern equipment
Asset never belongs to the business unless an ‘option to buy’ is included in the agreement
Increases outflows and impacts working capital
Can be expensive
-Trade Credit
Business has use of goods immediately and pays the supplier 30-90 days later
Short-term finance
Can sell goods before they pay for them
Good for cash flow and no interest is paid
Won’t receive cash discounts for prompt payment, and need to pay on time
Requires robust financial records to keep track of outstanding debts
-Grants
Government payments to businesses given with conditions
Don’t have to be paid back
Only available to certain businesses
May not be available in the future
Additional audit requirements
-Donations
Important for non-profit organisations
Can be difficult to plan and budget for
May be affected by the economy’s state and also by negative publicity
-Peer-to-Peer Lending
Small investors use an organisation to help them find businesses to invest in, that organisation
takes a fee
Long-term funding option
Useful for businesses that can’t get finance from traditional financial institutions
Interest may be higher than those charged by financial institutions
-Invoice Discounting
Instead of buying a business’s outstanding invoices the organisation lends against the value of
outstanding invoices for a fee
Short-term
Advantage of business still managing the relationship with the customer
Loss of some profit

CASH INFLOWS
• Inflows/Receipts:

-Cash Sales

Sales paid for at the time of purchase using cash or debit card

-Credit Sales

Sales paid for following the purchase

-Loans

Money borrowed from an external source

-Capital Introduced

Funds invested in the business by the owner or shareholders

-Sale of Assets

Money received from selling an asset

-Bank Interest Received

Interest earned on any savings in the bank

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CASH OUTFLOWS
• Outflows/Payments:

-Cash and Credit Purchases

Anything a business buys

-Rent, Rates, Salaries, Wages and Utilities

Regular outflows that the business must be able to cover

-Purchase of Assets

Small and large expenditure to buy assets used over a long period

-Value Added Tax (VAT)

Charged on most goods and services
Must be registered for VAT if sales go over the VAT threshold (£85,000 in 2017)
Business adds VAT onto the cost of its goods and services
-Bank Interest Paid

CASH FLOW FORECASTS
• Cash

Flow Forecasts:
-Why Do Businesses Use Them?
To identify potential problems with cash flow
-Uses of Cash Flow Forecasts
Planning
Monitoring
Control
Target Setting
• Format and Data:
-Format of a Cash Flow Forecast
Opening Balance
Itemised Receipts
Total Receipts + Opening Balance
Itemised Payments
Net Cash Flow
Closing Balance
-Entering Data into a Cash Flow Forecast
Figures must be realistic
Look at what the figures show — how could potential problems be resolved?
• Profit and Cash:
-Businesses selling lots may have major cash flow problems
May be short on cash due to credit sales
They will need to replace the inventory but don’t have the funds as they haven’t been paid yet
• Benefits and Limitations:
-Should help predict when they may have cash flow problems
Able to plan and possibly arrange a bank loan or overdraft
-Don’t consider the business can delay payments or that it can buy using a leasing agreement
• Ways to Improve Cash Flow:
-Reduce unnecessary expenses
-Sell debts to a debt factor agency
-Encourage suppliers to offer extended credit
-Request extension of bank overdraft
-Sell and lease back assets
-Set targets to avoid issues
-Encourage debtors to pay quicker

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COST AND SALES
• Break-Even

Analysis:

-Identifies the point where business costs are matched by the money it receives from sales

Below the break-even point the business loses money
Above the break-even point the business makes a profit
• Costs:
-Fixed Costs
Incurred by the business regardless of sales
-Variable Costs
Increase when the business increases its activity or output
-Semi-Variable Costs
Combination of fixed costs and those that become variable once a certain output is reached
• Costs:
-Selling Price Per Unit
Amount paid by each customer for each item bought
-Sales in Units
Quantity of sales
-Sales in Value
Monetary value of sales
• Formulae:
Total Variable Costs =
Total Costs =
Variable Cost Per Unit x Quantity
Fixed Costs + Variable Costs + Semi-Variable Costs
Sales in Value =
Selling Price x No of Units Sold

Total Revenue =
Number of Units Sold x Selling Price Per Unit

BREAK-EVEN ANALYSIS
• Calculating

Break-Even:
Contribution Per Unit =
Selling Price - Variable Cost Per Unit

Total Contribution =
Contribution Per Unit x Number of Units Sold

Break-Even Point =
Fixed Costs ÷ Contribution Per Unit

Margin of Safety =
Sales - Break-Even Level of Output

Time to Break-Even =
Break-Even Units ÷ Units Produced Per…
• Break-Even

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Chart:

USING BREAK-EVEN
• Planning

-Planning

and Monitoring:

Break-even helps the business work out how many sales they need to cover their costs
Helps them set prices that will enable them to make a profit
-Monitoring
Alerts the business to potential problems — allows them to take steps to fix them
• Control and Target Setting:
-Control
Can be used to identify where costs are increasing — allows them to take control of this
-Target Setting
Helps a business set targets for sales, unit costs, contribution and profit
• Contribution:
-Contribution pays for the fixed overheads and is important to measure
-Advantages
Can see whether products actually cover their variable costs
Used to set product prices in relation to direct production costs
-Disadvantages
Contribution per unit may be very low — business needs to sell more to cover fixed costs
Contribution per unit may be extremely high on some products
Contribution per unit is distorted and may not be valuable
• Preparing, Completing and Analysing:
-Businesses need to go through a series of stages to work out the break-even point:
Variable costs relate to the additional costs incurred per unit
Total costs are the total of these two figures
Total revenue is calculated by multiplying the number of units sold by the price they sold for
-If a business makes no units they will still have to pay fixed costs but revenue will be zero
• Revising Break-Even:
-Break-even may need to be recalculated where there is change in:
Selling price — increased total revenue will be larger and rise, if it falls total revenue will too
Fixed costs — total costs will increase if fixed costs increase
Variable costs — affect the total costs line

STATEMENT OF COMPREHENSIVE INCOME
• Purpose

and Use:

-Sets out the business’s revenue and expenses
-Shows whether the turnover has grown or shrunk
-Shows where costs have been incurred
-Shows the amount of net profit and how the business has used it

• Formulae:

Gross Profit =
Sales Revenue - Cost of Sales
• Calculation

Operating Profit =
Gross Profit - Overheads

of Profit or Loss:

-Tax is taken from Net Profit to get Net Profit After Tax

Anything remaining is profit which the business can use

-Loss is calculated similarly

Expenses exceed income

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Net Profit =
Operating Profit - Financing Costs

• Adjustments

for Depreciation:

-In the profit and loss account it is often necessary to show the fall in assets’ value

If an asset is depreciated too quickly profit will appear to fall
If the depreciation is too slow the profits will be inflated
• Adjustments for Prepayments and Accruals:
-Statement has to include expenses even if they haven’t been paid
Prepayments occur when the business pays for something in advance
Accrual occurs when an expense incurred hasn’t yet been paid
• Interpretation, Analysis and Evaluation:
-External factors like inflation can affect the statement
-Businesses may also try to bring sales forward that should belong to the next trading period
They’re shown here to increase turnover and profit
-The statement alone won’t tell you how the business is performing
Needs to be compared with about five years to show a real trend

STATEMENT OF FINANCIAL POSITION
• Key

Relationships:

-Statement of financial position (aka balance sheet) shows assets, liabilities and capital
-Shows how a business has raised and used capital

Assets are equal to liabilities
Total assets of the business are equal to the fixed and current liabilities
Liabilities are equal to the share capital, borrowings, other creditors and reserves
• Importance:
-Statement of Financial Position shows:
Actual value or worth of a business
Progress when compared over a number of years
Whether the business is borrowing money and will be vulnerable if interest increases
Whether the business is using short-term or long-term loans
• Other Information:
-It shows the state of the business at a particular moment — before or after could be different
-Only shows financial dealings — doesn’t show how well the business is being managed
• Reading and Interpreting:
-Possible to use it to make an assessment of both the short-term and long-term financial position
-In the short-term it shows:
Short-term debt
Current assets used to pay off the debts
-Longer term position can be seen by:
Examining the fixed assets, capital and reserves
• Fixed Assets and Capital:
-Fixed Assets
Those items used by the business to generate income
Acquiring fixed assets means they’re intending to improve their performance and output
-If a business borrows money to buy assets then it’s vulnerable to interest rate changes
It will bet safer if it has used share capital or reserves
• Reserves:
-Funds that the business has set aside with the intention of spending it on an asset or to make a
payment to it’s shareholders
• Non-Current Assets:
-Assets that are not intended to be converted into cash in the short term:
Can be tangible
Can depreciate in value
-Can be valued at its net book value (cost of value before it has been depreciated)
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• Current

Assets and Liabilities:

-Current assets intended to be converted into cash in the short-term
Inventories

Trade receivables

-Current liabilities are short-term debts

Prepayments

Money as cash or in the bank

Bank overdraft
Trade payables
Accruals
• Net Current Assets and Liabilities:

-Subtract the current liabilities from the current assets
-A positive figure shows the business has surplus working capital to cover its liabilities
-A negative figure shows the business doesn’t have any working capital and is unlikely to cover its
current liabilities
• Non-Current Liabilities:
-Those that are due after more than a year
Will probably be still paying in instalments but the full balance isn’t due within 12 months
• Net Assets:
-Also known as net worth
Net Assets =
Current Assets + Fixed Assets - Current Liabilities

Net Assets =
Fixed Assets - Working Capital

• Capital:

-Either cash or other assets that have been introduced or removed from the business

Opening Capital — value of investment by owners
Transfer of Profit or Loss — Statement of Comprehensive Income shows profit and loss
Drawings — funds that could be salaries or wages withdrawn by the owners
Closing Capital — equal to the opening capital + or - any other capital figures

Working Capital =
Current Assets - Current Liabilities
• Straight-Line

Depreciation:

-When the same value of £ is reduced from an assets value each year
Annual Depreciation =
(Asset Purchase Price - Estimated Salvage Value) ÷ Estimated Useful Life

• Reducing-Balance

Depreciation:

-Reducing the same % of an assets value each year

• Prepayments:

-When an invoice is paid in advance of the current accounting period

• Accruals:

-Where stock, assets or other items have been received from a supplier but the invoices haven’t

been received or aren’t due yet
• Interpretation and Analysis — Key Aspects to Consider:
-Profitability
Measure by its profit margins, mark up and efficiency in using capital
-Liquidity
Ability to be able to cover current liabilities by its current assets
-Efficiency
Ability to collect and pay debts and the use of stock
• Evaluation — Key Points to Consider:
-Cash Conversion
How quickly can the business turn stock into cash?

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-Fixed Assets

The value of fixed assets needed to generate sales

-Return on Assets

How much is earned from the assets

-Intangible Assets

What value is there in the business of its intellectual property and its goodwill?

GROSS PROFIT AND MARK-UP
• Gross

Profit Margin:

-Enables the business to work out the gross profit on goods sold after deducting their cost
Measured as a %

-Ways of improving gross profit margin:
Increasing Sales

Reducing Costs

Gross Profit Margin =
(Gross Profit ÷ Revenue) x 100
• Mark-Up:

-% added to the cost to create the selling price
-Gross Profit is measured as a % of cost of sales
Gross profit increases with mark-up

Mark-Up =
(Gross Profit ÷ Cost of Sales) x 100

PROFIT MARGIN AND RETURN ON CAPITAL EMPLOYED
• Net

Profit Margin:

-Ratio measuring the profit made by the business after all expenses

Considered to be the more accurate measure of efficiency and performance

-Measured as a % of revenue

If the net profit falls the business may take steps to reduce its expenses
Net Profit Margin =
(Net Profit ÷ Revenue) x 100

• Return

On Capital Employed (ROCE):
-Investors and owners put capital into a business hoping to help it make profit
They will expect a return on this investment
-Ratio measuring return on capital as a % of capital employed — showing efficiency with money
A high profit with a low investment means the business is performing well
Return On Capital Employed =
(Net Profit Before Interest and Tax ÷ Capital Employed) x 100

LIQUIDITY
• Current

Ratio:

-Also known as working capital ratio
-Measures a business’s assets compared to liabilities

Shows whether the business is being managed properly

-Ideally a business should have £1
...
5:1
If it has less than 1
...
1

If a business has less than this it will have problems paying off its current liabilities

Liquid Capital Ratio =
(Current Assets - Inventory) ÷ Current Liabilities

EFFICIENCY
• Trade

Receivable Days:

-This ratio measures the average number of days debtors take to pay their invoices
-Payment terms vary between industries

A high number of days may indicate the business isn’t controlling debt collection
A high number of days may cause cash flow problems
Trade Receivable Days =
(Trade Receivables ÷ Credit Sales) x 365

• Trade

Payable Days:

-This ratio measures the average number of days the business takes to pay its suppliers
-Businesses with cash flow problems are likely to take longest to pay
Trade Payable Days =
(Trade Payables ÷ Credit Purchases) x 365

• Inventory

Turnover:

-This ratio measures the average number of days the business holds it stocks

Can help determine when to reorder
Where a business uses perishable items it will be low
A high number of days may mean that the business has money tied up in stock

Inventory Turnover =
(Average Inventory ÷ Cost of Sales) x 365

LIMITATIONS OF RATIOS
• Limitations

of Ratios:

-Ratios are averages

Figures used are taken from across the business
May hide that one area is performing well and another is performing poorly
-Ratios only highlight the problems — don’t fix or explain them
-Accounting Practices used can distort the performance
Figures in the accounts may be misleading
-Poor performance doesn’t always mean the business is failing
-May be difficult to compare ratios with those of competitors
Accounting practices may vary and data used may no longer show a rival’s true situation
-Ratios are based on data which may have changed
Figures come from the Statement of Financial Position (a specific point in time), they change

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