Finance

Internal = comes from inside bus
Personal savings/owner's capital
retained profit
sales of assets

*External = comes from outside bus:*
Bank overdraft, bank loans, share capital, leasing, venture capitalist, trade credit, mortgage, crowdfunding

Short term: money has to be pai in less than a year
Long term: money that is either never repaid or repaid over a long period of time (1+ year)

*Cash inflows* - money entering bus (sales, rev, loans...)
*Cash outflows* - money exiting bus (wages, rent, tax...)

-Financial document showing expected cash inflows + outflows over future period
-Forecast shows planned cash flow of bus monthly

*Identifying cash shortages* - advance notice of when bus needs to borrow.
*Supporting applications for funding* - lenders insist on seeing cash flow forecast before lending.
*Help when planning the bus* - clarifies aims + improves performance.
*Monitoring cash flow* - bus must compare predicted figures with real ones to see why figures different.

cash inflow - cash outflow

Fixed costs: Costs that do not vary with the level of output. rent, advertising, TAX, insurance
Variable costs: costs that change directly with the level of output produced, raw materials, packaging, fuel .

*Cost to firm of producing all output over period*

*TOTAL COSTS = FIXED COSTS + VARIABLE COSTS*

*Average cost of prod is cost of producing 1 unit*

*AVERAGE COST = TOTAL COST/QUANTITY PRODUCED*

*Amount of cash firm receives from selling output.*

*TOTAL REVENUE = PRICE X QUANTITY*

*Profit is difference between total revenue + total costs*

*PROFIT = TOTAL REVENUE - TOTAL COSTS*

If total costs more than total revenue, loss made.

where a firm's total revenue is the same as its total costs. Cash flowing in=cashflowing out
at this point there is no profit or loss women.
Fixed costs/sales price per unit - variable cost per unit

-Break-even point where TC and TR meet
-Level output below BEP, loss made
-Level output above BEP, profit made
-Margin safety = Outputs which makes profit
-Some show fixed cost - straight line
*Statement of comprehensive income*

Financial document showing a firm's income and expenditure, helps calculate profit/loss in the last 12 months

-TC + TR shown straight lines, *may not be straight* revenue, costs, quantity is not constant
-*Assumed all output sold + no stocks held*. Many hold stocks for changes demand.
-*Accuracy break-even chart depends on quality + accuracy data* used to construct TC and TR.

-TC + TR shown straight lines, *may not be straight* revenue, costs, quantity is not constant
-*Assumed all output sold + no stocks held*. Many hold stocks for changes demand.
-*Accuracy break-even chart depends on quality + accuracy data* used to construct TC and TR.

Revenue, cost of sales, Gross profit (revenue - cost of sales), Administrative expenses, Operating expenses , selling expenses, operating profit (Gross profit - expenses), finance costs, Proft per year, Proft after taxation

*Investment decisions* -profits rising, encourage use more funds for investment
*Cost analysis* - eg. cost sales up sharply, bus must find reasons for this + try to reduce costs
*Basis for future forecasts* - Most PLCs give shareholders idea what earnings expected
*Making comparisons* - Tells where invest funds.
*Statement of financial position*

-Shows financial position at particular point.
-Summarises assets, liabilities + capital
-Assets are resources owned by business.
-Liabilities are debts of business.
-Capital is money put into business by owners.

Non-current assets: assets that last for more than 1 yr.
Current assets - assets turned into cash in 1y (liquid), raw materials, trade receivables, cash 'in hand'.
Current liabilities -debts repaid within 1y, trade payables, taxation, leases + hire purchases.
Net current assets: current assets - current liabilities.

Non-current liabilities: repaid many years. Mortgages, long-term bank loans.
Net assets all assets - all liabilities.
Shareholders' equity - capital owed to owners: (share capital, retained profit, other reserves)
At bottom, capital employed (amount invested)
Interpreting the statement of financial position

-Value all *bus assets, capital + liabilities*
-*Asset structure*, how money spent diff assets
-*Capital structure*, analysis types funding used
-*Value net current assets*, working capital. Shows if enough liquid assets for immediate bills
*Ratio Analysis*

*Profitability ratios*, measure performance + focus on profit, revenue + amount invested
*Liquidity ratios*, how easily pays short-term debts

-Shows *gross profit made on sales revenue:*
*Gross profit margin = gross profitevenue x 100*
-Higher gross margins better than lower ones

-*How well bus controls expenses + cost sales*
-Difference GPM and OPM small, expenses low.
Operating profit margin:
*Operating profitevenue x 100*

-Shows *profit per item sold*
*Mark up = profit per item/cost per item x 100*
-Mark up used by some bus to *set prices*
-Price *guaranteeing cost prod covered + profit*
-If bus wants certain amount profit on each item:
*Price = cost + (cost x mark-up)*

-liquidity ratio, current assets + current liab:
*Current ratio = current assets/current liabilities*
-Enough liquid resources if ratio between *1.5-2*
-If ratio *below 1.5, not enough working capital*
-*Above 2, money tied up unproductively*

-More severe test liquidity
-Inventories not treated as liquid resources
Acid test ratio: Below 1, CA (less inventory) do not cover CL
-Retailers receiving cash operate well with much lower acid test ratios compared to manufacturer

-ROCE compares profit w money invested
-If ROCE high w low int, good returns on capital.

-Assess perf + liquidity bus at particular point
-Used to monitor progress of bus over time
-SCI + SFP show figures current financial year + one before, so ratios can be calc + compared.
-Can track historic performance of bus over time by eg. comparing ratios over 5 years.

-Ratios can also be used to *make comparisons between bus in same ind*.
-This helps to *judge performance bus compared with closest rivals.*
-Must remember events at the time which may affect ratios, however. *SEE P.259 FOR EXAMPLES*
*The use of financial documents*
Using financial documents to assess the performance of a business

-*Profit made by bus reflection of performance*
-If bus does well, *higher rewards. Motivates*
-Allows for *wage negotiations* using statements

-Bus targets using statements to *maintain interest*
-Shareholders may look at *size dividends*
-Ratios to show how their *investment performing*
-*Compare other companies* they could invest
-Financial doc *show if grown*. Like growing bus
Using financial documents to assess the performance of a business

-Banks need up-to-date info to lend cash to bus
-Bank look at accounts to see if bus can repay
-Banks focus working capital + if large debts
-Suppliers assess *creditworthiness* bus
-Accounts PLCs published. Inform shareholders.

*Funding decisions* - Predict when more cash needed. Tells where funding most appropriate
*Reducing costs* - Eg. can compare GPM and OPM too assess whether costs under control.

*Increasing profitability* - Use accounts for ways making more profit (finding new markets etc.)
*Investment decisions* - risky, bus cannot know if it will generate returns. BUT info in financial doc helps bus assess if it is strong enough for risks.