Study guide: Business Finance and Accounting

📋 Course Outline

1. Sources of Business Finance
2. Cash Flow Forecasting
3. Improving Cash and Profit
4. Financial Statements and Position
5. Depreciation Methods
6. Payment Methods and Cards
7. Regular and Bank Transfers
8. Liquidity and Working Capital
9. Profitability Ratios
10. Efficiency Ratios
11. Probability and Business Efficiency
12. Structuring Eight-Mark Answers

📖 1. Sources of Business Finance

🔑 Key Concepts & Definitions

• Sources of finance: The ways money comes into a business.
• Retained profit: Profit kept in the business instead of being distributed.
• Venture capital: Investment in a business by investors who may also provide professional advice and monitoring.
• Trade credit: Trade credit lets a business obtain goods or services now and pay suppliers later, and is suitable only as a short-term source of finance.
• Crowdfunding: Attracts investment from many speculative investors, many of whom contribute small amounts.
• Mortgage: A long-term loan, normally around 25 years, secured against a specific asset such as a house.

📝 Essential Points

📌 Retained profit requires no interest and can strengthen financial stability, but it can slow expansion and reduce owner dividends.

📌 Venture capital can provide advice and monitoring, but may cause partial loss of control and require the business to share profits.

📖 2. Cash Flow Forecasting

🔑 Key Concepts & Definitions

• Cash flow forecast: An educated prediction of a business's future cash flow.
• Cash inflow: Money coming into a business.
• Cash outflow: Money going out of a business.

★ Must-know

📐 Formula - $\text{Net cash flow} = \text{total cash inflow} - \text{total cash outflow}$.

📐 Formula - $\text{Closing balance} = \text{opening balance} + \text{net cash flow}$.

Further detail

📌 A month's opening balance equals the previous month's closing balance, and opening balance is not a cash inflow.

📌 Cash flow forecasts help avoid shortages, support decisions and planning, ensure bills are paid on time and help secure finance, but may be inaccurate, affected by unexpected events and time-consuming to prepare.

💡 Memory Hook

Cash inflows minus outflows determine net cash flow, which changes the closing balance.

📖 3. Improving Cash and Profit

★ Must-know

• Sales can be increased through:

  • promotions or discounts
  • new products or services
  • improved marketing

• Net profit can be increased by:

  • increasing selling prices
  • selling more products
  • introducing new products
  • improving marketing
  • entering new markets
  • improving customer service

Further detail

• Sales discounts can increase costs and reduce profit margins.

• Expenses can be reduced by:

  • cutting unnecessary spending
  • reducing utility costs
  • negotiating better supplier prices
  • changing suppliers

• Cost-cutting can affect the quality of goods and services.

• Reducing expenses from £13,000 to £10,000 increases net profit by £3,000, all else being equal.

• Cost of sales can be reduced by:

  • negotiating lower supplier prices
  • buying in bulk
  • reducing waste
  • improving stock control
  • finding cheaper suppliers

📌 Selling unused assets can provide cash, but assets may be difficult to replace later.

📖 4. Financial Statements and Position

🔑 Key Concepts & Definitions

• Statement of financial position: A statement that shows what a business owns and owes, together with its capital or equity.
• Assets: Assets are what a business has, including cash, inventory, vehicles, bank balances, equipment, buildings and trade receivables.
• Liabilities: Liabilities are amounts a business owes, including bank loans, trade payables, overdrafts and mortgages.
• Income statement: A statement showing whether a business made a profit or loss during a particular period.

★ Must-know

📐 Formula - $\text{Cost of sales} = \text{opening inventory} + \text{purchases} - \text{closing inventory}$.

📐 Formula - $\text{Gross profit} = \text{revenue} - \text{cost of sales}$.

📐 Formula - $\text{Net profit} = \text{gross profit} - \text{total expenses}$.

Further detail

📌 Non-current assets are kept for more than one year, whereas current assets are expected to be converted into cash within one year.

📖 5. Depreciation Methods

🔑 Key Concepts & Definitions

• Depreciation: The reduction in a non-current asset's value over time due to wear and tear, age or obsolescence.
• Reducing-balance method: A method that charges a fixed percentage on an asset's net book value each year.

★ Must-know

📐 Formula - $\text{Straight-line depreciation per year} = \frac{\text{cost} - \text{residual value}}{\text{useful life}}$.

Further detail

• The straight-line method charges the same amount of depreciation each year.

📐 Formula - $\text{Depreciation} = \text{net book value} \times \text{rate}$.

💡 Memory Hook

Straight-line depreciation repeats the same charge; reducing-balance depreciation applies a rate to net book value.

📖 6. Payment Methods and Cards

🔑 Key Concepts & Definitions

• Cheque: A paper order instructing a bank to pay a specified amount from one account to another.
• Electronic transfer: An electronic transfer moves payment directly from one bank account to another and provides a payment record without additional cost.
• Prepaid card: A prepaid card is loaded with money in advance, and each transaction reduces its balance; a bank account is not required to use one.
• Charge card: A charge card allows customers to buy now and pay later, but the full balance must be paid each month when the statement is issued.
• Store card: A store card allows delayed payment but is accepted only by the issuing store or a linked association.

📝 Essential Points

📌 A cheque can be written for an exact amount and cashed only by the named payee, but processing can take longer and a cheque may be returned for insufficient funds.

📖 7. Regular and Bank Transfers

🔑 Key Concepts & Definitions

• Direct debit: A direct debit authorises a company to take money from a bank account on an agreed date for regular goods or services, with the amount able to vary.
• Standing order: An instruction to a bank to pay a fixed amount to another person's account regularly on set dates.
• BACS: Banker's Automated Clearing Service (BACS) transfers payments directly from one bank to another.
• CHAPS: Clearing House Automated Payment System (CHAPS) transfers payments directly from one bank account to another.

📝 Essential Points

• Faster Payments is a system separate from BACS; payments normally arrive within 2 hours, but not all banks offer this service and a transaction limit applies.

📌 CHAPS can transfer money on the same day with no single-transaction amount limit, but normally charges a fixed transaction fee.

💡 Memory Hook

Direct debits vary with the amount due; standing orders repeat a fixed amount.

📖 8. Liquidity and Working Capital

🔑 Key Concepts & Definitions

• Liquidity: A business's ability to have enough assets to cover its liabilities.

★ Must-know

📐 Formula - $\text{Liquid capital ratio} = \frac{\text{current assets} - \text{inventory}}{\text{current liabilities}}$.

Further detail

• With current assets of £85,000 and current liabilities of £30,000, the current ratio is approximately 2.83:1.

• With current assets of £85,000, inventory of £40,000 and current liabilities of £30,000, the liquid capital ratio is 1.5:1.

📖 9. Profitability Ratios

★ Must-know

📐 Formula - $\text{Gross profit margin} = \frac{\text{gross profit}}{\text{revenue}} \times 100\%$.

📐 Formula - $\text{Mark-up} = \frac{\text{gross profit}}{\text{cost of sales}} \times 100\%$.

Further detail

• For revenue of £350,000, cost of sales of £200,000 and expenses of £85,000, gross profit is £150,000 and gross profit margin is approximately 42.9%.

• Using the same example, net profit is £15,000 and profit margin is approximately 4.3%.

📖 10. Efficiency Ratios

★ Must-know

📐 Formula - $\text{Inventory turnover (days)} = \frac{\text{average inventory}}{\text{cost of sales}} \times 365$.

📐 Formula - $\text{Trade receivables collection (days)} = \frac{\text{trade receivables}}{\text{credit sales}} \times 365$.

📐 Formula - $\text{Trade payables payment (days)} = \frac{\text{trade payables}}{\text{credit purchases}} \times 365$.

Further detail

📐 Formula - $\text{Average inventory} = \frac{\text{opening inventory} + \text{closing inventory}}{2}$.

• With average inventory of £15,000 and cost of sales of £150,000, inventory turnover is 36.5 days.

• With trade receivables of £45,000 and credit sales of £300,000, the receivables collection period is 55 days; with trade payables of £25,000 and credit purchases of £100,000, the payables period is 91 days.

📖 11. Probability and Business Efficiency

🔑 Key Concepts & Definitions

• Probability: The chance of something happening, such as customers buying a product.
• Efficiency: Doing something well without wasting time, money or resources.

📖 12. Structuring Eight-Mark Answers

★ Must-know

• An eight-mark discussion answer should use two paragraphs, discussing an advantage in the first and a disadvantage in the second, without a judgement.

• Each developed point should state the point, give evidence such as a figure or case detail, and analyse how it helps or affects the business.

Further detail

• An eight-mark solution-and-drawback answer should explain a solution with evidence and analysis, then explain its drawback.

💡 Memory Hook

Point → evidence → analysis, then repeat with another advantage or a drawback.