Finance

1. Finance National 4/5 Business Management

2. Learning Outcomes • 2.1 – Sources of Finance (costs & benefits) • 2.2 – Breakeven Charts • 2.3 – Cash Budgets (cash flow issues and solutions) • 2.4 – Profit & Loss statement

3. Contents • Role of Finance Department • Sources of Finance • Break-even Charts • Break-even definitions • Cash Budgets • Cash Budget –problems and solutions • Profit Statement • Profit Statement – problems and solutions • Role of Technology

4. Role of Finance Department • The Finance Department are responsible for the following roles: • Payment of Invoices and Wages • Preparing Financial Accounts • Interpreting Financial Accounts

5. Learning Outcome 2.1 Sources of Finance

6. Sources of Finance

7. Sources of Finance

8. Learning Outcome 2.2 Break-even Charts

9. Break-even Charts • A break-even chart is crucial to an organisation as it shows how many units must be sold before the company stops making a loss and begins to make a profit. • The point on the chart where the company does not make a loss or a profit is known as the break-even point.

10. Break-even Chart Sales Revenue Total Costs PROFIT BREAK EVEN POINT Variable Costs LOSS Fixed Costs

11. Break-even - Definitions • Fixed Costs • costs which remain constant even when the volume of production changes. These must be paid even if no sales are madee.g. rent, insurance • Variable Costs • costs which vary directly with the volume of production e.g. raw materials, wages. • TOTAL COSTS = FIXED COSTS + VARIABLE COSTS

12. Break-even - Definitions • Sales Revenue • The total money as business has made from its sales, this will increase as more products are produced • Break-even Point • This is reached when total costs = sales revenue. At this point neither a loss nor a profit is being made.

13. Learning Outcome 2.3 Cash Budgets

14. Cash Budget • A financial statement which shows the amount of cash flowing in and out of a business over the course of a set time period.

15. Cash Budgets Cash Inflows Cash Outflows Cash Sales Credit Sales Other income (rent etc) Wages Rent Utilities Purchases (raw materials)

16. Cash Budgets - Importance • New businesses aim to simply cover costs in the initial period of their business. • They need to forecast their costs and income in advance. • They need to be able to calculate if they can cover their costs and if not, what to do about it. • It allows for greater control of the business • Less uncertainty and fear about the future • Provides targets for staff to work towards

17. Cash Budget - example

18. Cash Budget - example What does this show? • Brian’s Cash Budget has highlighted that he will be short of money in October and December (both figures have negative balances). • Brian and any other business owners with such shortages should take immediate action to avoid running out of cash.

19. Cash Budgets – problems and solutions Problem Solution decreased cash sales decrease in debtor receipts increase in raw material costs Increase sales (promotions, price) decrease time for debtor repayment (credit terms, offers) decrease raw materials (negotiate with supplier, find new supplier)

20. Cash Budgets – problems and solutions Problem Solution increase in utility costs or increase in other expenses purchase of fixed asset Increased loan repayments decrease other expenses (new utility provider, become more economical) decrease purchase of fixed assets (hire purchase) decrease loan repayments (negotiate terms, find new provider), sell fixed assets.

21. Learning Outcome 2.4 Profit Statement

22. Profit Statement • This is the account that is used to calculate the profit made by a business over a period of time, usually a year.

23. Profit Statement - example

24. Profit Statement - definitions • Sales/Turnover • Income received from the customers from sales of products • Less Cost of Sales • The cost of buying in the stock sold during the year. • Opening Stock – Stock in the business at the start of the year • Purchases – Stock that is bought in during the year • Closing Stock – Stock left over at the end of the year • Gross Profit = Sales – Less Cost of Goods Sold • This is known as the Trading Profit, the money made solely from trading activities.

25. Profit Statement - definitions • Gross Profit • Less Expenses • Other expenses that have to be paid for other than stock. This might include Wages, Rent, and Electricity etc. • Net Profit = Gross Profit – Expenses • Final profit left after taking all expenses from Gross Profit

26. Profit Statement – problems and solutions Problem Solution Decrease in Sales Increase in Cost of Goods Sold Increase in Expenses Increase selling price find new supplier; negotiate a better deal with the supplier reduce expenses through better deals or becoming more economical.

27. Job Cost Statements • Job costing is a method used to add up costs. • Work consists of a number of separate jobs, each of which is completed to a customer’s specific requirement. • The idea of job costing is simple, direct costs are collected and charged to each job. • This is then charged to the customer plus a percentage for profit. • Main items in a job costing statement are: Materials, Labour, Factory overheads, and selling/admin costs.

28. Job Costing Example

29. Role of Technology

30. Role of Technology in Finance - Spreadsheets • The most common software to use in the Finance Department is Microsoft Excel. • This software allows the Department to complete their accounts using Spreadsheets.

31. Role of Technology in Finance - Spreadsheets Why use a Spreadsheet to create accounts? • Once a formula is entered, calculations are done automatically. • A Spreadsheet can be easily edited. • When figures are altered, totals will be updated automatically. • Can use ‘What if?’ scenarios. • Many copies can be printed out easily.