National 4/5 Business Management

Presentation on theme: "National 4/5 Business Management"— Presentation transcript:

1 National 4/5 Business Management
Finance National 4/5 Business Management

2 Learning Outcomes 2.1 – Sources of Finance (costs and benefits)
2.2 – Breakeven Charts 2.3 – Cash Budgets (cash flow issues and solutions) 2.4 – Income 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 is responsible for the following roles: Payment of Invoices and Wages Preparing Financial Accounts Interpreting Financial Accounts

5 Sources of Finance Learning Outcome 2.1

6 Sources of Finance Source of Finance Description Advantage
Disadvantages Bank Loan Money borrowed and paid back in fixed instalments, with interest added. Does not have to be paid back all at once. Interest could be expensive. Bank Overdraft Taking more money out of a bank account than is available. Good when in need of quick finance. Daily charges and/or interest applied. Grant A sum of money given to a business for a specific purpose, from the Government or Princes’ Trust. Does not need to be repaid. Usually has conditions attached. Hire Purchase Buying an item now and paying for it at a later date (over a period of time). Can receive item immediately without paying the full amount. The item is not owned until all payments are made.

7 Sources of Finance Source of Finance Description Advantage
Disadvantages Mortgage A special type of loan used to purchase property. Taken out over a long time period. If interest rates change, repayments might increase. Owners’ Money (Capital) Money invested by the owner. Does not need to be paid back. Limited amount of money may be available. Reinvest Profits Money paid back into business from previous profits. Profits may be low. Taxes Money collected from taxpayer eg Council Tax Large sums of money can be collected. Time taken to collect payments.

8 Break-even Charts Learning Outcome 2.2

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 PROFIT LOSS Sales Revenue Total Costs
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 made eg rent, insurance Variable Costs costs which vary directly with the volume of production eg raw materials, wages. TOTAL COSTS = FIXED COSTS + VARIABLE COSTS

12 Break-even - Definitions
Sales Revenue The total money a 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 Cash Budgets Learning Outcome 2.3

14 Cash Budget A forecast of the money expected to be received (receipts) and the money expected to be paid out (payments) over a period of time A forecast is a prediction. It is made up. The more established a business is the more likely it is to be accurate

15 inflows VS OUTFLOWS Cash Budgets Cash Inflows Cash Outflows Cash Sales
Credit Sales Bank Loan Other income (rent etc) Purchases (raw materials) Wages Rent Utilities

16 NOT Cash Budgets Cash Inflows Cash Outflows Cash Sales Credit Sales
Bank Loan Other income (rent etc) Purchases (raw materials) Wages Rent Utilities NOT

17 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.

18 Cash Budget - example

19 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.

20 Cash Budgets – problems and solutions
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)

21 Cash Budgets – problems and solutions
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) negotiate terms to decrease loan repayments (find new provider)

22 Income Statement Learning Outcome 2.4

23 Income Statement Statement that shows how much profit a business has made over a period of time

24 Income Statement 2 kinds of profit
Gross profit – profit made from sales activity Sales – cost of sales = gross profit

25 Profit Statement Profit at End of Year – profit after other income has been added and expenses have been subtracted

26 Income Statement - example

27 Income Statement - definitions
Sales Revenue/Turnover/income Income received from the customers from sales of products. Less Cost of Sales The cost of buying in the stock sold during the year. Gross Profit = Sales – Less Cost of Sales This is known as the Trading Profit, the money made solely from trading activities.

28 Income Statement - definitions
Expenses Other expenses that have to be paid for other than stock. This might include Wages, Rent, and Electricity etc. Profit at end of year = Gross Profit – Expenses The overall profit made by the business during an accounting period.

29 Income Statement – problems and solutions
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

30 NATIONAL 4 FINANCE MATERIAL – JOB COST STATEMENTS
To be used in Nat 5 if teaching to both levels

31 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.

32 Job Costing Example (N4)

33 Role of Technology

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

35 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 saved and edited later. When figures are altered, totals will be updated automatically. Graphs/charts can be created to display information. Templates can be used for financial information eg Cash Budgets. Can use ‘What if?’ scenarios.

36 Other Technology Word Processing – to create documents informing departments of their annual budget figure. Word Processing – to compile the Shareholders’ Annual Financial Report. Database – to keep records of suppliers’ accounts due and/or customers’ accounts owed. Database – to create reports of overdue accounts. PowerPoint – to display financial information at the shareholders’ meeting. Internet/website/online…