Business Management

Owner’s Savings This means money the owner has personally saved to invest into the business. Only used by sole traders. Advantages The business does not go into debt to anyone It allows the owner to keep control of the business without bringing in other Disadvantages If the owner needs to access the money it can be difficult to withdraw it The owner risks losing their investment if the business fails Partnership Capital This means money each partner brings to the business when forming or joining a partnership. Advantages The business does not go into debt to anyone The business can raise more money by inviting people to become partners Disadvantages The profit will need to be shared between more people If there are disagreements and a partner leaves, they will take their capital with them Selling Shares This means inviting people to purchase a ‘share’ of the business in return for a share of the profits. This is only available to Private Limited Companies. Advantages Shareholders have limited liability Share capital does not need to be repaid Disadvantages It can be expensive to issue shares It is difficult to estimate how much each share should be sold for   Bank Loan Sum of money given by the bank to be paid back in instalments with interest Advantages Quick and easy to set up Can be repaid over a long period of time Disadvantages Interest could be expensive Loans from Family/Friends Sum of money lent by family and friends to be paid back at an agreed time, generally without interest. Advantages No interest to be paid Disadvantages Arguments over the borrowed money might occur  Government Grants Sum of money given by the government to an organisation for specific purpose. Advantages Does not need to be paid back Disadvantages Usually has conditions attached Can take time to get as requires may forms to be completed    Bank Overdraft A business can agree with the bank that it can take out more money than it actually has in its account. Advantages Easy and quick to arrange for a short period of time Disadvantages Usually only for a small amount of money Daily charges and/or interest applied             Hire Purchase Purchasing machinery/equipment by paying the cost of the item plus interest in equal instalments.   Advantages Can receive the immediately without paying  Disadvantages Interest could make the item expensive Item not allowed until all payments madeMortgage Large sum of money given by the bank linked to property. Advantages Can be taken out over a long period of time i.e. 25 years Disadvantages If interest rates change, repayments might increase.  Retained Profit This is when companies keep back their profits from previous years of savings, and can then use them when they need large sums of money. Advantages The money does not have to be paid back to anyone No interest need to be paid Disadvantages It can take a long time for companies to save up the large amounts of money needed to grow or expand  Trade Credit This is when firms buy goods from suppliers, but do not have to pay until a later date. Advantages This makes it easier for the officer to manage the cash flow – when money come into or out of the business Disadvantages The office may lose out on their prompt payment discount If they pay late than 30 days, the stationery supplier may be reluctant to sell them any more stationery Factoring It can take time and effort for a business that has issued invoices to collect in money it is owed. Small companies can therefore find it in more effective to sell its invoices to another company who specialise in collecting payments Advantages They receive the money quickly and do not have to employ someone to chase up unpaid bills Disadvantages The company selling the invoices will sell them at a lesser value and thus do not get the full amount owed Venture Capital This is a large sum of money invested by someone other...

The role of the finance function   Finance is important to every organisation, because all organisations have to deal with money.    Every organisation must manage its finances efficiently to ensure the success of its business – whatever this is.  For example, every organisation must make sure that it:    has enough money to pay the wages and salaries of its employees has enough money to pay its bills – for things like supplies of raw materials, electricity, advertising and so on has enough money to develop new products to avoid being overtaken by competitors Checks how much it is spending – organisations, which have high costs, are often unsuccessful.   The finance department is responsible for the financial affairs of the organisation.  Its role is to manage the finances of the organisation and to make sure that the organisation meets its financial objectives.    The role of finance is to:   Pay wages and salaries to employees Pay bills, e.g. electricity, insurance and advertising Record and maintain financial records, e.g. cash budgets and profit statements

Types of Costs   Costs is another name for expenses (money going out of the business).  There are 3 types of costs:   Fixed Costs – these are costs that always stay the same, no matter how many units of a product are made.  Examples include rent, rates, insurance, loan repayments etc. Variable Costs – these are costs that change depending on how many units of a product are made.  Examples include raw materials, electricity, cost of labour etc. Total Costs – these are fixed costs and variable costs added together.  Revenue  Revenue is the name given to money that a business receives through selling a product.  The more products sold, the higher the total revenue will be!  Total revenue = selling price x units sold   Note:  total revenue is not the same as ‘profit’ as no costs have been taken off yet.  Break-even Calculation:   To calculate the break-even point, we need the total costs figure and total revenue.   Break-even point (BEP) = Total Costs (TC) = Total Revenue (TR)

Cash flow (the amount of cash in a business) has to be carefully monitored.  Businesses that do not have a healthy cash flow can face problems.   Cash flow problems   Cash flow problems can arise even if the firm is successful in selling a lot of its goods.  Poor cash flow can be caused by:   Spending too much money on stock that has not sold Giving customers too long to pay their debts Not receiving enough money from sales Not having enough time to pay bills from suppliers Owners taking too much money out of the business (drawings)  Methods of improving cash flow   There are many ways in which organisations can improve their cash flow.  Some of these include:   Looking for cheaper supplies of raw materials as this would reduce the variable costs of making a product. Offering discounts to customers who pay on time, as this will encourage them to pay more quickly. Taking out bank loans.  Small organisations can get a loan from friends or partners.  By doing this, the organisation will get an inflow of cash but repayments (including interest) will have to be made regularly. Selling equipment or machinery no longer needed as this will bring in cash that can be used to fund other activities. Spreading purchase costs – hire purchase or leasing.  This will mean that the outflow of cash will not be in one month but will be spread over a number of months. Tight stock control – ensuring capital is not tied up in too much stock.  This will help to keep the outflow of cash to a reasonable level.     Cash Budgets   A cash budget contains a list of cash the business expects to receive (receipts) and the cash expected to be paid out of the business over a period of time (payments).    The benefits of preparing a cash budget are:   It shows if the business will have a surplus (more cash expected to come in than will go out) or a deficit (more cash going out than coming in). It can show if additional finance is required, e.g. overdraft or a loan. It can help control expenses by highlighting periods when expenses could be high. It can help in making decisions.

Role of technology in managing finance   Spreadsheets (Microsoft Excel) are widely used to record and edit numerical information.  Spreadsheets could be used to:   record cost information and calculate break-even point prepare cash budgets calculate profit create graphs   Formulae can be inserted to perform calculations!  Information can be edited quickly and saved to be used at another time.  Advantages of using spreadsheets are:   less chance of errors as formulae can carry out automatic calculations   Businesses can easily see the effect changes will have, e.g. changing figures in cash budgets will allow them to see the effect on the closing balance quickly.   What if scenarios can be created, to help managers make decisions   Charts can be created to make figures more easily understood