start up money capital“money invested by the owners” - it can be a substantial amount - limited...
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Start up money
Capital “money invested by the owners”- it can be a substantial amount- limited to personal wealth (Sole trader/partner)- LTD/PLC can sell shares
Loans - Bank loan: fixed term; pay interest; instant money
- Commercial mortgage: 80% value; need security
- Venture capital loans: lend money in return for some business control
- Private loans from family or friends
Government Assistance - Welsh Assembly - Enterprise Capital Fund- Small Firms Loan Guarantee
Financing Running Costs
•Sales Revenue - money from selling goods and services
•Overdrafts - short term borrowing
•Credit trading - buying goods and services, and agreeing to pay at a later date (usually 30 – 60 days)
•Selling Assets - selling items owned by the business
•Retained profits -using profits made by the business
•Hire Purchase - paying for goods in instalments
•Share Issue - giving up sole ownership of the business
Start up costs
•Premises - buying (big expense)- deposit on renting/leasing- could work from home- e-commerce will cost less
•Equipment - varies to type and size of business: - IT equipment- telephone- desk - van
•Fixtures and fittings - Carpets- Light fittings
•Market Research - finding out what people want
Running Costs
Examples:
Raw Materials Packaging Advertising
Website up keep direct mailing Staff wages
Recruitment costs Training Insurances
Rent and Rates Utilities Telephone
Stationery Postage Bank charges
Accountant fees
Flow of Cash:
Sources of cash•Customers•Overdraft
•Capital•Investors•Bank loan
Uses of cash•Buying stock &
Materials•Running expenses
•Paying owners•Surplus cash
Liquidity – ability of a business to pay off its debts as they come due.
Problems with cash flow:
•What if sales fall below set targets?
•What if a debtor goes bust?
•What if the shop catches fire?
•Bank will not lend anymore money?
Outside sources i.e. bank calls in O/D
Debtors fail to pay
Expenses: no money
To pay wages
Stock/Materials:No money to paysuppliers
CASHDANGERPOINTS
Cash Budget / Cash Flow
Receipts (money in)•Sales•Capital introduced•loan•Grant•Other income
Expenses (money out)•Stock•Equipment•Wages•Marketing•Utilities•Telephone•Rent
Closing balance for
one month is the
opening balance of
the next month.
Cash flow used as a prediction.
Good for “What if?” situations
Forecasting Cash Flow
“predicting future cash flowing in and out of the business”
Example:
Jan Feb MarOpening cash 250 65 10Cash in 0 0 85Cash out 185 55 75Net Cash flow (185) (55) 10Closing cash 65 10 20
Good cash flow:•Accurate sales predictions•Debtor collection times•Payment timing
Remedies for negative cash flow:•Cut stock levels•Increase credit time from suppliers•Reduce credit time to customers
Break-even
Revenue = Costs
Fixed Costs - do not vary with output or sales and have to be paid
Variable costs - vary with output or sales i.e.replenishing stock
Formula:
Fixed Costs
Selling Price - Variable Costs
i.e.£1000 = £1000 = 500 units
£4 - £2 £2
Break-even table & graph:
Units 100 200 300 400 500 600 700Fixed costs 5000 5000 5000 5000 5000 5000 5000Variable costs 1000 2000 3000 4000 5000 6000 7000Total costs 6000 7000 8000 9000 10000 11000 12000
Total Revenue 2000 4000 6000 8000 10000 12000 14000
£
Units
FC
TCTR
B/E
500
£10000
Break-even shortcomings:
•Based on single product
•Assumes all products made will be
•Assumes all costs are constant
•Does not take into account external factors i.e. rise in interest rates
Profit and Loss Account
“money made or lost by the business”
Sales – running costs = Profit or loss
Cost of Sales = opening stock + purchases – closing stock
Gross Profit = Sales – cost of sales(money made from buying and selling)
Net Profit = Gross profit – expenses(money made after all expenses have been paid)
Payments ot owners = drawings
Payments to shareholders = dividends
Profit and Loss Account – Example:
£ £Sales 400,000- Cost of sales 220,000
Gross Profit 180,000
Expenses:Wages 95,000Marketing 7,000Rent and rates 12,000Electricity 750Insurance 5,000Office Expenses 15,000
Total Expenses 134,750
Net Profit 42,250
Balance Sheet
Assets:items owned by the business
Liabilities: owed by the business
Capital: money invested into the business
John Cooper Ltd: Balance Sheet as at 31 December 20..£ £ £
Fixed AssetsPremises 200,000Equipment 40,000
240,000Current AssetsStock 43,000Debtors 9,650Bank 0Cash 350
53,000Current LiabilitiesCreditors 18,000Bank overdraft 15,000Bank Loan 75,000
108,000Working Capital -55,000
Net Assets 185,000
Financed by:Opening Capital 150,000+ Net Profit 35,000-Drawings 0-Closing Capital 185,000
Working Capital
“surplus between current assets and current liabilities”
Current Assets: items owned by the business, or owed to the business i.e. stock, debtors, bank, cash
Current Liabilities: owed to other people i.e. creditors, loans
Need to able to pay debts when they fall due.
Credit purchase
Stock held by business
Credit sales to customers
Money in bank
Debtors
pay up
Pay creditors
Managing Debtors
Need to receive money from customers on time
•Check customer references before giving them credit•Establish payment terms•Effective credit control – chase non payers
Managing Creditors (Suppliers)
•Negotiate terms•Long credit payments
Managing Stock
•Holding too much stock means money is tied up •Cost of storage•Could get out of date/fashion
Budgets
“financial plan setting out revenues and costs for a given time period, this includes targets for incomes and
expenditures”
Types:•Sales budget
•Production budget
•Staffing budget
•Departmental budget
•Cash budgetAdvantages:•Motivated staff•Helps planning•Shows consequences to actions
Limitations:•only estimates
•Can be restrictive•Must be set at realistic level
Variances:
“difference between the budgeted figures and actual figures”
Outcomes are:
Favourable to the business (good)
Adverse to the business (bad)
Need to look at reasons behind the variances – spedning too much for materials, staff making mistakes during the production process, etc.
Examples:•Sales variances•Materials variances•Labour variances•Overheads variances
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