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