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
Role of Finance Department The Finance Department are responsible for the following roles: Payment of Invoices and Wages Preparing Financial Accounts Interpreting Financial Accounts
Sources of Finance Learning Outcome 2.1
Sources of Finance Source of Finance DescriptionAdvantageWho Bank Loan Money borrowed and paid back in set instalments Does not have to be paid back all at once All Private Sector Bank Overdraft Arrangement to go below your bank balance Good when in need of quick finance All Private Sector GrantGiven for new business or a needed business Does not need to be repaid All Private Sector Hire Purchase Used for buying capital goods e.g. Vehicles. Paid in instalments Does not need repaid all at once All Private Sector SharesPeople give money to own a percentage of the business Large amounts of finance raised without repaying all at once PLC and LTD
Sources of Finance Source of Finance DescriptionAdvantageWho Trade Credit Credit offered by suppliers giving you more time to pay for goods Can improve cash flow, if you can sell goods before paying for them All Companies DebentureA loan that is secured on the business assets Can be paid back over a very long period of time – low interest rates PLC Owners Money (capital) Money invested by the owner Does not need to be paid back All Private Sector Reinvest Profits Money paid back into business from previous profits Does not need to be paid back All Companies TaxesMoney collected from taxpayer e.g. Council Tax Large sums of money can be collected Public Sector
Break-even Charts Learning Outcome 2.2
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.
Sales Revenue Total Costs Variable Costs Fixed Costs Break-even Chart BREAK EVEN POINT PROFIT LOSS
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 e.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
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.
Cash Budgets Learning Outcome 2.3
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.
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
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.
ProblemSolution 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)
ProblemSolution 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) decrease loan repayments (negotiate terms, find new provider), sell fixed assets.
Profit Statement Learning Outcome 2.4
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.
Profit Statement - example
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.
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
ProblemSolution Profit 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.
NATIONAL 4 FINANCE MATERIAL – JOB COST STATEMENTS To be used in Nat 5 if teaching to both levels
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.
Job Costing Example
Role of Technology
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.
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.