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N5 Bus Man – 3.2: Finance © BEST Ltd Management of People and Finance 3.2 – Finance Business Management (National 5)
N5 Bus Man – 3.2: Finance © BEST Ltd What is Finance all about? The role of FINANCE in a business is to make sure that a business has enough CASH to keep going and to produce FINANCIAL DOCUMENTS that will help it to plan and record its’ financial performance. Benefits of effective financial management include the following: ◦ MORE MONEY AVAILABLE FOR ACTIVITIES ◦ BETTER BUSINESS PERFORMANCE ◦ INCREASED SATISFACTION AND SALES ◦ PREVENTS BANKRUPTCY AND CLOSURE
N5 Bus Man – 3.2: Finance © BEST Ltd What happens when there are financial problems? Businesses that run out of money to pay their bills have failed. The following things will then happen to end the business. ◦ COURT ACTION BY THOSE OWED ◦ BUSINESS ENTERS ADMINISTRATION ◦ ATTEMPT TO RUN BUSINESS SO DEBTS ARE PAID ◦ ATTEMPT TO SELL BUSINESS AS GOING CONCERN ◦ LIQUIDATION OF BUSINESS ◦ (SOME) REPAYMENT OF DEBTS
N5 Bus Man – 3.2: Finance © BEST Ltd Raising Business Finance In order to operate and pay expenses, a business needs money or FINANCE. There are 2 main SOURCES OF FINANCE available to businesses: ◦ INTERNAL FINANCE (inside) ◦ EXTERNAL FINANCE (outside) The finance used will depend on: ◦ BUSINESS SIZE and TYPE ◦ PURPOSE OF FINANCE ◦ AMOUNT NEEDED
N5 Bus Man – 3.2: Finance © BEST Ltd Internal Finance (Inside) The main INTERNAL sources of finance are as follows. ◦ LONG TERM Capital (EQUITY) Ordinary Shares (EQUITY) Preference Shares (EQUITY) Profits Government Budget
N5 Bus Man – 3.2: Finance © BEST Ltd External Finance (Outside) The main EXTERNAL sources of finance are: ◦ LONG TERM (10 Years +) Mortgages Sale and Leaseback Agreements Venture Capitalists ◦ MEDIUM TERM (1-10 Years) Bank Loan Hire Purchase Leasing Grants ◦ SHORT TERM (<1 Year) Overdraft Debt Factoring Trade Credit
N5 Bus Man – 3.2: Finance © BEST Ltd Taking Advice about Sources of Finance UK GOVERNMENT ◦ ADVICE FROM BUSINESS ADVISORS EUROPEAN UNION (EU) ◦ EU REGIONAL DEVELOPMENT FUND ◦ EU SOCIAL FUND SUPPORT ORGANISATIONS ◦ PRINCES TRUST ◦ TRADE ASSOCIATIONS PROFESSIONALS ◦ ACCOUNTANTS ◦ BANKS ◦ LAWYERS
N5 Bus Man – 3.2: Finance © BEST Ltd A BUSINESS PLAN is a document which shows the following information about a business. ◦ BUSINESS DETAILS ◦ PRODUCT INFORMATION ◦ MARKET STRUCTURE INFORMATION ( ◦ MARKETING INFORMATION ◦ RESOURCES REQUIRED ◦ FINANCE REQUIRED ◦ PERFORMANCE FORECASTS Business plans are usually drawn up in order to convince financial institutions and advisors that a business seeking finance is eligible for it and able to pay it back. BUSINESS PLAN Business Details Business Name:Haddock Enterprises Ltd. Business Address:12 Fish Lane, GLASGOW, G12 2FC. Business Type:Private Limited Company. Product Details Product:Fast Food - Fish and Chips. Market Structure Customers:5,000 workers and shoppers pass premises daily. Competition:McDonalds (900m away) – prices are similar on average. Marketing Information Pricing:£3.00 for suppers, £2.00 for singles and £1.50 for chips. Promotion:£2.00 suppers at lunchtimes, local paper adverts. Resources Required Staff:4 part time and 2 full time staff (£4.50 per hour). Premises:12 Fish Lane - rent of £150 per week. Equipment:Frying equipment – purchase at £5,000. Finance Required Start up:£5,000 of Ordinary Shares between 5 owners. Forecasts Sales:100,000 sales per year at £3.00 (see SALES BUDGET). Profits:£150,000 (see FORECAST PROFIT AND LOSS ACC). Cashflow:No problems expected (see CASH BUDGET).
N5 Bus Man – 3.2: Finance © BEST Ltd Payments Received BUYERS have to pay businesses for the goods and services that they purchase. These payments can be made in any of the following ways. ◦ CASH ◦ CHEQUE ◦ CREDIT CARD ◦ DEBIT CARD The Finance staff should record the details of these payments for its records and accounts.
N5 Bus Man – 3.2: Finance © BEST Ltd Paying for Business Activities BUSINESSES have to make the following payments for all of the resources that they use. ◦ STAFF WAGES (known as PAYROLL) ◦ PROFIT PAYMENTS TO OWNERS ◦ RENT OF PREMISES ◦ INSURANCE FOR PREMISES ◦ PREMISES LIGHT, HEAT AND POWER ◦ PURCHASE OF RAW MATERIALS ◦ STORAGE OF STOCKS ◦ TRANSPORT OF FINISHED GOODS ◦ TAXES ON PROFITS ◦ PURCHASE OF NEW PREMISES ◦ PURCHASE OF NEW EQUIPMENT
N5 Bus Man – 3.2: Finance © BEST Ltd Managing Cashflow CASHFLOW describes the actual amounts of cash coming into a business (from sales) and going out of a business (as payments). All organisations need to manage their CASHFLOW so that enough money is constantly available to make payments and provide funds. This is the case because even profitable businesses will fail if they have poor cashflow for any of the following reasons. ◦ STOCKPILING LEAVING TOO LITTLE CASH ◦ OVERTRADING ◦ OVERINVESTMENT IN FIXED ASSETS ◦ ALLOWING TOO MUCH CREDIT ◦ TAKING TOO MUCH CREDIT ◦ UNDERESTIMATING INFLATION ◦ EMERGENCY EXPENDITURE ◦ UNEXPECTED DROPS IN DEMAND ◦ SEASONAL FACTORS
N5 Bus Man – 3.2: Finance © BEST LtdN5 Bus Man – 3.2: Finance © BEST Ltd 12 Licensed to: Turnbull High School Cash Budgets (FUTURE Cashflow) CASH BUDGETS show what will happen to the amount of money moving in and out of a business in the FUTURE. This information can be used for the following activities. ◦ USE SURPLUSES SAVING AND INVESTMENTS LARGE PURCHASES ◦ DEAL WITH/PREVENT DEFICITS ARRANGE AN OVERDRAFT ARRANGE LOANS SELL OFF STOCKS AND UNUSED ASSETS CUT BACK ON INVESTMENTS LOWER COSTS (eg staff or premises) INCREASE SALES TIGHTER CREDIT CONTROL
N5 Bus Man – 3.2: Finance © BEST LtdN5 Bus Man – 3.2: Finance © BEST Ltd 13 Licensed to: Turnbull High School Trading, Profit and Loss Accounts This document usually aims to show how much of a PROFIT (or LOSS) during a past period of time (normally 1 year). The main parts of it are: ◦ TRADING ACCOUNT SALES COST OF SALES GROSS PROFIT ◦ PROFIT AND LOSS ACCOUNT EXPENSES NET PROFIT ◦ APPROPRIATION ACCOUNT NOT USED IN SOLE TRADERS PROFIT USE AND SHARES
N5 Bus Man – 3.2: Finance © BEST Ltd Limits to the use of financial information Although helpful in managing a business, profit and loss accounts are not perfect because they ignore the following important information. ◦ POSITIVE HIGH STAFF MOTIVATION ◦ NEGATIVE LOW STAFF MOTIVATION ◦ POSITIVE LOW STAFF TURNOVER ◦ NEGATIVE HIGH STAFF TURNOVER ◦ STAFF SKILL LEVELS FROM TRAINING ◦ PRODUCT RESEARCH AND DEVELOPMENT ◦ MARKETING EFFECTIVENESS (eg brand loyalty)
N5 Bus Man – 3.2: Finance © BEST Ltd Breakeven Analysis BREAKEVEN ANALYSIS is a process that examines the FIXED and VARIABLE COSTS and REVENUES of a business in order to show the amount of sales that are needed to “break even” – ie cover all the costs of the business. Breakeven analysis can also be used to calculate the LOSSES that will occur BEFORE the breakeven point, and the PROFITS that will be gained AFTER it.
N5 Bus Man – 3.2: Finance © BEST Ltd Spreadsheets SPREADSHEETS are computer programs that store and manage NUMERICAL information through the use of FORMULAS. In many businesses nowadays, financial information will be produced using a SPREADSHEET computer program for the following reasons. ◦ FORMULA QUICKLY AND ACCURATELY CALCULATE INFO ◦ FORMULA AUTOMATICALLY UPDATE INFORMATION ◦ ALLOW “WHAT IF” ANALYSIS ◦ CHARTS CAN BE EASILY CREATED ◦ ELECTRONIC SECURITY AND BACK UPS
N5 Bus Man – 3.2: Finance © BEST Ltd Which factors affect the work of Finance? The effectiveness of Finance activities undertaken by a business will be affected by the following factors. ◦ INTERNAL FACTORS Finance Human Resources Capital ◦ EXTERNAL FACTORS Political Factors Economic Factors Social Factors Technological Factors Environmental Factors Competitive Factors
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