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 MaterialsPackagingAdvertising Website up keepdirect mailingStaff wages Recruitment costsTrainingInsurances Rent and RatesUtilitiesTelephone StationeryPostageBank 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 pay suppliers CASH DANGER POINTS

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: JanFebMar Opening cash Cash in Cash out Net Cash flow (185)(55) 10 Closing cash 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 Fixed costs Variable costs Total costs Total Revenue £ Units FC TC TR 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:£ Sales400,000 - Cost of sales220,000 Gross Profit180,000 Expenses: Wages95,000 Marketing 7,000 Rent and rates12,000 Electricity 750 Insurance 5,000 Office Expenses15,000 Total Expenses134,750 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 Assets Premises200,000 Equipment 40, ,000 Current Assets Stock43,000 Debtors 9,650 Bank 0 Cash ,000 Current Liabilities Creditors18,000 Bank overdraft15,000 Bank Loan75, ,000 Working Capital-55,000 Net Assets185,000 Financed by: Opening Capital150,000 + Net Profit 35,000 -Drawings 0 -Closing Capital185,000

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 budget Advantages: 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