Unit 2.3 How do businesses survive? SG Business Management

Costs and Cash Every business needs to control costs. To do this it needs to know an understand them as they affect the business.

Types of cost Start-up costs (some major expenditure to begin trading) Running costs (paying for the day to day business of the company) Capital costs (purchasing equipment or buildings) Fixed costs (often called overheads, these don’t vary whatever the production level) eg rent, rates etc Variable costs (depend totally on the production level, e.g. electric power machines, wages etc. Total costs (fixed and variable costs added together) Overheads (the name for fixed costs but can be used to include all costs) Cost of sales (purchases plus any stock)

Types of spending Capital expenditure – money spent on setting up the business: buying fixed assets (such as premises). Revenue expenditure – money spent on running the business from day to day (such as wages).

Cash Budget Every business needs to set up and control its cash budget properly. A business will use the budget to plan for the year ahead. Every department will make its own budget and its forecasts will be carefully checked.

Analysis of a Cash Budget Costs may vary up or down – by the hour, the day, the week or the year – and these are investigated and controlled as necessary. The business needs to look carefully at the cash budget and take some action.

What can the business do? Cut costs – this is a favourite way to make better profits. Move to cheaper premises Stop non-vital insurance and subscriptions etc Do only essential repairs/maintenance Reduce training programmes Find cheaper materials Cut advertising costs Recruit no new staff Reduce part-timers’ hours of work Cut expense accounts, company cars etc

Making major changes A more direct but long-term way of reducing some overheads of the business could be to : Reduce labour (cut no. of employees or management) Increase capitalisation (replace people with machines) Obtain cheaper suppliers (new businesses are always keen to impress) Bulk buy Share (the premises, the workforce, office, phone lines etc) Outsource (use other experts to do the work for your business) Subcontract (hand over sections of your business to outsiders and them to do it – like the canteen)

Warning! The business must make sure any cuts or changes Do not adversely affect the organisation’s Efficiency and its ability to carry out its normal Daily business. In other words “things mustn’t get worse”!

Cash flow Every business needs to control its cash flow – but first of all, what actually is cash? There are 3 easily described kinds and 2 more difficult ones.

Easy 1.Cash in hand is notes and coins; liquid means anything that can be turned into cash. 2.Petty cash is small sums in the office for immediate expenses such as milk and window- cleaning. 3.Cash at bank is money in a current account (bank or building society), which allows money to be withdrawn by cheque or debit card.

Hard Other Liquid funds include some deposit accounts where money can be withdrawn immediately. Non-liquid assets: - nearly liquid such as investments (payment will be delayed), and funds in term deposit accounts (need notice) - less liquid such as debtors (people who owe you money), stock, and work in progress (partly finished goods sold cheaply) - fixed assets – can be sold at a loss (e.g. machinery)

Avoiding a crisis The business needs to make sure it does not start a vicious circle or raising prices, resulting in lower sales, following with increasing prices again, meaning lower profits. What does the business do next~? Raise prices again? If revenue is falling and costs are rising, this might mean bills can’t be paid, because there is no actual cash – a cash-flow crisis. The business may have lots of orders even lots of orders, but if there is no cash, it is sunk!

To avoid a crisis, you can … Increase your overdraft Reschedule debts (have them paid in a different order and time period) Buy more on hire purchase Limit the payment time for debtors (have them paying you sooner) Allow credit only on purchases over a certain limit (eg over £1,000) Increase your sales (eg bogof) Buy cheaper materials Delay repairs Reduce staff if no redundancy payment is needed

What are final accounts? Final accounts are a complete record of the business’s finances. They give an up-to-date picture of the business’s health. They are a good indication of what the future holds for the business

Final Accounts A Sole Trader needs to pay taxes to the Inland Revenue and VAT to Customs and Excise In both cases clear accounts are needed. Companies need to report to the Registrar of Companies and to their shareholders with their annual accounts

Final accounts are prepared for the end of a financial period, usually a year. The business’s work is divided up into 3 distinct phases.