Finance

Start-up capital is the finance needed by a new business to pay for essential fixed and current assets before It and begin trading Revenue- money coming Into the business. Selling products Revenue= number of products sold x price Costs- money going out of the business. E. G. Salaries, rent, electricity/water Profit- Money which is left over after all costs have been paid A car manufacture – Machinery – Labor – Land – Telltales ; Raw materials A school -Land – Equipment – Utilities Capital expenditure: money spent on long-lived fixed assets such as premises, icicles and equipment.

Operating Expenditure: money for running costs such as wages, rent, telephone and other charges. Why do business need funds? Other than start-up costs, why may a business need extra funds other than sales? For advertising their brand and transporting goods. They would need to pay for other factors for example new shops, factory etc. How do you decide which method of finance? -Status and size of the business – Track record and experience of management team ; Growth prospects and profitability Costs the money going out of the business. Examples of costs: – office visits – drugs – emergency room Operating cost is the cost that have to be paid in day to day bases Variable costs do change with the level of out put!! Fixed-f Variable- v Rent- f Electricity- v Wages- v Raw materials- v Salaries- f Delivery cost- f Stationary orders- f Petrol for a taxi driver- v Telephone line rental- f Advertising- f Direct cost- are directly linked to the output Marginal cost- the extra costs a business will have to pay by producing one more unit of output Average cost per unit- cost of production divided by total output

Total cost Cash inflow: Money which is going into a business Cash outflow: Money which is leaving the business to for items such as wages and rent. Net cash flow- Inflows-outflows Opening balance- money in the business bank account at the start of the month Closing balance- net flow cash + opening bank balance How can cash flow problems be solved? 1 . Borrow money from the bank 3. Ask for credit to delay payments The breakable point shows how many products a business needs to sell in order to cover all their costs.

Once they have reached the point of break-even they start to aka profit on all the units they then sell. Break-even is where total costs= Total revenue. It is where what they are paying out is the same as what they are getting in. No loss rot profit is being made at the point. B. E. P= Fixed costs/selling price-variable costs A cash flow forecast indicates the likely future movement of cash in and out of the business. It’s an estimate of the amount of money you expect to flow in (receipts) and out (payments) of your business and includes all your projected income and expenses.

Net cash flow- inflow- outflow The break even- cover all their costs. To determine your gross profit , sales revenue minus variable cost Working out the net profit- sales revenue minus total costs Receipts- when the customer pays an invoice a receipt should be issued by the supplier. Sales turnover 1250 Cost of sales Gross profit 350000 Operating expenses 105 Interest payable 50 Net profit 195000 Dividends Tax 35 Remittance advice slips- these are usually sent with the statement of account. Statement of account- each month the supplier will send his customer a statement.

This will record the total value of devilries made each month, the value of any credit notes issued and many payments made by the customer. Credit notes- there are only issued if a mistake has been made. If the supplier sends the wrong goods to a customer the supplier will give him a credit note for the value of the goods incorrectly supplied. Invoice- these are sent by the supplier to the customer as a request for payment for the goods delivered. Delivery notes- these are used by the supplier to confirm that the customer has achieved the goods.

The customer must sign these when the goods are delivered. Purchase order- these are requests for goods or materials sent to suppliers. , Activity 7. 4 a) Profit and loss account b) Balance sheet c) Appropriation account d) Balance sheet e) Profit and loss account 1) To keep a record on how their accounting is going on from the day started their business so they can calculate the profit or loss they are making. The balance sheet shows the value of the business’s assets and liabilities at a particular time.

Retained profit is the net profit reinvested back into a company, after deducting the tax Assets is what the business owns. How to work out Working Capital? Deduct cists from the sales revenue Net assets= capital employed subtracting overhead costs from gross profit Total assets minus total liabilities equals Net Assets. On a balance sheet the two things that need to be the same is net assets and played. Budgets Plans for the future containing numerical or financial targets -sales demand -exchange rates -wage increase

Finance

George Stamped, a credit analyst with Micro)-Encapsulation Corp.. (MEG) needed to respond to an urgent email request from the southwest sales office. The local sales manager reported that she had an opportunity to clinch an order from Miami Spice (MS) for 50 encapsulation at $10,000 each. She added that she was particularly keen to secure this order since MS was likely to have a continuing need for 50 encapsulation a year and could therefore prove a very valuable customer.

However, orders of this size to a new customer generally required head office agreement, and t was therefore George’s responsibility to make a rapid assessment of M’s creditworthiness and to approve or disapprove the sale. Mr… Stamped knew that MS was a medium sized company with a patch earnings record. After growing rapidly in the sass’s , MS had encountered strong competition in its principal markets and earnings had fallen sharply. Mr… Stamped also made a number of other checks on MS.

The company add a small Issue of bonds outstanding, which were rated B by Moody’s, Inquires through Me’s Ann. Indicated that MS had unused lines of credit totaling $5 mill”on but had entered Into discussion with Its bank for a renewal of a $15 million bank loan that was due to be repaid at the end of the year. Telephone calls to M’s other suppliers suggested that the company had recently been 30 days late in paying its bills. Question What is the break even probability of default? How is it affected by the delay before MS pays its bills.? How should George Stammer’s decision be affected by the possibility of repeat orders?

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