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Flashcards · A Level Business · AS Topic 5
Finance (AS Level) flashcards
19 cards on AS Topic 5, subtopics 3.2.3.1 to 3.2.3.3. Pick a subtopic or study them all.
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3.2.3.1 Sources of finance
- Internal and external sources of finance in the specification
- Internal: retained profits, sale of assets, sale and leaseback, working capital. External: trade credit, share capital, overdraft, loans, business angels, private equity, crowd funding.
- Sale and leaseback
- Selling an asset, usually property, to raise cash and then leasing it back so the business keeps using it. It raises a large sum but brings ongoing lease payments.
- Business angel vs private equity
- Business angel: an individual backing small or new firms, bringing money plus expertise in return for equity. Private equity: firms investing larger sums, often taking control and pressing for returns.
- Overdraft vs loan; and why not buy a delivery van with an overdraft?
- Overdraft: short-term and flexible, but expensive and repayable on demand. Loan: a known sum repaid over years. A van is a long-term asset, so a loan matches repayments to its life; an overdraft can be withdrawn.
- Share capital and crowd funding: one plus and one minus each
- Share capital: permanent, no interest; but dilutes ownership and control. Crowd funding: many backers and it tests demand; but it may fail to reach its target and exposes the idea.
- How to choose a source of finance
- Ask how much is needed, for how long (match short-term needs to short-term sources), whether it can be repaid (uncertain cash flow favours equity), how much control the owners want, and what is available (a start-up has no retained profit).
3.2.3.2 Break-even analysis
- Contribution per unit and break-even output: formulas
- Contribution per unit = price − variable cost per unit. Break-even output = fixed costs ÷ contribution per unit (round up to a whole unit).
- Price £45, variable cost £27 per unit, fixed costs £54,000. Find break-even output.
- Contribution = 45 − 27 = £18. Break-even = 54,000 ÷ 18 = 3,000 units.
- Margin of safety, and the profit shortcut (actual sales 3,800, break-even 3,000, contribution £18)
- Margin of safety = actual output − break-even output = 800 units. Above break-even, profit = margin of safety × contribution per unit = 800 × 18 = £14,400.
- Reading a break-even chart
- Fixed costs: a horizontal line. Total costs: start at fixed costs, slope = variable cost per unit. Revenue: starts at zero, slope = price. Break-even is where revenue meets total costs; the vertical gap between them is profit or loss.
- Effect on break-even output of: a price rise; higher fixed costs; a fall in variable cost per unit
- Price up: revenue line steeper, break-even falls. Fixed costs up: cost lines shift up, break-even rises. Variable cost down: total cost line flatter, break-even falls.
- Limitations of break-even analysis
- It assumes all output is sold at one price and that costs are straight lines, and it is only as good as the cost estimates.
3.2.3.3 Profit and cash
- Gross, operating and net profit
- Gross profit = revenue − cost of sales. Operating profit = gross profit − operating expenses. Net profit = operating profit − interest − taxes.
- Profit margins: formulas and example (revenue £250,000, gross profit £95,000, operating profit £30,000)
- Each margin = that profit ÷ revenue × 100. Gross profit margin = 95,000 ÷ 250,000 × 100 = 38%. Operating profit margin = 30,000 ÷ 250,000 × 100 = 12%.
- A high gross profit margin but a low operating profit margin. What does this suggest?
- Heavy overheads (operating expenses). If net margin falls while operating margin holds, interest or taxes have risen. Compare margins over time or with rivals, not in isolation.
- Favourable vs adverse variances (budgeted materials £20,000, actual £22,500)
- Variance = actual − budget, labelled by its effect on profit. Revenue above budget or costs below budget: favourable. Revenue below or costs above: adverse. 22,500 − 20,000 = £2,500 adverse.
- Receivables days and payables days: formulas
- Receivables days = trade receivables ÷ revenue × 365 (for example 18,000 ÷ 219,000 × 365 = 30 days). Payables days = trade payables ÷ cost of sales × 365. If receivables days exceed payables days, the firm pays out before it is paid.
- Ways to improve cash flow
- Speed up inflows: debt factoring, shorter customer payment time, early payment incentives, credit checks, better invoice management. Delay or cut outflows: longer payment time to suppliers, reducing outgoings. Each has a cost.
- Profit vs cash; profit vs profitability
- Profit is earned when a sale is made; cash arrives when the customer pays. Profit is a sum of money; profitability is profit relative to revenue (a margin).