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Unit 7 - Business Finance
Quick revise
Every business needs to manage its finances. If it does not manage its finances successfully then the business is likely to fail. This unit introduces four key elements of business finance: sources of business finance, costs and break-even, financial statements and financial planning and forecasting.
 
1. Costs and Break-Even
 
This section investigates the nature of the costs that businesses face and how these costs combine with sales revenue to create a break-even output. The purpose, use and limitations of break-even analysis will be considered.
 
1.1 Business Costs
 
• identifying business costs.
Candidates should be able to identify and explain the different types of costs including: fixed, variable and semi-variable costs.
1.2 Using Break-Even Analysis to Make Decisions
 
• purpose of break-even
• calculation of break-even
• interpretation of break-even.
Candidates should be able to explain that break-even analysis allows a business to make decisions about changing costs or revenues.
 
Candidates need to be able to calculate break-even from a break-even chart or using a formula.
 
Candidates need to be aware of the effects that changes in costs and revenue have on break-even. This will include the use of ‘what if’ scenarios, such as the introduction of new products or services and increased fixed or semi variable costs.
 
2. Understanding and Using Financial Statements
 
This section considers how a business can be financed. This section will investigate the preparation of Profit and Loss Accounts and Balance Sheets and their use to the stakeholders of the business.
 
2.1 Sources of Business Finance
 
• identifying suitable sources of finance.
Candidates will need to be able to identify and explain the appropriate sources of finance available to a business including: owner’s funds, retained profits, loans and mortgages, overdrafts, leasing, issuing shares and venture capital.
2.2 Profit and Loss Accounts
 
• importance of profit and loss accounts to a
business
• calculation of profit or loss
• use of a profit and loss accounts.
Candidates will need to be able to explain that a profit and loss account shows the amount of net profit or loss a business has made during a period of time.
 
In order to calculate net profit or loss, candidates need to be able to use sales, cost of sales, gross profit and expenses in a profit and loss account.
 
Candidates need to understand the importance of the profit or loss figures to the stakeholders when assessing the performance of the business.
2.3 Balance Sheet
 
• importance of a balance sheet to a business
• preparing a balance sheet
• using a balance sheet to attract investors.
Candidates need to understand that a balance sheet shows the financial position of a business at a particular point in time.
 
In order to prepare a simple balance sheet, candidates need to be able to use and understand fixed and current assets, long-term and current liabilities and owners’ funds.
 
Candidates need to understand the importance of a balance sheet to the stakeholders of a business, including indicating the current level of debt and the availability of assets to be able to secure finance.
 
3. Financial Planning and Forecasting
 
Financial statements, such as cash-flow forecasts, provide useful information for the owners and other stakeholders of a business. This section will investigate how financial statements can be analysed by use of financial ratios and ICT so that meaningful decisions can be made.
 
3.1 Cash-Flow Forecasts
 
• importance of cash-flow forecasts to a business
• completing a cash-flow forecast
• using a cash-flow forecast to solve problems
• using ICT.
Candidates need to understand that a cash-flow forecast is an aid to planning for the future.
 
Candidates will need to be able to complete a simple cash-flow forecast that shows the total inflows and outflows of a business and opening and closing balances of cash.
 
Candidates need to be able to interpret a cash-flow forecast and identify possible problems, such as regular outflows outstripping inflows, larger than expected bills and too large a level of surplus cash. They should be able to provide suitable solutions, such as re-scheduling payments and receipts of income.
 
Candidates need to be able to explain how the use of ICT, such as a spreadsheet, can help a business in the construction of cash-flow forecasts and help in financial decision-making.
3.2 Financial Ratios
 
• purpose of financial ratios
• calculation of financial ratios
• interpretation of financial ratios.
 
Candidates need to understand that financial ratios provide a basis for comparison between figures from different years or between other similar businesses.
 
Candidates may be required to calculate from provided formulae the current ratio, acid-test, gross and net profit margins and simple return on capital employed.
 
Candidates will need to be able to interpret these ratios to make judgements about the solvency and profitability of a business.
 
Assessment
 
This unit will be assessed by an external written assessment of 60 marks and 1 hour in length.
 
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