Business Finance

This Cheat sheet covers:

1. Business Finance
2. Forecasting and Managing Cash flow
3. Costs and break-even
4. Accounting Fundamentals
5. Costing Methods
6. Budgets
7. Published Accounts
8. Analysing Published Accounts
9. Investment Appraisal

Capital is the money Share Capital is the Loan capital is money Non-Current Assets are
invested into a business money invested into a invested by a business assets that a business
either by its owners or company by as a result of borrowing.
expects to hold for one
organisations such as shareholders when they year or more.
banks.
buy shares.

REQ: IPO Debt financing

Business startup
Issue Shares Credit extension
Business expansion

R&D

Working capital (WC) is Capital Expenditure Sources of Finance Finances divided into :
the cash a business has Is the spending by a
for its day to day business on long-term Considerations:
Short Term Sources are
operations.
fixed assets such as 1. Amount of Money needed for a limited
property, machineries required by business
period of time , usually
WC = CA - CL
and vehicles.
less than a year.

2. Purpose for which

Current Assets are Revenue Expenditure finance is required

items owned by a Is the spending by a Long term Sources are

business that can be business on items such 3. Length of Time
those that are needed
readily turned into cash.
as raw materials which for a longer period of
will be used up in a short 4. Legal Structure
time, usually more than a
Current Liabilities are period of time.
year.
short-term debts of a 5. Financial Position

business, usually repaid

within one year. 6. Rate of interest

7. Cost of Selling
Shares

8. Control

Internal sources of finance is one that exists External sources of finance is an injection of
within the business.
funds into the business.

1. Retained Profits
1. Overdrafts

2. Sales of Unwanted Assets

2. Bank loans

3. Sale and Leaseback

3. Mortgages

4. Working Capital 4. Debentures

5. Venture Capital

6. Share or Equity Capital

7. Microfinance

8. Crowdfunding

9. Government Grants

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 Business Finance

Considerations for Cash flow is the Why is cashflow Causes of Cashflow

choosing an movement of cash into management crucial? problems
appropriate source of and out of a business
finance over a period of time.
1. Pay off Creditors on 1. Overtrading

time
2. Giving too much
1. Business financial Cash flow is not equals 2. Cash inflow may be Credit

situation
to profit .
slower
3. Poor Credit control

2. Business reputation
3. Financial evaluation 4. Bad planning

3. Legal Structure
Business may be by potential investors 5. Market factors
4. Business profitable but having bad
environment cashflow due to accrual.

Costs are expenses Fixed Costs > 1 year

Methods to improve Cashflow
that a business has to
incur in its trading Variable costs - 1. Reduce Costs

activities.
Changes directly with no 2. Improve management of trade receivables and
of output
trade payables

Revenue is the income a 3. Debt Factoring

business receives from Semi-variable costs -

4. Sale and Leaseback

selling its goods or Fixed and Variable 5. Tighten trade credit

services
element

Breakeven is the level

of production or output a
which the business’s
sales revenue is equals
to cost of production.
output.
Marginal Cost is the
extra cost to produce
one additional unit of

COST = REVENUE =
BE

Contribution pricing Cost Plus Pricing USES OF COSTING

is based on the notion (Mark-up) is the process
that any price set that is of establishing the price 1. Analyse cost management performance

higher than the variable of a product by 2. Benchmarking

cost of producing a calculating its cost of 3. Monitor Profit levels

product is making a production and then 4. Break even Analysis

payment towards fixed adding an amount which 5. Pricing methods

cost. is profit.

Break-even Analysis

Break even output is Uses of BE Analysis: BEP(OUTPUT)

the level of output at =
which
1. Decide profitability of business

2. Determine level of output and sales necessary

Sales = Costs. 3. Assesses changes in level of production on (Fixed costs)/(USP-(VC/

profitability
UNIT ))

4. Loan application

Where USP = Unit

Selling Price

Margin of Safety measures the quantity by which

a firm’s current level of sales exceeds the level of VC/ Unit = Variable costs
output necessary to break even. /unit .

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 Break-even Analysis

Benefits of BE Analysis Disadvantages of BE Analysis

1. Simple technique for entrepreneurs especially in 1. Assumes that all products are sold.

small and established businesses

2. Simplification of the real world where
2. Quick and easy technique without much training
businesses do not only sell 1 product.

3. Gives an overview of the potential profitability 3. Actual prices and costs may vary to market
and viability of a business conditions

Accounting Fundamentals

Income statement is an A Statement of Ratio analysis

Uses of Ratio Analysis

accounting statement Financial Position is a technique for
showing a firm’s sales (Balance Sheet) is a analysing a business’s 1. Benchmarking
revenue over a trading financial statement financial performance by Performance

period and all the showing the assets and comparing one piece of 2. Compare companies

relevant costs generated liabilities of a business at accounting information 3. Investment appraisal

to earn that revenue.
the end of an accounting with another.
AKA period.

Profit & Loss (P&L) Assets = Liabilities

Statement.

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 Ratio Analysis

Limitations of using User of Ratio Analysis

Ratio Analysis
1. Different industry 1. Investors would compare profitability and liquidity to determine potential
may have different investment into the company.

indication of ratio
performance.
2. Managers will use the ratios to benchmark against previous year / across
Industry performance

2. Financial Statements
may be cloaked by 3. Suppliers will have a particular interest in liquidity position of business as
Window Dressing. this means that business would have the ability to pay up on time.

Hence Ratios may

not be accurate. 4. Employees may be interested in the profit of the company if they are
involved in a Profit-related pay scheme.

Limitations of Financial Statement

1. Leadership of Business is not reflected

2. Business workforce capability

3. Window dressing

4. Consolidated performance of the business may not show the individual performance of each business
units

Budgeting

A Budget is a financial Budgets include: Why Businesses set Budgets:

plan.

• Sales Revenue or A. Assist Business in controlling finances by

Cost Centre is a distinct Income Budgeting
planning expenditure over a future period

part of a business for

which costs can be • Production or B. Assess viability of new projects

calculated. Expenditure Budget

C. Budget monitoring

Profit Centre is where • Budgeted Income

revenue can be statements
D. Motivate junior managers and giving them
determined. control over budget management in a team level
• Budgeting Financial
Balance Sheet

Advantages of Disadvantages of Difficulties in Variance Analysis

budgeting Budgeting Budgeting Is the process of

investigating any
• Ensure business do • Training may be difference between
not overspend
required for employees • Inaccurate sales budgeted and actual
to understand the forecast
figures.

• Allow senior managers purpose and

to direct extra funding evaluation of Budgets
• Unexpected market
into important areas of swings may render Favourable variance is
the business
• Budgets normally budget useless
when difference results
short-term and may in higher profits

• Target method for neglect long-term • Time- Consuming and

employees to work prospects of business require experience Adverse Variance is
towards when difference results
in lower profits or losses.

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 Investment Appraisal

Businesses take Risk is the chance of a Investment Appraisal Useful in :

decisions when: misfortune occurring,
1. Contemplating to possibly resulting in
introduce new financial loss.
1. Quantification of proposed actions

product

2. Expansion
Investment appraisal is 2. Assist mangers in making good informed
3. Investment
a series of technique decisions.

4. Purchase of designed to assist

Technologies businesses in judging 3. Complementing other project decision-making
the desirability of
investing in particular
projects.

Investment Appraisal Techniques

Payback is a simple technique that measures the

time period required for the earnings from an
investment to recoup its original cost.

Benefits : Disadvantages:
• Quick and Simple

• Ignores timing of any

• Gives an overview of reciept

how much time is

required to recuperate • 

initial investments
Ignores level of profits
• Relevant to firms with that may be ultimately
limited funds who want generated.

a quick return
(Overly focused on
timing)

Average rate of return (ARR)

The Average rate of return (ARR) measures the

percentage rate of return on each possible
investment.

Benefits : Disadvantages:

• Considers level of • Does not Differentiate

profits earned from between investments
investment
that generate high
returns in early years
• Easier comparison to or later.
other investments

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 Discounted Cash Flow (DCF)

The Discounted Cash Present Value is the

Flow technique takes value of a future stream
into account what is of income from an
termed the ‘time value’ investment, converted
of money.
into its current worth.

Discounting is the
process of adjusting the
value of money received
at some future date to its
present value.

Benefits: Disadvantages Other influences on Investment Appraisal :

Takes into account cash Choosing the discount 1. Corporate Image

inflow and outflows for rate is difficult- 2. Corporate objectives

duration of the especially for long term 3. Environmental and ethical issues

investment projects
4. Industrial relations

Complex method to
calculate and easily
misunderstood.

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