N5 Bus Man – 3.2: Finance © BEST Ltd Management of People and Finance 3.2 – Finance Business...

N5 Bus Man – 3.2: Finance © BEST Ltd

Business Management (National 5)


The role of FINANCE in a business is to make sure that a business has enough CASH to keep going and to produce FINANCIAL DOCUMENTS that will help it to plan and record its’ financial performance.

Benefits of effective financial management include the following:

◦ MORE MONEY AVAILABLE FOR ACTIVITIES◦ BETTER BUSINESS PERFORMANCE◦ INCREASED SATISFACTION AND SALES◦ PREVENTS BANKRUPTCY AND CLOSURE


Businesses that run out of money to pay their bills have failed. The following things will then happen to end the business.

◦ COURT ACTION BY THOSE OWED◦ BUSINESS ENTERS ADMINISTRATION◦ ATTEMPT TO RUN BUSINESS SO DEBTS ARE PAID◦ ATTEMPT TO SELL BUSINESS AS GOING CONCERN◦ LIQUIDATION OF BUSINESS◦ (SOME) REPAYMENT OF DEBTS


In order to operate and pay expenses, a business needs money or FINANCE.

There are 2 main SOURCES OF FINANCE available to businesses:

◦ INTERNAL FINANCE (inside)◦ EXTERNAL FINANCE (outside)

The finance used will depend on:

◦ BUSINESS SIZE and TYPE◦ PURPOSE OF FINANCE◦ AMOUNT NEEDED


The main INTERNAL sources of finance are as follows.

◦ LONG TERM Capital (EQUITY) Ordinary Shares (EQUITY) Preference Shares (EQUITY) Profits Government Budget


The main EXTERNAL sources of finance are:

◦ LONG TERM (10 Years +) Mortgages Sale and Leaseback Agreements Venture Capitalists

◦ MEDIUM TERM (1-10 Years) Bank Loan Hire Purchase Leasing Grants

◦ SHORT TERM (<1 Year) Overdraft Debt Factoring Trade Credit


UK GOVERNMENT◦ ADVICE FROM BUSINESS ADVISORS

EUROPEAN UNION (EU)◦ EU REGIONAL DEVELOPMENT FUND ◦ EU SOCIAL FUND

SUPPORT ORGANISATIONS◦ PRINCES TRUST ◦ TRADE ASSOCIATIONS

PROFESSIONALS◦ ACCOUNTANTS◦ BANKS◦ LAWYERS


A BUSINESS PLAN is a document which shows the following information about a business.

◦ BUSINESS DETAILS ◦ PRODUCT INFORMATION ◦ MARKET STRUCTURE INFORMATION (◦ MARKETING INFORMATION ◦ RESOURCES REQUIRED◦ FINANCE REQUIRED◦ PERFORMANCE FORECASTS

Business plans are usually drawn up in order to convince financial institutions and advisors that a business seeking finance is eligible for it and able to pay it back.

BUSINESS PLAN

Business DetailsBusiness Name: Haddock Enterprises Ltd.Business Address: 12 Fish Lane, GLASGOW, G12 2FC.Business Type: Private Limited Company.

Product DetailsProduct: Fast Food - Fish and Chips.

Market StructureCustomers: 5,000 workers and shoppers pass premises daily.Competition: McDonalds (900m away) – prices are similar on average.

Marketing InformationPricing: £3.00 for suppers, £2.00 for singles and £1.50 for chips.Promotion: £2.00 suppers at lunchtimes, local paper adverts.

Resources RequiredStaff: 4 part time and 2 full time staff (£4.50 per hour).Premises: 12 Fish Lane - rent of £150 per week.Equipment: Frying equipment – purchase at £5,000.

Finance RequiredStart up: £5,000 of Ordinary Shares between 5 owners.

ForecastsSales: 100,000 sales per year at £3.00 (see SALES BUDGET).Profits: £150,000 (see FORECAST PROFIT AND LOSS ACC).Cashflow: No problems expected (see CASH BUDGET).


BUYERS have to pay businesses for the goods and services that they purchase.

These payments can be made in any of the following ways.

◦ CASH◦ CHEQUE◦ CREDIT CARD◦ DEBIT CARD

The Finance staff should record the details of these payments for its records and accounts.


BUSINESSES have to make the following payments for all of the resources that they use.

◦ STAFF WAGES (known as PAYROLL)◦ PROFIT PAYMENTS TO OWNERS◦ RENT OF PREMISES◦ INSURANCE FOR PREMISES◦ PREMISES LIGHT, HEAT AND POWER◦ PURCHASE OF RAW MATERIALS◦ STORAGE OF STOCKS◦ TRANSPORT OF FINISHED GOODS◦ TAXES ON PROFITS◦ PURCHASE OF NEW PREMISES◦ PURCHASE OF NEW EQUIPMENT


CASHFLOW describes the actual amounts of cash coming into a business (from sales) and going out of a business (as payments).

All organisations need to manage their CASHFLOW so that enough money is constantly available to make payments and provide funds. This is the case because even profitable businesses will fail if they have poor cashflow for any of the following reasons.

◦ STOCKPILING LEAVING TOO LITTLE CASH◦ OVERTRADING ◦ OVERINVESTMENT IN FIXED ASSETS ◦ ALLOWING TOO MUCH CREDIT ◦ TAKING TOO MUCH CREDIT ◦ UNDERESTIMATING INFLATION ◦ EMERGENCY EXPENDITURE◦ UNEXPECTED DROPS IN DEMAND ◦ SEASONAL FACTORS

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CASH BUDGETS show what will happen to the amount of money moving in and out of a business in the FUTURE. This information can be used for the following activities.

◦ USE SURPLUSES SAVING AND INVESTMENTS LARGE PURCHASES

◦ DEAL WITH/PREVENT DEFICITS ARRANGE AN OVERDRAFT ARRANGE LOANS SELL OFF STOCKS AND UNUSED ASSETS CUT BACK ON INVESTMENTS LOWER COSTS (eg staff or premises) INCREASE SALES TIGHTER CREDIT CONTROL

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This document usually aims to show how much of a PROFIT (or LOSS) during a past period of time (normally 1 year). The main parts of it are:

◦ TRADING ACCOUNT SALES COST OF SALES GROSS PROFIT

◦ PROFIT AND LOSS ACCOUNT EXPENSES NET PROFIT

◦ APPROPRIATION ACCOUNT NOT USED IN SOLE TRADERS PROFIT USE AND SHARES


Although helpful in managing a business, profit and loss accounts are not perfect because they ignore the following important information.

◦ POSITIVE HIGH STAFF MOTIVATION◦ NEGATIVE LOW STAFF MOTIVATION◦ POSITIVE LOW STAFF TURNOVER◦ NEGATIVE HIGH STAFF TURNOVER◦ STAFF SKILL LEVELS FROM TRAINING◦ PRODUCT RESEARCH AND DEVELOPMENT◦ MARKETING EFFECTIVENESS (eg brand loyalty)


BREAKEVEN ANALYSIS is a process that examines the FIXED and VARIABLE COSTS and REVENUES of a business in order to show the amount of sales that are needed to “break even” – ie cover all the costs of the business.

Breakeven analysis can also be used to calculate the LOSSES that will occur BEFORE the breakeven point, and the PROFITS that will be gained AFTER it.


SPREADSHEETS are computer programs that store and manage NUMERICAL information through the use of FORMULAS.

In many businesses nowadays, financial information will be produced using a SPREADSHEET computer program for the following reasons.

◦ FORMULA QUICKLY AND ACCURATELY CALCULATE INFO◦ FORMULA AUTOMATICALLY UPDATE INFORMATION◦ ALLOW “WHAT IF” ANALYSIS ◦ CHARTS CAN BE EASILY CREATED◦ ELECTRONIC SECURITY AND BACK UPS


The effectiveness of Finance activities undertaken by a business will be affected by the following factors.

◦ INTERNAL FACTORS Finance Human Resources Capital

◦ EXTERNAL FACTORS

Political Factors Economic Factors Social Factors Technological Factors Environmental Factors Competitive Factors

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