FINANCE AND ACCOUNTS

1.1. Introduction
Financial information is important when comparing and understanding businesses,
in order to judge their successes and failures. It allows to compare the business
performance over time, and with the performance of other businesses. In addition,
managers can make decisions about their prices, their production, and their
investments in the business so that they plan ahead so as to ensure cash is available
when it is needed.
1.2. Purposes of funding required by businesses
1.2.1. Capital expenditures
- They are long-term investments intended to assist businesses to succeed
and grow.
- It includes fixed assets such as machinery, land, businesses, vehicles, and
equipment, these items in a business may last for more than a year and
may be used over and over again.
- Capital expenditures can be used as collateral.
1.2.2. Revenue expenditure
- It refers to the money spent on the day-to-day running of a business. They
do not involve the purchase of long-terms, fixed assets, as they need to be
covered immediately to keep the business operational and should therefore
provide immediate benefits.
- They could include rent, wages (salarios), raw material (material prima),
insurance, and fuel (combustible).
- High revenue expenditure could make it difficult for businesses to build
sufficient capital in order to make long-term investments.
1.3. Sources of finance
1.3.1. Internal sources of finance
1.3.1.1.Personal funds
1.3.1.1.1. Concept
o Source of finance for sole traders as it comes mostly from their
own personal savings.
o By investing with their personal savings, sole traders maximize
their control over the business.
 o It is a good signal to other investors or financial institutions that
the business might need to approach for additional sources of
finance.
1.3.1.1.2. Advantages
o It is cheap.
o Easily available.
o No interest will need to be paid.
1.3.1.1.3. Disadvantages
o It is a great risk for sole traders or the owners of a business,
because they could be investing their lifes savings.
o If it is the only source of finance, it may prove difficult to start or
maintain a business.
1.3.1.2.Retained profit
1.3.1.2.1. Concept
o It refers to the profit generated from sales once (una vez que)
interest payments to lenders (prestadores), tax to the government
(impuestos al gobierno), and dividends (dividendos1) to
shareholder have been accounted for (han sido contabilizados).
1.3.1.2.2. Advantages
o There are no associated borrowing costs. ( no hay costos de
endeudamiento asociados)
o Businesses do not see a rise in debt levels. (no incrementa el
nivel de deuda de la empresa)
1.3.1.2.3. Disadvantages
o Start-up businesses will not have any retained profit as they are
new ventures.
o The owners may take out all the organization's spare cash (Los
propietarios pueden sacar todo el dinero en efectivo de la
organizacin).
o If the retained profit is small, there would not be possibilities of
expansion.
1.3.1.3.Sale of assets

1
Dividendos: Los dividendos son la parte de los beneficios corporativos que se le asigna a los accionistas.
Cuando una empresa obtiene beneficios, la direccin decide si lo vuelve a invertir en el negocio o si se lo
paga a los accionistas en forma de dividendos.
 1.3.1.3.1. Concept
o When a business sells its unwanted and anused assets to raise
funds, like any excess land or redundant buildings they may not
be using.
o Such funds can be used to part finance new machines or fund
other requirements.
1.3.1.3.2. Advantages
o No associated borrowing costs or debts.
1.3.1.3.3. Disadvantages
o It may be time-consuming to find a buyer to sell the assets to,
especially in the case of obsolete machinery.
1.3.2. External sources of finance
1.4. Costs and revenues
1.5. Break-even analysis
 CASE STUDY

Twitters new revenue streams look promising

When Twitter announced its proposal to sell shares to the public (to go public) analysis were
surprised noy only by the forecast of rising total revenue Us$ 200 million that it reported but
also by the forecast loss it expected to make. What Twitter did not draw attention to was the
surprise that it has for new investors: It has eight new revenue streams that could grow hugely
over the next few years. Currently, Twitter has three main revenue streams: promoted tweets,
promoted accounts and promoted trends.

Here are eight new ones the Company is developing:

Self-serve adverts in international markets.

Video adverts on Vine
Big Daa data licensing
Mobile adverts has just acquired MoPub for US$100 million
Real time bidding on adverts
TV advert targeting
Amplify . Twitters video advert product
Custom audiences

In preparation for this expasion in revenue-earning activities, Twitter has massively increased its
staffing it now has 2000 employees, adding substantially to the overhead cost of the business.
It is also well funded US$ 1.1 billiom from the venture capitalist and US$ 1 billion from the sale
of shares.

20 marks, 40 minutes

1) Define the term total revenue (2)

2) Explain how Twitter can report an overall loss when total revenue is rising (4)
3) Analyse two advantages to Twitter of developing new revenue streams. (4)
4) Evaluate Twitters decision to increase its scale of operations so quickly. (10)

Source: Business Management. P. 246.

Formula

CONTRIBUTION PER UNIT:

Contribution per unit = Price per unit variable cost per unit

TOTAL CONTRIBUTION:

Total contribution = total revenue total variable cost

E.g. if the business sells 100 tables at the same price of $150 and a variable cost of $60 per table.

Total contribution = (150X100) (60X100)

Total contribution = 9000

Alternatively:

Total contribution = contribution per unit x unit sold

CONTRIBUTION AND PROFIT

Profit = Total contribution Total fixed costs

e.g. If the business incurs a total fixed cost of 5000

Profit = 9000 5000

Profit = 4000

BREAKING EVEN

Total cost = total revenue

METHODS

The table method

Formula method
 USING CONTRIBUTION PER UNIT

USING THE TOTAL COSTS = TOTAL REVENUE METHOD

TOTAL REVENUE (TR) = TOTAL COST (TC)

P x Q = TFC + TVC

PROFIT OR LOSS

PROFIT = TOTAL REVENUE (TR) TOTAL COSTS (TC)

PROFIT = (P x Q) (TFC + TVC)

TARGET PROFIT OUTPUT

+
=

BREAK EVEN REVENUE

Essay
Answer one question from this section.
1) With reference to one organization that you have studied, examine the impact ethics and culture have
on raising finance.
2) With reference to or two organization(s) that you have studied, evaluate different strategies
businesses can adopt to increase revenue in a globalized business environment.
3) With reference to one or two organization(s) that you have studied, evaluate the usefulness of
business models like break-even which organizations can use to support business strategy.
20 marks, 40 minutes
Raising finance = Obtencin de financiamiento