GCSE Business

Finance Fixed Costs

Definition: Costs which do not change with the
number of goods made or sold.

£
Functions of the Accounts/Finance FEB
RUA Break-Even
Examples: RY
Department • rent for the shop Definition: Occurs where the total amount of money
• monthly lease on taken in by a business is the same as the amount of
• Keeps financial records/accounts/“the books” equipment and machinery money paid out. Neither a profit nor a loss is made
• Draws up financial tables ➔ profit and loss • payment of business rates on premises. where total revenue equals total cost.
account/balance sheet/cash flow/budgets
• Deals with wages Calculation: Fixed Costs

£
• Settles bills/pays creditors Contribution per unit
Variable Costs
• Collects/chases up debt (Contribution = Selling Price – Variable Costs)
• Organises loans etc. ➔ liaises with Definition: A cost that changes with the number of
banks.
BREAK EVEN CHART )
goods produced/sold/output. Graph: u e(
TR
en Maximum
ev profit
lR

Revenues and Costs

ta at full
To IT
Examples: PR
OF
capacity

• raw materials Break even point

t (T
C)

Sales (£)
Cos
• electricity and gas. Tot
al
Turnover (Revenue)
Definition: The value of sales/income/revenue
Total Costs
Fixed Cost (FC)
SS
of a business/money made from selling goods or LO

services.
Definition: The full amount of money spent by Margin of Safety

Calculation: Selling Price x Quantity Sold a business when producing the goods sold in a Break even output
particular period. It is calculated by adding its fixed Quantity (Units) Full Capacity Output

Ways to improve turnover: costs to its variable costs.

• Increase price ➔ make more revenue per item
sold Calculation: Fixed Costs + Variable Costs Sources of Finance
Total Costs
• Reduce price ➔ may create demand/sell more

goods to increase total revenue
• Increase promotion/advertising ➔ may attract
more customers/ sales.
Profit
£
Definition: The difference between
the total revenue of a business and
the total costs of a business, when
revenue is greater than cost.
PROFIT
Calculation: Total Revenue – Total Costs
COSTS
Factors a business will need to consider
£
Variable
Costs if it is trying to raise extra finance
• Availability of finance ➔ some banks may not lend
Fixed Costs
➔ willingness of banks to lend
UNITS • Interest charged ➔ will add to cost / may add to
price
• Time for repayment ➔ to spread cost over time /
lower repayments
Contribution • Amount of money needed ➔ banks not willing to
lend large amounts / effect on interest
Definition: The amount taken from the cost of • Effect on business ownership ➔ more
selling every good used towards paying the fixed shareholders = less control
costs of producing that good. Contribution per • Administration charges ➔ will add to costs ➔
good is selling price minus the cost of the good.
reason for borrowing ➔ long-term / short-term ➔
capital / expenses etc.
Calculation: Selling Price – Variable Costs
 GCSE Business
Finance

Sources of
Definition Advantages Disadvantages
Finance
Personal Money that is put • Not an inexpensive source of finance but requires no • May not have the required amount, for example,
Savings / into a business by its interest or repayments. expansion plans are likely to require a considerable sum
Owners’ owner or owners. of money.
Capital
Internal Sources

Retained Profits that have been • Cheaper than taking out a loan. • Once the money has been used it is gone.
kept in the business • Business has the flexibility to decide how much is used • Owners or shareholders may want the retained profit as
profits rather than paid out and when. their income.
to its owners.
Sale of Assets Items of property • If the assets are no longer required, this could raise large • All assets are likely to be essential to the business ➔ once
owned by the sums of money. sold they are no longer available for use.
business that are sold
to raise funds.

Overdraft A form of short-term • The business is allowed to take more from its account • Interest is paid on overdrawn amount.
loan provided by than is in the account. • Counts as a current liability as the amount has to be paid
banks to cover cash- • When cash is paid into the account, the overdraft will be back.
flow difficulties of cleared.
businesses.
External Sources – Short Term

Trade Credit A source of finance • Allowed credit for short time ➔ usually 30 days ➔ no • Counts as a current liability as the amount has to be paid
whereby a business interest charged ➔ discounts allowed if payment within to the other business.
receives stock and time.
can pay for it at a later • Allows products to be sold before payment.
date.

Hire Purchase A system where goods • Useful for purchasing plant and machinery which can be • Interest rates are usually very high.
are rented but which obtained quickly. • The property is not owned by the business until the
are eventually owned • Finance houses may also be less selective than banks. last payment has been made ➔ items can be legally
by the business. • The good becomes the property of the buyer when the repossessed if the business falls behind with repayments.
final payment is made.

Leasing A system of renting an • The business acquires the use of resources without the • Over a long period of time it can be very expensive and
asset to a business. need for a large sum of money. well in excess of the purchase price.
The asset remains • The maintenance and repair bills are met by the leasing • The business never gets to own the items leased.
the property of the company.
company renting out
the good. • They are generally easier to obtain than loans.
 GCSE Business
Finance

Sources of
Definition Advantages Disadvantages
Finance
Bank Loan/ Long to medium term • Access to large sums of money. • Eligibility ➔ hard to get ➔ business plan needed ➔ prove
Mortgage loans that can be • Spread payments/instalments. can pay back.
used to buy producer • If successful the money becomes immediately available • Interest charged ➔ will add to cost causing cash flow
goods. • The goods become the property of the business problems ➔ pay back more than borrowed.
BANK
immediately. • Cost of repayments may be added to price ➔ causing a
£ •
loss of customers.
Some businesses may not be able to repay the loan
➔ business/personal assets may be taken to repay ➔
business may have to close.
Loans/finance Raising finance by • Money will be available immediately. • Limited funds may be available.
from family or borrowing from • May not incur interest/pay back. • If loan is not repaid could damage friendships/cause
External Sources – Long Term

friends friends and family. family issues.

Government Funds given by • Usually given to businesses in regions where • They tend to be small amounts that last only for a
Assistance charities or the unemployment is high. relatively short period of time.
(Grants) government to • Often they are grants which do not have to be repaid. • Very hard to obtain ➔ they are also few and far between
help businesses get due to strict criteria.
started.
Share Capital/ Funds raised by • There are no interest or repayment costs attached to it. • It is a source of finance only available to limited companies
Issue issuing shares in • It is costly ➔ means giving away some of the company and
return for cash. its profits to investors.
Take on a Funds raised by • They invest capital without interest payments. • The owner will lose some control
Partner inviting an individual • They offer expertise, skills, specialisations. • The profits will be distributed between partners/
to join the business shareholders.
who then invests
money.
Venture Involves private • Possibly large sums of money can be • Likely to lose full control of the business as the business
Capital/ investors providing attained quickly . angels will want a share of the business in exchange for
Business capital to new or small • Advice may also be given. their investment.
Angels businesses which
have the potential for
growth.

START
£
£

UP £
£
£
£ £ LOAN £ £
£ £ £
£ £ £ CASH £ £ LEND
CREDIT
£

BORROW
£
£