Finance Year 11
Internal Source of finance- Money generated by the business itself e.g. Retained Profit.
External Source of Finance- Money generated outside the business e.g. Bank Loan.
Short Term Source of Finance- Finance that is used to solve short term cashflow problems and pay day to day bills e.g. Wages, Suppliers, overdrafts.
Selling Unwanted Assets
Selling items within the business that are not needed. Money generated Externally.
Advantages:
Adds to cashflow
Generates finance
PLC can sell on the stock market
Disadvantages:
If you need the asset again, you can't buy it back
Dilutes Ownership
Loss of Profit via dividends
May not be easy to sell if an LTD as they do not have access to the stock market
Sale and Lease Back
When you rent something- paying to borrow. Internal.
Advantages:
Okay in the short term as it is temporary
Large inflow of cash
May relieve cash flow problems
Allows you to take advantage of a good offer
Disadvantages:
Costly to rent back overtime
Cannot be used again to solve cashflow problems
Trade Credit
Agreement with suppliers which allows you to pay for materials later. External.
Advantages:
Helps solve cashflow problems
Eases the issue of different timings between payments
Disadvantages:
Could damage relationship with suppliers
Still must pay back
Not available to a start-up business.
Share Issue
Creating new shares in an LTD or PLC, selling them to raise finance. External.
Advantages:
Quickly raised
No need to pay anyone back
Bring new skills into the business
Disadvantages:
Dividends must be shared
Dilutes level of ownership
Less control of the business
Mortgage
This is the money a bank gives for a property or house and it must be paid back later in regular instalments. External.
Advantages:
Gives people time to save up money for the property
Paid in instalments which allows people to organise their time and finance
Disadvantages:
Can often be risky
If liability is unlimited the bank can take away the property if instalments not paid
Factoring
When a business hires a specialist to chase up debts which people owe to them. External.
Advantages:
Other people can chase up debts for you
Allows you to focus your time on other important aspects in the business
Disadvantages:
The people who chase up the debts require a high fee
Can annoy customers and cause inconvenience
Reducing Stock
This is when a business deducts the number of products they make. Internal.
Advantages:
If less products are made, this allows the business to ensure product quality
Less wasted products
Disadvantages:
If demand rises for the product, you will not meet the demand and this will lose revenue.
Financial Accounts
Purpose of financial accounts
To establish whether profit or loss has been made
Measure success
Helps set future targets
Helps assess how much the business is worth
Allows you to know how much money is coming in and out
Best and worst selling products
Assist with products decisions
Workers- job security
Allows banks to assess the level of risk
The Profit and Loss Accounts
Statement or record of cost and revenue over a period.
Total Cost = FC + VC
Total Profit = Total revenue - Total Cost
Sales Revenue = Selling Price X Quantity Sold
Gross Profit
Money left over after taking away production from revenue.
Sales Revenue - Cost of Sales
Cost of Sales
Direct costs involved in production of a good.
Opening Stock + Purchases - Closing Stock
Net Profit
This is the final cost once all costs have been subtracted from revenue.
Gross Profit - Expenses/Overheads
Overheads/Expenses
Other costs that a business must pay for that are not required in production. ‘Indirect.'
Rent
Utility bills
Insurance
Wages/salaries
Advertising
Depreciation- This is the fall in value of assets over time such as machinery and vehicles. It is the cost of ownership.
Profitability Ratios
Measures the performance of a business. It allows a business to compare profitability to the past and to competitors.
Main Types of Profitability ratios
Gross Profit Margin
NET Profit Margin
Return on capital employed
Gross Profit Margin
This measures the percentage or proportion of sales revenue that is gross profit.
Gross profit/Sales Revenue X 100
NET Profit Margin
This measures the percentage or proportion of sales revenue that is NET Profit.
NET Profit/Sales Revenue X 100
Return on Capital Employed
This measures the percentage or proportion of NET profit as a proportion of capital employed.
NET Profit/Capital Employed X 100

Balance Sheets
Record of the assets and liabilities of a business at a point in time. It shows the current value of the business.
Assets
Something of value that a business owns. E.g. machinery, land, stocks, property.
Fixed Asset
The current value of assets that are used in the day to day running of the business. They are kept for at least 12 months and are