FINANCE
Working capital: The capital needed to pay day a day running costs: leases, expenses, credit offered
to customs.
In Accountant terms: Working capital = current assets - current liabilities
Start-up capital: Capital needed to set up a business.
Management buy-out: A manager that buys majority of shares of a company in order to take control
of the company.
Capital expenditure: The purchase of assets that are expected to last more than a year:
Buildings/machinery.
Revenue expenditure: Short term spending of expenses. Wages/Salaries.
INTERNAL SOURCES of Finance: Retained profit, Sales of assets, reductions in working capital,
sale and leaseback of noncurrent assets.
External Sources of Finance: Bank overdrafts, take credit, leasing, medium term bank loans, hire
purchase, share capital, Debentures, long term bank loans, business mortgage.
Retained profit: The remaining profit (after deductions had been made such as dividends and taxes)
is kept in the business and becomes “retained profit” to be used for future activities.
Debtors/Creditors: The debtor is the party that owes the money (debt), while the creditor is the party
that loaned the money (shares credit).
SHORT TERM SOURCES OF FINANCE up to one year
- Bank overdrafts: The bank gives cheques to a greater value than the balance on the
account.
- Take credit: Delay the payment of bills.
MEDIUM TERM EXTERNAL SOURCES OF FINANCE up to five years
- Hire purchase: An asset is sold to a company which agrees to make fixed repayments over
an agreed time period; the asset belongs to the company once the final payment is made. (Cuotas)
- Leasing: To use an asset in exchange for rental payments. (sort of alquiler)
- Medium term bank loans: Bank loans that are up to five years.
LONG TERM SOURCES OF FINANCE more than five years
- Equity finance: Finance raised by companies through the sale of shares.
- Long term bank loans: Loans that are up to more than 5 years.
- Debentures: Bonds created by companies to raise debt finance with a fixed rate interest.
Debenture can be up to 25 years
BALANCE SHEET
Property, plant and equipment 542
Accumulated depreciation -100
NON-CURRENT ASSETS 442
Stocks 34
Debtors 28
Cash 4
CURRENT ASSETS 66
TOTAL ASSETS 508
Creditors 42
Bank overdraft 28
Other short-term loans 3
CURRENT LIABILITIES 73
Non-current liabiliti8Ies 125
TOTAL LIABILITIES 198
NET ASSETS 310
Total assets - Total liabilities
Share capital 200
Retained earnings 110
Total shareholders equity 310
PROFIT AND LOSS ACCOUNT
Revenue 3060
Cost of sales -1840
GROSS PROFIT 1220
Expenses - 580
PROFIT BEFORE TAX 640
AND INTEREST
Interest -80
PROFIT BEFORE TAX 560
Tax -112
PROFIT FOR PERIOD 448
Dividends -200
Retained profit 248
RATIOS
Gross profit margin Ratio:
- Shows how does the management team of a company converts revenue into profit
- Gross profit ÷ sales revenue x 100 = gross profit margin
- Shows how managers add value to the cost of sales
Profit margin = profit before tax and interest ÷ sales revenue x 100
Return Of Capital Employed = profit before tax and interest ÷ capital employed x 100
Liquidity: ability of a business to pay its short term debts
Current ratio = current assets ÷ current liabilities
Liquid assets: Existing and instant goods that can be quickly converted into cash. Example:
Cash, take credit
Acid test ratio: compares liquid assets with current liabilities
Stock turnover ratio: It measures the number of times inventory is converted in sales
Debtor days: how long does the business recovers from the debts of its customers
Creditor days: Average length of time to pay to suppliers
Gearing ratio: measures the proportion of long term borrowed capital invested
CASHFLOW + FORECAST (estimated future inflows and outflows)
Net monthly balance: estimated difference between monthly inflows and outflows
Possible problems in cash flow
- Overtrading: expanding a business rapidly without obtaining the necessary
finance so that a cashflow shortage develops
- Bad credit control: customers might take exceeding periods to pay its debts and
become very unlikely to pay debts.
INVESTMENT APPRAISAL to evaluate how an investment can go
ARR: Average rate of return
Criterion rate: minimum ARR that a company would accept
NPV: Net Present value
