5:1 The Role of the Finance Function 5:3 Revenue, Costs and Profit

Finance function Revenue

is the finance department It is vital for any business to have accurate financial Calculation Money from sales
and is only found in larger data. Without accurate data wrong decisions could Average rate of
Revenue Quantity sold x selling price
businesses be made which affect the business negatively. return
Variable costs Quantity sold x variable cost per unit A method of
measuring and
When will financial info be useful in business decision-making? Total costs Fixed costs + variable costs comparing the
Knowledge Organiser

When a business decides to Gross profit Revenue - cost of sales profitability of an

There may be increased costs to monitor, it may need investment over its life
become more environmentally
extra finance - finance function will provide this Loss
friendly Net profit Gross profit - expenses
Occurs in a business
When the business is thinking A prediction in changes of costs will be needed from the Gross profit when costs are
about changing production finance function as well as what extra finance will be Gross profit ÷ revenue x 100
margin greater than revenue
methods needed and how the changes might affect cash flow
Expenses
Net profit
When the business wants to The finance department would provide information about Net profit ÷ revenue x 100 The costs of operating
change the way it markets its the costs of these new advertising methods and may need margin
the business
products to raise extra finance Profitability ratios
Profit Revenue - costs
Calculations which
Financial information help to interpret
Includes details of profit, loss, cash flow, break-even, profit margin and average rate Businesses will need to interpret these figures to help make financial data
of return. These can be used to help make business decisions. business decisions

5:2 Sources of Finance

Owners’ capital Retained profit Loan Issuing shares
Advantages Disadvantages Advantages Disadvantages Advantages Disadvantages Advantages Disadvantages
 No need to  The owner  No interest has  Business might  Repayment is  Interest has to be  A lot of  Dividends may
Unit 5: Finance

repay the money might not have to be paid not have enough spread over paid finance can be have to be paid to
No interest has enough savings  No need to profit to cover time  Business may need raised from shareholders
to be paid to cover the repay the money the whole finance  Business to risk an asset as many investors Shareholders are
 No cost to raise whole finance  No cost to raise  May leave the knows exactly security Money does entitled to have a
the finance  May leave the the finance business short in how much has  Bank will want to not have to be say in the running
 Readily owner short in  Readily the future in to be repaid and see a business plan paid back of the business
available personal available emergency when to ensure they can  No interest is The business may
situations situations  Money is afford the loan payable be taken over by a
available quickly competitor

Interest Crowd funding Retained profit Owners’ capital

The amount of money that has to be paid Money raised through an appeal to public Profit not distributed to owners Money from savings put into the business by
back on borrowed money Overdraft Loan the owner
Sale of assets An arrangement with a bank to spend more Sums borrowed for a certain period at an
Items sold by the business money than it has in its account agreed rate of interest
 Businesses use information about revenues Calculating break even
Break-even forecast and costs to calculate the break-even level of 5:4 Breakeven
A prediction about output Total fixed costs ÷ (price - variable costs per unit)
the break-even
quantity based on
estimates of future Can make
sales revenues and decisions
Costs may
costs about A price
It will help change
price and Prices may
Knowledge Organiser

Can find increase

Break-even quantity when costs change
expected could lead
taking out because of
The amount a profit promotions to a fall in
loans
business must sell to sales
earn enough revenue
to cover its costs
See how The
Margin of safety much you Shows the Competitors product
The amount by which need to margin of may change may enter
Usefulness of Limitations of
a business’ actual sell safety the decline
break-even break-even stage
output is greater analysis analysis
than its break-even
output

Cash flow forecast: 5:5 Cash Flow Enables Assessment Information

shows the expected remedies to Possible questions
A planning
flow of money into be put in
tool Your assessment will take place during a
and out of a place for 1. State one function of the finance
shortages normal timetabled lesson but you
business department.
Usefulness of should be revising at home.
Unit 5: Finance

cash flow 2. Calculate the profit a business

Inflows forecasts Number of marks available: 40
Cash flowing into the would make in 4 weeks.
Anticipates Time allowed: 50 minutes
business Provides
periods of 3. Analyse one benefit of owners’
Outflows targets Answer ALL of the questions
cash shortage savings.
Cash flowing out of the
business
The first 10 questions will be multiple
Expenditure 4. Recommend one source of finance
A negative cash flow may: choice - you must only select ONE
Money that the for a business to use.
 only be temporary and may not necessarily cause a answer, selecting two will score 0 marks.
business pays out
Opening balance problem for the business
5. Evaluate whether a business should
Cash available at the  require the business to obtain additional finance in The other questions will include a range
use a bank loan or retained profit.
start of the month the form of an overdraft to help it overcome a shortage of 2, 3, 4, 6, 7, & 9 mark questions
Closing balance of cash
Cash available at the  mean that the business has to delay payment of
end of the month money it owes to others such as suppliers State Explain Analyse Recommend Evaluate