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# Unit 2: Finance for Business

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## Derrick Okyere

on 25 June 2014

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#### Transcript of Unit 2: Finance for Business

Understanding the costs involved in business
Calculating Total Costs
Understanding, define and identify different types of running costs
Understanding Expenditure
Understanding Revenue
To run a business, costs are split into two main categories:
No matter how business the businss is, or how many people work in it, ALL businesses must spend money in order to succeed.
The total costs of a business are found by adding fixed cost and variable costs.
The running costs of a business can also be split into two types:
Businesses make a profit by generating revenue through selling their product or service.
By Derrick Okyere
Learning Objectives:
-To be able to understand each topic of this unit.

-To understand and remember key words and definitions.

-To be able to apply the knowledge.
Start up costs
Money spent to start-up a business.
Operating Costs
(Also known as running cost)
Money spent on a regular basis to keep the business running.
examples:
-Raw Materials

examples:
-Taxes
- Bills
Key words:
-Start up costs
-Running Costs
Key Words:
-Fixed Costs
-Indirect Costs
-Variable Costs
-Direct Costs
Fixed Costs:
(also known as indirect costs)
These costs DON'T change according to the number of unit bought or sold.
Variable Costs:
(also known as direct costs)
These costs VARY according to the number of units bought or sold.
examples:
Car taxes don't change according to how many people are in the car or are using it.
example:
The cost of the fuel of the car varies according to how far you want to go or how long you want to keep driving
FORMULA:
Fixed Costs + Variable Costs
= TOTAL COSTS

a) Divide this list of costs for a sandwich shop into:
Start-up cost, Running cost, Fixed Cost and Variable cost
1. Electricity - £50 per month
2. Bread - £3.90 each pack; 25 packs
3. Fruits - £0.60 each; 50 fruits
4. Telephone bills - £65 per month
5. Ham - £2.90 each pack; 20 packs
6. Butter - £3.50 each pack; 20 packs
7. Cheese - 2.90 each pack; 20 packs
8. Water bills - £65 per month
9. Rent - £1050 per month
10. Broadband - £25 per month

b) Calculate the total cost
1503.5
Key Words
-Revenue
-Income
-Expenditue
-Profit
-Loss
Revenue:
The money that a business gets form customers, servicis, investements, and evry other source of
income
FORMULA:
Number of sales x price per unit
= REVENUE
For example: If a business sells 1000 boxes of chicken, and each box is £4.00, the calculation will be:
N. of sales x price per unit = Revenue

1000 x £4.00 = £4000

Expenditure:
The every day
running cost
of the busness.
"Expenditure" relates to all the money that a business pays out. Some of these will be fixed costs and some will be variable costs.
"Overheads" have fixed costs to pay ALL THE TIME
Attention:
Understanding Profit
All business owners need to be constantly aware of how much revenue making and how much expenditure they're doing to be able to identify if the business is making a
Profit
or a
Loss
.
Profit:
Occurs when revenue is more than expenditure.
Loss:
Occurs when expenditure is more than revenue.
FORMULA:
REVENUE -EXPENDITURE
= PROFIT/LOSS
1)
2)

Which of these is a source of revenue?
a. Does the business makes a profit or a loss if the revenue of a business is £3000 and it spends £2500 in the same period?

b. Does the business makes a profit or a loss if the expenditure is £14.500 and the revenue is £13.00?
Explain your anwer using the correct formula
Selling shampoo and conditioning products
Staff wages
Electricity bill
Investiments
Stock item for resale
3)
Alex's expenditure in his first three months of trading was £7805 and his revenue £7802.
a. Did he make a Profit or a Loss?
b. Of how much?
c. Why?
Understanding Breakeven
Breakeven occurs when a business had made enough money through products sales to cover the cost of making them.
Key Words
- Breakeven point
-Breakeven chart
In a simpler way
Breakeven:
When neither a profit or a loss are made
There are two different ways to calculate the Break-even point.
1st: THE FORMULA
Fixed Cost : (Selling price per unit - Variable cost per unit)
Remember!
When using the break-even formula, always do the subtraction before dividing it to the Fixed Cost
Activity:
Tom is considering starting a mobile hot dog van business. He reckons that his fixed cost would average at £100 per week and the variable cost for each hot dog would be 80p. He aims to sell the hot dogs for £1.30 and wants to find out how many he would need to sell in a week before he would start to make a profit.

Apply the formula to find the break-even point.
200 hot dogs.
2nd: THE CHART
The break-even point can be identified by drawing a chart.
Break-even Analysis
Every business person has to predict the future success of the business. With the break-even analysis, they plan costs involved in selling a product as well as be able to predict future sales.
It's not compulsory, but without these factor, the business could stock too many items or try to sell them at a too high or too low price, leading the business towards a loss.
Both fixed costs and variable costs are known.
Sales and revenue are both calculated
Owners know how many items must be sold to make a profit.
Owners have the possibility to make adjustments to their plan in order to make a profit sooner
The best goods are stocked and sold at the optimum price, making the business reaching success
Risks of not compliting the break-even analysis
Costs are unkown and/or too high
The selling price might be too low or too high
The owner won't have any idea of how many items he must sell in order to make a profit
The business makes a loss over a long period of time without any action being taken
Stock costs too much, is sold at the wrong price (maybe at less than cost price) and the business fails.
Benefits of doing a break-even analysis
Take 5 minutes to remember these 5 key points.
RECAP!
1. What is the difference between Start-up Cost and Running Cost?

2. Give two examples of start up costs and two examples of running costs.

3. What is the difference between Fixed Costs and Variable Costs?

4. Give two examples of Fixed Costs and two examples of Variable Costs.

5. What is the formula for total costs?

6. Define Total Costs.

7. What is the difference between Revenue and Expenditure?

8. What's the difference between Profit and Loss?

9. What's the formula for Profit/Loss?

10. Give two different examples of ways a business can get a profit and to different example of ways a business can have a loss.

11. Define Break-even.

12. What's the formula for Break-even.

13. Define the Break-even analysis.

12. Give two benefits and to risks of doing a break-even analysis.

Key Words:
Budgeting
Forecasting
Budgetary Control
Budgeting helps people and businesses to get what they want by planning ahead.
Budgeting:
A process of setting targets for spending and revenue over a future of time

or simpler:
Planning future revenue and/or expenditure
The purpose of Budgeting
Examples of Budgeting in Business Situations:
Forecasting start-up costs for a new business
Introducing a new product or building an extension to a factory
Forecasting sales revenue.
The main purpose of budgeting in a business is to ensure that the business is in control of its revenue and expenditure so that it makes a profit.
Budgeting and Budgetary Control
Once a budget is set, there must be a system to ensure that the targets are met. This is why a
Budgetary Control
This process consists in 3 sections.
FIRST:
Misusing actual performance regularly -normally at the very least once a month.
SECOND:
Give this information to the budget holder who checks for any difference between the planned target and the actual performance and take action if necessary
THIRD:
If the action works, the next month the performance should be better and match the targets set.

Budgetary Control:
Checking difference between the target with the reality.
BENEFITS:
People and businesses monitor and control their finance.
Managers are encouraged to plan ahead.
Providing a target becomes motivating
Better co-ordination of different departments in an organization.
Efficiency improvement

BUDGETING
PROBLEMS:
External factors can affect the budget
Lack of historical data makes budget setting for new business difficult
Budgets may be de-motivating if
-Workers have no input in budget setting
-They are too difficult to achieve
Managers may make decisions based on the achievements of short term benefits to stake holders
Budget may couse conflicts between managers
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