Unit 3: Finance and Accounts

3.1 Sources of finance

• Role of finance for businesses: capital expenditure, revenue expenditure

• The following internal sources of finance: personal funds (for sole traders), retained profit, sale of assets

• The following external sources of finance: share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capital, business angels

• Short, medium and long-term finance

• The appropriateness, advantages and disadvantages of sources of finance for a given situation

3.2 Costs and revenues

• The following types of cost, using examples: fixed, variable, semi-variable, direct, indirect/overhead

• Total revenue and revenue streams, using examples

3.3 Break-even analysis

• Total contribution versus contribution per unit

• A break-even chart and the following aspects of break-even analysis: break-even quantity/point, profit or loss, margin of safety, target profit output, target profit, target price

• The effects of changes in price or cost on the break-even quantity, profit and margin of safety, using graphical and quantitative methods

• The benefits and limitations of breakeven analysis

3.4 Final accounts (some HL only)

• The purpose of accounts to different stakeholders

• The principles and ethics of accounting practice

• Final accounts: profit and loss account, balance sheet

• Different types of intangible assets

• Depreciation using the following methods: straight line method, reducing/declining balance method (HL)

• The strengths and weaknesses of each method (HL)

3.5 Profitability and liquidity ratio analysis

• The following profitability and efficiency ratios: gross profit margin, net profit margin, ROCE

• The following liquidity ratios: current, acid-test/quick

• Possible strategies to improve these ratios: gross profit margin, net profit margin, ROCE

• Possible strategies to improve these ratios: current, acid-test/quick

3.6 Efficiency ratio analysis (HL only)

• The following further efficiency ratios: inventory/stock turnover, debtor days, creditor days, gearing ratio

• Possible strategies to improve these ratios

3.7 Cash flow

• The difference between profit and cash flow

• The working capital cycle

• Cash flow forecasts

• The relationship between investment, profit and cash flow

• The following strategies for dealing with cash flow problems: reducing cash outflow, improving cash inflows, looking for additional finance

3.8 Investment appraisal (some HL only)

• Investment opportunities using payback period and average rate of return (ARR)

• Investment opportunities using net present value (NPV) (HL)

3.9 Budgets (HL only)

• The importance of budgets for organizations

• The difference between cost and profit centres

• The roles of cost and profit centres

• Variances

• The role of budgets and variances in strategic planning