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GCSE: Accounting & Finance
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How to calculate 'break even'
- 1 There are three ways this can be done. All will give the same answer which is the number of products the business must make or sell to ‘break even’. This means they receive as much revenue as their costs.
- 2 A break even table will list the fixed cost, variable cost, total cost (fixed plus variable cost), revenue and profit or loss for each level of output. As profit or loss is the revenue minus the total cost this can be calculated relatively easily, especially if you use a spreadsheet program..
- 3 A break even graph plots the total cost and revenue for all the levels of output. Where the total cost and revenue intersect is the break even point. This can be easily produced from the table using the chart wizard.
- 4 The break even formula gives you the break even output. The formula is fixed cost divided by the price of one unit minus the variable cost.
- 5 The margin of safety is the number of items being produced, over and above the break even point.
What is cash flow?
- 1 Cash flow looks at the cash flowing through a business. It is not the same as the profit being made as businesses may be receiving goods on credit or giving credit to customers. This means that although a business may be profitable, it may still run out of cash. This could cause the business to go bankrupt.
- 2 A cash flow forecast predicts the flow of cash going through the business. A business may use it to see if there are any months when it will run out of cash.
- 3 Knowing that it may run out of cash in any month means that a business can plan for this by possibly arranging a bank overdraft.
- 4 A bank overdraft is an agreement arranged with a bank whereby if the business runs out of cash, the bank will lend it money to keep it trading. This overdraft will normally be at a high rate of interest but is better for a business than running out of cash.
- 5 A business may also cover a period of negative cash flow by deferring payment to suppliers or getting payment early from customers.
What could be a source of finance?
- 1 Many students go wrong when discussing sources of finance by not relating them to the size of the business or the reason they need it. A new business starting up has different needs to an existing business looking to expand.
- 2 Sources of finance available to sole traders and partnerships include the owner’s funds, borrowing from friends and relatives, bank borrowing or funds from venture capitalists that specialise in lending to new businesses.
- 3 A problem for sole traders and partnerships is unlimited liability. This means that the owner is responsible for all the debts of the business, not just the amount they have invested.
- 4 Private limited companies and public limited companies have limited liability. This means that investors in the businesses can only lose the amount they have invested. This makes it much easier for them to raise finance as people are more likely to lend to them knowing the maximum amount they can lose.
- 5 A benefit of selling shares compared with borrowing from the bank is that the money does not need to be repaid. Share holders will expect a share of the profits. With a loan, the amount borrowed has to be repaid with interest.
Financial report. I will be talking about the financial performance of my business including how a profit and loss account works and what my account tells me.
A balance sheet will tell you all your assets and liabilities and will list them and tell you how much they are worth/ costing you, you can also find out your working capital and also find out whether it is viable for you to draw more money out of the business or whether you need to be taking less money out of the business (your drawings). As I said earlier a profit and loss account can be used to show whether your business is making a profit or a loss and then to decide what you should do next.
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