Year 11 Enterprise Revision KO - Promotion and Finance PDF

COMPONENT 3 – Promotion and Finance Elements of the Promotional Mix Learning Aim A : Promotion What is promo...

COMPONENT 3 – Promotion and Finance Elements of the Promotional Mix Learning Aim A : Promotion What is promotion? Promotion is any method of communication that tries to encourage current and potential customers to buy products. Examples include adverts on television and money-off coupons in magazines The use of advertising to persuade and inform. The two The purpose of promotion basic aspects of advertising are: Promotion can be used to:  Create a positive The What the communication needs to say about image of the message the product. enterprise in the  Low price minds of current and  Quality potential customers  Useful  Encourage current and The How to get the message across by choosing the potential customers to medium correct method of advertising to reach current buy products and potential customers. Promotional mix There are many different methods of promotion used to get current and potential customers to buy products. Enterprises will choose a combination of methods depending on their product and their suitability for the size of the enterprise. This is known as the promotional mix. COMPONENT 3 – Promotion and Finance Elements of the Promotional Mix Learning Aim A : Promotion Methods of Where advertising Benefits advertising appears Moving image  Television  Enables products with moving parts  Cinemas of a practical use to be seen in action  Video sites and where/how they can be used  Promotional DVDs Print  Local and national  Likely to be seen by large numbers of newspapers people, either in a specific location  Magazines (local newspaper, billboards and  Leaflets leaflets) or over a wide geographical  Billboards area (national newspapers and magazines). Ambient  Public places, such  Outdoor advertising aims to catch as bus stops and the attention of passers-by shopping centres Digital  Company websites  Enables large and small businesses to  Social media connect with large numbers of [Pinterest, people instantly Instagram] Audio  Local and national  Allows businesses to speak directly to radio their target market COMPONENT 3 – Promotion and Finance Elements of the Promotional Mix Learning Aim A : Promotion Purpose of sales promotion Personal selling Enterprises use sales promotion for different reasons. This is where a representative of an  To entice people into a shop where they may buy the product but other enterprise contacts potential customers products also directly. There are 4 main methods of  To boost sales figures personal selling:  To attract first time buyers  To sell off older or less-fashionable goods to make space for new items 1. Face to face  To maintain customer loyalty The sales person is in direct personal contact with the customer Method and features Benefits/Limitations 2. Telephone The sales person makes phone calls to the Coupons 👍 may encourage purchases customer [usually from a call centre] Money-off voucher 👎impacts profit if doesn’t cover cost 3. Email Free sample 👍 potential repeat sales The sales person communicates electronically Often given with coupon 👎could impact profit with the customer. 4. Video or Web conferencing Competitions 👍 builds up marketing – thrill means more entrants Prize draws 👎impacts on profits The sales person communicates with the customer through a webcam. Money off discount 👍 encourages purchases Percentage reduction 👎profit affected if sales are low Loyalty incentive 👍 long term customer relationships established Points towards other product 👎impacts on profit if too few sales generated or free items Buy-One-Get-One-Free 👍 encourages additional purchases Free product on purchase of a 👎 profit impacted if sales are low full price product COMPONENT 3 – Promotion and Finance Elements of the Promotional Mix Learning Aim A : Promotion An enterprises public image is an essential aspect of its success. A poor reputation may lead to reduced sales and a fall in profits. A positive image can maintain or even increase sales. Public relations (PR) involves building and maintaining an enterprises reputation – its image – through the media. The purpose of public relations PR may be used to promote products. Its purpose is to:  Encourage positive views  Encourage positive publicity through media  Protect the brand image Telemarketing Sales representatives make phone calls to inform customers of offers or new products (cold calling) Email marketing and text messaging Both may include links to the enterprises website. Magazines Enterprises own magazines including features and news of its latest products, or specialist magazines targeting a Direct marketing is specific market when an enterprise Mail order catalogues communicates with a Include photos and descriptions of products and customer directly to information on how to order. Used by try to sell them enterprises selling a wide range of products. something, either by phone or written Direct mail [junk mail] communication Leaflets, letters and brochures about new products. Suitable for a small enterprise such as a local restaurant or service. COMPONENT 3 – Promotion and Finance Targeting and segmenting the Learning Aim A : Promotion market Markets can be sorted into different sections, known as segments. Each segment is made up of consumers with shared characteri stics, needs and interests. Enterprises segment their markets for various reasons. Enterprises decide on the most suitable promotional mix based on whether they are targeting a business-to-business (B2B) market or a business-to-consumer (B2C) market. B2B Market segmentation An enterprise sells its goods to another This is the process of breaking down a large market into much smaller groups of enterprise. The goods may be raw materials, consumers. equipment, consumables (items that are used up Enterprises analyse the market, and divide it into segments, each containing and replaced) or items for resale. This type of consumers with similar characteristics. market is known as Business to Business (B2B). B2C Why enterprises segment the market:  To better understand the characteristics, needs and interests of current and potential customers An enterprise sells its products – goods and  To develop products for a particular market segment services – directly to individuals for their own use.  To develop products that suit the needs of different market segments Such individuals are known as consumers, and the  To choose promotional methods that are better suited to the target market. type of market is known as Business to Consumer (B2C). Markets can be segmented in different ways. Enterprises may target one or more segments. They may also target different B categories within each segment. The segments include: Demographic: Characteristics of consumers A Geographic: where consumers live THE MARKET C Behavioural: how customers behave (spending choices, frequency) E D Psychographic: social class, attitudes, lifestyle etc. COMPONENT 3 – Promotion and Finance Targeting and segmenting the Learning Aim A : Promotion market Age: Markets are often segmented by age ranges to identify specific needs Gender: Genders have different tastes and have differing needs Income: Differing incomes determine whether individuals can afford luxury or basic items Education level: Higher education can sometimes mean higher earnings Socio-Economic group: Social class is based on income and type of occupation Ethnicity, religious and cultural beliefs: May influence choices such as food and clothing. Family size: Larger families usually buy in larger quantities.  Cinemas may offer two-for-one deals, materials may be promoted to meet Behavioural segmentation looks at how customers relate to products personality, likes and dislikes, values, Using psychographic segmentation  Spending and consumption attract regular movie goers and discounts and annual passes to the needs of environmentally lifestyle, interests and attitudes. encourage customer loyalty.  Products made of recyclable Consumers are segmented by conscious consumers. Behavioural  Desired benefits Demographic  Loyalty  Usage through: Market segments Geographic Where people live influences the products they buy. For example:  People living in cold, hot or damp climates will need different types of clothing and transport  Regional tastes in cuisines means different demands for food  Customs and cultural characteristics of a country or region affect peoples choices  The general standard of living in an area will affect how much consumers have to spend COMPONENT 3 – Promotion and Finance Factors influencing Learning Aim A : Promotion the choice of promotional methods Large enterprises Smaller enterprises These are likely to: These are likely to have:  Have a large promotional budget  A limited promotional budget  Use all of the promotional methods you have  A narrower range of promotional methods as some would be too revised costly  Employ specialist staff to plan and manage They are unlikely to employ specialist Enterprises need to choose methods promotional methods staff. Promotions mat only run at that are appropriate  Employ a team of sales staff to promote certain times to keep costs down. for the product These may be linked to the skills of the based on its size products owner and employees, the type of and audience.  Hire public relations specialist and agencies to products, the size of the market and promote the brand the budget. Budgetary constraints The promotional budget Promotional methods may Both large and small be limited in scope for enterprises set aside smaller enterprises with money to run promotional smaller budgets activities. Decisions on spending may be influenced by product Budget size is based on: lifecycle. For example, new  Size of the enterprise products may require a To have positive impacts on sales, promotional  How much competition bugger budget than a methods must: there is – the more product with steady sales 1. Reach the target market competition the higher Poorly performing 2. Be based on their habits and wants to appeal the spend may be to them [Reading? Hobby? Lifestyle?] enterprises may have to  Sales revenue – the restrict promotional money received from activities to those that sales generate most sales COMPONENT 3 – Promotion and Finance Financial documents Learning Aim B : Financial records Enterprise use a range of financial documents throughout the buying and selling process to record the sale and purchase of go ods and services. Purchase Delivery Statement Invoice Receipt Credit note order note of account Document Description Document Description Purchase Completed by buyer (the customer) Receipt Completed by supplier and sent to the order A legal offer to buy goods from the supplier customer List items required, including price agreed and A record of payment made by the customer quantity Rarely used when enterprises sell goods on Sent to the supplier requesting products credit (see statement of account) Delivery note Completed by supplier Credit note Completed by supplier and sent to the Sent to customer when goods delivered customer Lists details about the order, including contents of Lists any goods that may have been returned delivery by the customer Lists any goods not supplied, with reasons for non- Confirms money refunded to the customer or delivery may be used against the purchase of other Used by the customer to check that goods goods by the customer in the future delivered match goods requested on the purchase order Invoice Completed by supplier Statement of Completed by supplier and sent to customer A request for payment – sent to customer, either account A financial summary of the goods ordered, on receipt of goods or shortly after purchased or returned by the customer over a List price of goods delivered, delivery charges and period of time, usually a month amounts owed to supplier Some enterprises pay their invoiced only after States date by which money must be paid receiving the statement Explains how to pay, for example by bank transfer COMPONENT 3 – Promotion and Finance Accuracy of financial Learning Aim B : Financial records documents Importance of accuracy Importance of keeping accurate records Problems with inaccurate records  Ensure correct goods are delivered in correct quantities  Profits may be over or understated  Check customers aren’t being under or overcharged  Not all costs are accounted for  Ensure there is enough stock to meet customer demand  Investors may lose confidence in the business  Ensure calculations of costs and revenues are accurate  Reputation for the business can be damaged  To ensure enterprise and customer have a clear understanding of  Financial statements will not be accurate the terms of sale  It an lead to cash-flow problems  Enable the enterprise to accurately calculate the taxes it owes the  Suppliers and other trade payables may not be paid on time government  Bad debts can increase  To allow managers to make strategic decisions COMPONENT 3 – Promotion and Finance Payment methods Learning Aim B : Financial records Debit card Credit card Direct debit Issued by banks to their Issues by banks and financially An instruction to a bank customers (account holders); companies. Allows you to authorising a third part, such card is linked directly to the spend to your limit and pay as enterprise, to transfer bank account. back at the end of the month money of various accounts to its own bank on an agreed date. This is such as a phone Payment methods Cash [notes and coins] Payment technologies contract that is taken on the same day every month. There are many different Accepted in most places as a This could be such as PayPal ways for enterprises and form of payment. Money can which allows individuals to Cheque their customers to pay for be withdrawn from a bank transfer money safely goods and services. account with the use of a between buyers and sellers. A written order to pay a sum Depending on the type of debit card. Some shops only Money is added/ withdrawn of money from a bank account financial transaction, some accept cash if they do not from the individuals bank to the payee. This is a methods are more suitable have the technology available. account. declining method of payment. than others. Positive impacts on customers and enterprises Negative impacts on customers and enterprises  Direct payments X Theft  Safety X Identity theft  Pay for large amounts in one go X Charges from banks  Can be used remotely X Available funds in bank  Set limits to reduce overspending X May be limited where can be used  Easier shopping online X Mistakes made  Interest free periods X May not be suitable for online purchases Factors influencing customers Safety and Ability Convenience Cost Lifestyle Technology choice of payment methods security to pay COMPONENT 3 – Promotion and Finance Sources of revenue and Learning Aim B : Financial records costs Income from sales Start up costs This is the most common form of income. Before trading these help to set up Income from sales is known as revenue or the enterprise turnover  Cash sales from over the counter Start-up costs will be influenced by the type of enterprise. For example:  Credit sales from methods of credit - A clothing manufacturer will require an industrial premises, machinery and materials to such as a credit card produce goods.  Commission received from sales the - A high street retailer will require shop premises, shop fittings and items to sell. business has supported  Repairs of products previously To pay for these the enterprise needs to source the start-up capital. This could be from purchased owners own money, money loaned from family and friends, business loan or an investor  Maintenance contracts to regularly service a product and keep it in working Running costs order There are two types of running costs Income from assets An asset is something owned by an enterprise, such as property or equipment. An asset can be sold to generate income for the enterprise. There are many ways to Fixed costs Variable costs generate income from assets: These are costs that the enterprise has to These costs are directly linked with  Lease or hire out equipment pay n mater how well it is doing. the number of items produced or  Invest in another enterprise to receive a Heating and lighting charges sold. For example: share of its profits Rent The more orders a clothing  Put spare cash into an account that Insurance manufacturer receives for t- pays interest Business rates shirts the more material it will  Sell assets such as property or need to produce them equipment to raise money The more vehicles a car  Rent out part of the premises to mechanic repairs and services, another enterprise. the more replacement parts would be required. Total running costs Fixed costs + variable costs COMPONENT 3 – Promotion and Finance Terminology in financial statements Learning Aim B : Financial records Understanding terminology You may come across the terms below by different names elsewhere. The different terminology is shown in brackets – they mean the same thing:  Debtors (trade receivables)  Creditors (trade payables)  Fixed assets (non-current assets)  Long term liabilities (non-current liabilities) Financial terminology often appearing in financial statements Statement of Statement of financial comprehensive position income Turnover, Cost of Fixed assets, current sales, gross profit, assets, owners capital, expenses, net profit, current liabilities, long retained profit term liabilities (non- current liabilities), debtors (trade receivables), creditors (trade payables) COMPONENT 3 – Promotion and Finance Statement of comprehensive Learning Aim B : Financial records income A statement of comprehensive income is a summary of the enterprises activities over a specific period of time, usually a year. It is used by several interested groups of people to Interested groups understand how well the enterprise is Sales revenue – This is the revenue received by the Several groups of people will performing. business from selling its products. It is also referred be interested in the to as simply sales or turnover (net sales) because it comprehensive statement of £ £ takes into account any price discounts or goods account as they will want to returned by the customer know if the enterprise is being Sales revenue 15 400 well run. Cost of sales – this includes the cost of making the - Managers Cost of sales 5 200 products. - Employees Gross profit 10 200 - Shareholders Gross profit = turnover – cost of sales - Suppliers Less expenses - Customers Wages 2 800 - Tax authorities Expenses – These are the indirect costs incurred Rent 1 200 when running a business. Expenses are listed separately in the statement of comprehensive Marketing 500 income. Purpose of Transport 1 800 comprehensive 6 300 This is the total of the individual expenses. statement of income The financial statement shows: Net Profit 3 900 - How much revenue the Net profit – Once sales, cost of sales and expenses enterprise has received In financial statements if figures are shown in are identified, the net profit or loss can be from sales of goods and (brackets) they are negative. The minus sign is calculated: Net profit = Gross profit - Expenses services not used - How much the enterprise has sent Profit Loss - Where the money was On the example above both gross profit and net If total costs (cost of sales + expenses) are greater spent profit were positive figures, which means the than the revenue, the enterprise will make a loss, enterprise made a profit. as shown in the example. COMPONENT 3 – Promotion and Finance Statement of financial Learning Aim B : Financial records position This column identifies the value of individual items £ £ This column identifies the total value of individual items A statement of financial position is a Fixed assets financial snapshot of the assets and liabilities of an enterprise on a Computer 500 particular day, usually the last day of Vehicle 2 000 The total fixed assets are 500 + the enterprises financial year. 2000 = 2500 2 500 Purpose of a financial Current assets statement of position This shows: Inventory 4 000 The value of all the enterprises Debtors 600 assets and liabilities Total of current assets The source of capital used by the Cash in bank 2 000 enterprise to finance its operations 6 600 Preparing a statement of Current liabilities Total of current liabilities financial position To prepare a statement of financial Creditors 700 position correctly, you first need to Net current assets = current Overdraft 300 categorise the enterprises assets into assets – current liabilities fixed and current assets and liabilities 1 000 6600 – 1000 = 5600 into current and long-term liabilities. Net current assets 5 600 Owners funds Total assets less current liabilities 8 100 = owners capital + net profit for the year Financed by = 5000 + 3100 = 8100 This figure will be reduced if the owner Owners capital 5 000 takes money out of the business to pay Retained profit 3 100 themselves a salary. It would be shown as ‘drawings’ 8 100 COMPONENT 3 – Promotion and Finance Statement of financial position Learning Aim B : Financial records Information in the Current liabilities: Debts that Capital: Shareholders funds statement of financial need to be repaid within one You can find a lot of information about the or retained profit position year enterprise in the statement of financial position. The information canbe analysed to understand the enterprises performance. From this, you can make suggestions to advise the enterprise on the actions it may ned to take. Fixed assets: Assets not Current assets: Assets easily easily converted into cash converted into cash Total assets owned by the Long-term liabilities: Debts Total liabilities owed by the enterprise (fixed assets + that have to be paid over enterprise (current liabilities current assets) more than a year + long-term liabilities) Can the enterprise pay its short- Can the enterprise take a long- What is the value of debtors? Has the enterprise made a profit? term liabilities? term loan to help grow the What to look for – debtors in What to look for – the figure What to look for – calculate the business? current assets retained profit new current assets (current assets – What to look for – the figure for What it means – if the figure is What it means – compare the current liabilities) long term liabilities large compare with other current figure with the retained profit from What it means – if the net What it means – if long-term assets, there may be a risk that the previous year – has it increased current assets figure is negative the liabilities are large, the business some customers will not pay the or decreased? business may not have enough cash may find it difficult to get additional money they owe to the business. Possible actions to take – to pay its long term debts. business finance. Possible actions to take – increase sakes, reduce the cost of Possible actions to take – Possible actions to take – sell of reduce the amount of trade credit sales, reduce expenses. increase sales, reduce credit terms fixed assets or use cash to pay off provided to new customers; chase to customers, sell off fixed assets, some long-term loans. up customers who owe money. reduce expenses. COMPONENT 3 – Promotion and Finance Profitability and profitability ratios Learning Aim B : Financial records What is profitability? Profitability is the ability of an enterprise to turn revenue into profit. This is know as its profit Increasing profitability margin. It is the amount of profit generated from each £1 generated in saes revenue. So, a An enterprise can increase its profitability by profit margin of 20% means the enterprise is generating £0.20 from each £1 of sales raising prices without demand falling or lower revenue. its costs without a noticeable change to the product or service. £ £ Sales revenue and Sales revenue 17 800 gross profit are the The value for sales revenue two items needed Cost of sales 7 120 (17,800) minus the cost of these to calculate gross sales (7,120) will enable the Gross profit 10 680 profit margin. business to calculate its gross Less expenses profit. Wages 3 420 The value for gross profit Rent 1 400 (10,680) minus total expenses (7,120) will enable the business Marketing 600 to calculate its new profit Insurance 1 700 (3,560). 7120 _______ Net profit 3 560 Gross profit margin Net profit margin To calculate gross profit margin, you will need to extract To calculate net profit margin, you will need to extract figures figures from the enterprises statement of comprehensive from the enterprises statement of comprehensive income. income. Formula Formula Gross profit margin = (gross profit ÷ sales revenue) x 100 Net profit margin = (net profit ÷ sales revenue) x 100 The answer will be shown as a percentage The answer will be shown as a percentage COMPONENT 3 – Promotion and Finance Liquidity and liquidity ratios Learning Aim B : Financial records Current ratio and liquid capital ratio To understand the liquidity of an enterprise two ratios are calculated – one which includes the inventory (stock) and another which excludes it. Liquidity is the ability of an enterprise to pay its debts Liquidity ratios  An enterprise with good (positive) liquidity will have sufficient net current assets to pay its creditors. It means the enterprise is Liquidity ratios Current ratio solvent – can pay its debts. If an enterprise needs to pay debts in the This is the ratio of total current assets and X An enterprise with poor (negative) liquidity near future, such as wages, it will need to liabilities. It includes both cash and may not be able to pay its debts. The have cash. The liquid capital ratio is a inventory (stock). It is a useful measure of enterprise may become insolvent and have more accurate measure of the enterprises the enterprise’s ability to pay its debts, to cease trading. liquidity, as it removes inventory (stock) but may be misleading if current assets from the calculation, since stock may be largely consist of inventory. difficult to turn into cash quickly. Liquidity and cash Liquid capital ratio formula If an enterprise needs to pay its debts in the near Current ratio formula future – such as wages and heating and lighting – Liquid capital ratio = it will need to have access to cash. Current ratio = (current assets – inventory) ÷ current current assets ÷ Current liabilities The ability of an enterprise to convert its assets liabilities into cash is known as liquidity. For example, if a business has to pay its suppliers £5000 in 10 days’ time but only has £2000 in cash, it could sell one of its fixed assets, such as a company vehicle it no Interpreting current and liquid capital ratios longer requires, or sell some of its inventory Current assets must be higher than current liabilities. Most enterprises will accept 1.5:2.1 (stock) at reduced prices. for the current ratio as it includes inventory. If either ratio falls below 1.1, the enterprise will struggle to pay its debts because it has insufficient cash. It would be advised to reduce the quantity of its inventory and increase its cash levels. COMPONENT 3 – Promotion and Finance Using cash flow data Learning aim C : Financial planning and forecasting Cash inflows and outflows Payments from customers are cash inflows. When an enterprise pays a bill, this is an Inflow is the money example of a cash outflow. The difference between inflows and outflows is the amount coming into an of cash in the enterprise – this is its net cash flow. enterprise. An enterprise needs to know how much cash is flowing in and out, and its net cash flow, so that it can ensure it has sufficient money to cover purchases and other running costs such as wages, rent and any monthly loan repayments. Cash in enterprise Outflow is the money leaving an enterprise. Outflows Inflows Enterprise (purchases, including running costs)  Revenue from sales of goods and services  Raw materials for manufacture of goods  Owners capital  Wages and salaries  Capital introduced, for example money £ £  Heating, lighting and power from family and friends or from additional  Fuel for vans investors such as shareholders  Rent  Bank loans  Insurance and business rates  Rent from property owned by enterprise  Internet and phone charges  Sale of assets  Marketing  Monthly loan repayments  Using cash flow data COMPONENT 3 – Promotion and Finance (cash flow forecasts) Learning aim C : Financial planning and forecasting Cash flow forecast This predicts the enterprise’s likely cash inflows from sales, and outflows (purchases) each month over a period Enterprises collect cash flow data and use it to produce cash flow statements and cash flow of time. The forecast allows the enterprise to calculate forecasts. They use this information to monitor and control cash flow. net cash flow and ensure it has sufficient cash to cover its Cash flow statement running costs. This records the enterprise’s actual cash inflows and outflows over the previous 12 months. It is It is also used to determine net current asset used by the enterprise to monitor the flow of cash. Analysis of the previous year’s cash flow requirements – the working capital needed to operate statement may be used to produce the enterprise’s cash flow forecast. the business – and to make business decisions. 2019 Jan (£) Feb (£) March The net inflow/outflow – the The total receipts row shows the (£) net cash flow – figure is cash inflows (sales) for each month. In January, total receipts Cash inflows calculated as total receipts = £1000 + £250 = £1250 (cash inflows) less total Sandwich sales 1 000 2 500 3 000 payments (cash outflows). In Soft drinks 250 750 1 000 February, there is a net cash The total payments row shows flow figure of £1575 (£3250- the cash outflows (purchases) for Business loan 2 000 £1675). each month. In January, total Total receipts 1250 3250 6 000 payments = £750 + £200 + £150 + £300 = £1400 Cash outflows The closing balance in one Bread and Rolls 750 900 1 120 month is the money available to the enterprise at the end of This is a negative net cash flow Fillings 200 250 300 the month. The closing (shown in brackets) where total balance is carried forward to payments are greater than total Soft drinks 150 225 400 the next month and becomes receipts. Rent 300 300 300 the opening balance. At the end of February, the closing Total payments 1 400 1 675 2 120 balance was £3675. this was The closing balance at the end of Net inflow/ outflow (150) 1 575 3 880 carried forward to become the the month is calculated by adding opening balance in March. Opening balance 2 500 2 100 3 675 together the net cash flow and the opening balance. Closing balance 2 100 3 675 7 555  Financial COMPONENT 3 – Promotion and Finance forecasting Learning aim C : Financial planning and forecasting Analysis of cash flow Analysing the cash flow for Colins Bike information Repair Shop: The differences between forecast and 2019 Jan (£) Feb (£) March actual cash flow can alert an enterprise (£) to cash flow problems. Cash flow information can be analysed to find out Cash inflows where there is a problem – in inflows or outflows. The size of the closing balance Repairs 2 500 3 000 3 500 will indicate to the enterprise that it mat Spare part sales 950 1 000 1 300 need to take action to improve cash flow. Bank loan 2 000 Total receipts 3 450 6 000 4 800 Rent increased in April from £300 to £1000 per month. The enterprise Cash outflows Total receipts (cash inflows) show a may have moved to larger large increase between February Cycle frames 1 900 2 120 2 400 premises. and march, mainly due to the Bike chains 750 1 900 2 200 £2000 bank loan. Tyres 225 800 1 000 Monthly loan repayments start in April because the enterprise Rent 300 300 1 000 borrowed the money in March. The closing balance forecast for April is Loan repayment 75 only £230 as a result of the impact of the net cash outflow. If there is another Total payments 3 175 5 120 6 675 There is a negative net cash outflow cash outflow in May, Colin will need to in April of £1425. a move to larger Net inflow/ outflow 275 880 (1 425) take steps to improve cash flow. premises (the big increase in rent) Opening balance 500 775 1 655 may mean the enterprise needs additional inventory (stock). Colin Closing balance 775 1 655 230 must ensure that cash inflows in future months increase, otherwise the business may face financial difficulties.  Suggesting COMPONENT 3 – Promotion and Finance improvements to Learning aim C : Financial planning and forecasting cash flow problems Benefits of cash flow forecasting Risks of not forecasting cash flow  Timing of cash inflows and outflows is known X Late inflows (debtors) can be identified  Potential problems can be spotted quickly X There may not be enough cash to pay employees, suppliers and  The purchase of expensive items can be planned to suit cash flow. running costs  The enterprise can plan when to expand or reduce its activities X Suppliers may refuse to trade with an enterprise that does not depending on cash flow. pay on time X The enterprise may need an expensive loan or overdraft to cover short-term cash flow problems X The enterprise may run out of money and have to cease trading.  Suggesting COMPONENT 3 – Promotion and Finance improvements to Learning aim C : Financial planning and forecasting cash flow problems Reduce fixed and Sell of inventory (stock) variable costs to make that can be easily sold Offer incentives to sales staff to savings. to raise cash Delay payments to suppliers – this make more sales. may be risky. Reduce the customers credit terms Increase sales revenue – either by by shortening the time period given Possible actions to improve raising prices or using sales for payment. timing of inflows and outflows promotions to increase sales. Get a bank loan or overdraft – this Delay any planned expansion of the may fix the problem in the short enterprise’s activities until cash flow term but can be risky. improves. Sell of unused fixed Chase debtors for assets to raise cash money owed. Potential impacts of improving cash flow X Reducing customers credit terms may result in fewer sales if customers switch to other businesses that offer more favourable credit terms X Selling off inventory could be at a lower cost than the purchase cost, resulting in a financial loss. X Selling off unused fixed assets such as machinery or company cars may mean that the enterprise is willing to accept a lower price for these assets than they are worth. X Delaying planned expansion could mean that the enterprise is not able to take advantage of business opportunities. X Reducing costs by purchasing cheaper supplies or laying off part of the workforce could result in poorer quality products and dissatisfied customers. COMPONENT 3 – Promotion and Finance Break-even analysis and Learning aim C : Financial planning and forecasting Break-even point Key Term Definition Example and / or Formula Break-even is when revenue from sales selling a product is equal to the cost of Break Even Works out how many items a business must sell in order to make a profit money that the enterprise has made making the product. The break-even profit and no loss. At this point, the and costs are the same. There is no point can be calculated using a Margin of The difference between the sales made Total Sales – Break even point Safety and the break even point Break even Fixed Costs Costs which don’t change with output Rent, Rates, Insurance, Salary (how many items you make or sell) formula. Variable Costs which do change with output (how Raw Materials, Stock, Wages, Costs many items you make or sell Electric used to make product Total Costs All of your costs added together Fixed Costs + Variable Costs Break-Even When the amount of money spent on ________Fixed Costs_______ Point making/buying in the product is the (Selling price per unit – Variable same as the money made from selling Costs per unit) the product Profit Sales made after the break-even point are a Profit for the company Loss Sales made before the break-even point are a Loss for the company Changes to If variable costs decrease, each unit costs If costs increase, each unit costs Variable or less to make. This means they have to more to make. This means they Fixed Costs sell less to break even. If revenue stays have to sell more to break even. If the same they will make a bigger profit revenue stays the same Changes to If the selling price increases the break If they lower the selling price the Sale Price even point will be lower so they need to break even point will be higher so sell less. This could affect sales as people will need to sell more. The lower won’t pay as much so revenue would be price might attract more customers less and boost their total revenue COMPONENT 3 – Promotion and Finance Break-even analysis and Learning aim C : Financial planning and forecasting Break-even point Information for a break even chart: Before drawing a break-even chart, you will An example of a break-even chart need the following information about the product: Fixed costs Revenue Variable costs Total revenue (sales) Selling price per unit Break-even point Total Costs Profit How to draw a break even chart 1. Draw the fixed costs line 2. Draw the total costs line (variable + fixed costs) Margin of 3. Draw the total revenue line 4. Mark on the break-even point – where Loss Safety total costs and total revenue lines cross. Remember to: - Give the chart a title - Label the axes, lines and break-even point Key Facts You must remember the Break Even helps a business by showing how many units it needs to sell formulas as these are not to cover its costs. It shows when it will start to make a profit and the lowest amount they can sell so they don’t make a loss. It can show the given in the exam!! margin of safety and if costs or selling price change how that will affect the profit or loss COMPONENT 3 – Promotion and Finance Using break-even analysis in Learning aim C : Financial planning and forecasting planning Costs Selling price Sales (revenue) Costs fall Increase in selling price Sales increase Lowers break-even point. The Break-even point lowers. Lowers break-even point. The margin of safety enterprise makes more profit. The Fewer sales required to increases, revenue increases and the enterprise lower the break-even point, the fewer break-even. makes more profit. the sales are required to break-even. Costs increase Decrease in selling price Sales fall Break-even point rises. The enterprise Break-even point rises. Break-even point rises. The margin of safety makes less profit. Action to take: The decreases. Action to take: the enterprise may enterprise will need to Action to take: The enterprise may try to improve need to sell more items to break- make more sales to sales by lowering the selling price. This increases even. It may try to reduce costs. It break even or reduce its the number of goods needed to be sold to break may raise the selling price. variable costs. even. It may also reduce its variable costs. Increasing the selling price. A change in the selling price can have the opposite effect to the one hoped for by the enterprise – to lower the break-even point. Customer may not be prepared to pay the increased price and switch to a rival, cheaper brand. Falling sales An enterprise may lower the price for a short time only to boost sales and attract new customers. COMPONENT 3 – Promotion and Finance Limitations of break-even Learning aim C : Financial planning and forecasting analysis Break even analysis assumes that … Revenue and costs move in The enterprise only All inventory (stock) is sold Costs remain the same a straight line produces one product. The actual situation may be different The enterprise may receive a Where there are several All inventory may not be Workers may work overtime discount for buying raw similar products, it may be sold, so total revenue may and receive extra wages – materials in bulk – costs will more difficult to calculate be lower than planned. costs will increase decrease. the break even point Benefits of break-even analysis Risks of not using break-even analysis.  Fixed and variable costs are known Costs are unknown so action cannot be taken to reduce them if  Potential sales revenue can be calculated they are too high. For example if inventory (stock) is sold below  The number of items needed to be sold in order to make profit is cost price, the enterprise will make a loss. known The enterprise will not know how many items need to be sold in  The enterprise can take action to increase profit, for example by order to make a profit. If it sells too few, it may make a loss. reducing costs Setting the price of products may be guesswork, resulting in too  The best price can be set for the product high or too low a price.  The enterprise knows which are the most profitable products to The margin of safety is not known. make  The margin of safety is known. COMPONENT 3 – Promotion and Finance Internal Sources of business finance Learning aim C : Financial planning and forecasting Start up enterprise Expanding enterprise Obtain equipment Established enterprise Produce and sell more Hire workers Pay short term liabilities products Rent or buy premises Stay solvent Enter a new market Purchase inventory (stock) Open new branch Internal sources of finance When an enterprise requires money, depending on the purpose, it may be able to provide the finance itself from its own finances. Owner funds Retained profits Most new owners supply most of the start-up capital themselves These can be used to finance the growth of the enterprise. because profits have yet to be made.  Money does not have to be repaid and no interest is payable.  No interest is payable X New enterprise will not be at the stage to have retained profits  If the enterprise is successful, the owner may in time get back their X Many enterprises may not make sufficient profits to be able to investment with a profit invest them back into the business. X The owner may not have sufficient savings to invest in the enterprise X If the enterprise fails, the owner may lose their investment Sale of assets Net current assets Vehicles, premises owned by the enterprise, machinery and equipment This is money that is immediately available to the enterprise – its can be sold to give the enterprise cash to pay short-term liabilities, to working capital. It may use this to pay short-term liabilities such as address cash flow problems or to reinvest in the enterprise money owed to suppliers.  A good way to raise money from assets that are no longer needed  A quick way to raise money  It may avoid the need for a loan X If selling off inventory (stock), the enterprise may have to accept a X Some enterprises may not have assets that they can sell. It may take lower selling price. time to sell larger assets. COMPONENT 3 – Promotion and Finance Sources of business finance Learning aim C : Financial planning and forecasting External sources of finance – Short term Bank overdrafts The bank allows the enterprise to spend more than it has in its bank balance up to an agreed Short term finance limit. This is a type of loan, and may be used by start-ups and small businesses. Short term finance refers to financing  Flexible method of finance as the X Interest may be at a high rate needs for a small period normally less enterprise only uses the overdraft facility X Has to be paid in a short amount of time than a year. In businesses, it is also when it needs to. known as working capital financing.  Can be arranged quickly This type of financing is normally needed because of uneven flow of Credit cards cash into the business, the seasonal A common method of finance used by large and small enterprises. It can be used to pattern of business, etc. purchase stock and finance business trips and pay hotel bills.  Instant source of finance X Interest can be high if not repaid in  Allows purchases to be made on behalf of interest free period the enterprise X Only suitable for purchases up to a credit limit Trade credit Current assets are purchased on credit with payment terms of 30-90 days. Trade credit is often used by enterprises to buy raw materials or products to sell on.  Good for cash flow. In some cases, the X Can only be used to buy certain types of enterprise ma be able to sell on the goods products before paying the supplier for X Loan is only available based on supplier them. payment terms.  No interest is paid COMPONENT 3 – Promotion and Finance Sources of business finance Learning aim C : Financial planning and forecasting External sources of finance – Long term Hire purchase This allows the enterprise to purchase an asset such as equipment or machinery by paying a deposit followed by regular monthly instalments over a period of time. Long term finance  Once the enterprise has paid all the X It is more expensive method of purchase Long-term finance can be defined as instalments, it owns the asset than buying the asset with cash at the any finance with repayments outset. exceeding one year (such as bank loans, bonds, leasing and other forms Bank loans of debt finance) This is money borrowed by the enterprise at an agreed rate of interest. It is paid back over a period of time, for example 3,5,10 years. Bank loans may be used to purchase non- current assets such as vehicles, machinery or property.  The interest rate on the loan is fixed X Interest rates may be high and the bank during the repayment period even if may want security on the loan. general interest rates increase X Failure to repay the loan may lead to the  Enterprises can budget more easily as it enterprise becoming bankrupt. is a fixed cost  The rate of interest is usually lower than an overdraft. Government grants Local and national government grants are used to develop the economy. They may be given to certain enterprises, for example to enable them to create jobs in a certain area.  Grants do not need to be paid back X Only certain enterprises are able to obtain government grants COMPONENT 3 – Promotion and Finance Sources of business finance Learning aim C : Financial planning and forecasting External sources of finance – Long term Leasing This allows an enterprise to have use of the asset, such as an expensive item of equipment of machinery, over a period of time without buying it. The owner of the asset lends it to the Long term finance enterprise for regular payments. Long-term finance can be defined as  The enterprise can have modern X The enterprise does not own the asset. It any finance with repayments equipment without having to pay out returns the equipment to the owner at exceeding one year (such as bank large amounts to buy them the end of the leasing period. loans, bonds, leasing and other forms  The enterprise has the asset it requires of debt finance) for the time it needs it. It is not left with an unwanted asset at the end of the leasing period Venture capital These are funds from a professional investor (venture capitalist) who expects a return on their investment and a share of the ownership of the enterprise.  The enterprise may benefit from the X The venture capitalist may want to be expert guidance of the venture capitalist involved in decision making, and the enterprise owner may lose some management control. Peer-to-peer lending Small investors invest in an enterprise, usually a start-up, in exchange for a return on their investment.  It may be used by enterprises that may X Interest payments may be higher than have difficulty getting traditional forms traditional types of finance. of finance, such as a bank loan.