1. Raising finance: Start-up capital
Before you start your business you will need a sum of money to set things up. This money is called start-up capital.
Start-up capital is used to purchase fixed assets (called capital expenditure). Working capital is also needed. This is used to fund the trading activity of the business eg buying materials and/or stocks (called revenue expenditure).
How do businesses raise this initial start-up capital?
There are several possible sources, but we will focus on four:
- issuing shares (for limited companies only)
- bank loans
- venture capital/business angels
- personal sources.
Activity – Finance Task 1- Raising finance NOT REQUIRED FOR MAY 2018
2. Costs, revenues & profit
When businesses spend money it is called a cost. Fixed costs are those that do not change with a change in the number of products (e.g. factory rent). Variable costs do change when the number of products changes (e.g. materials). When businesses receive money from selling products it is called revenue.
Profit = Total Revenue – Total Costs.
Activity – Finance Task 2 – Costs, Revenue & Profit
Answer using the link below:
Chapter 11 – Calculating costs, revenues & profits
3. Calculating the break-even point
It is important for you to know how many products your business must sell in order to pay off the fixed costs and start making profits. This can be achieved through a break-even chart, or by calculation.
Break-even is the quantity of product sold where total revenue = total cost, ie where zero profit is made.
Contribution = price – unit variable cost. It is money that comes from selling products that goes towards paying the fixed costs. Once the fixed costs are covered further contribution becomes profit.
An example of a break-even chart
Finance Task 4 – Produce a forecasted break-even chart for your funfair business based on your expected costs and the G10 cost sheet (below).
Finance Task 5 – Produce a completed financial plan for your funfair business using the following document;
Preparing cash flow forecasts – NOT REQUIRED FOR MAY 2018