Finance and accounting

Business finance 企业资金 is the money a firm needs to start, run and grow. A new firm needs money to buy premises 经营场所 and equipment; a growing firm needs money for new projects; and every firm needs money to pay day-to-day bills.

Banks are a key external source of finance, through loans and overdrafts.

Spending falls into two types:

Capital spending buys fixed assets; revenue spending covers running costs

• capital expenditure 资本性支出 — money spent on fixed assets 固定资产 that last a long time, such as machines, vehicles and buildings.
• revenue expenditure 收益性支出 — money spent on day-to-day running, such as wages, rent and raw materials.

Working capital 营运资本 is the money a firm has for its daily needs. It is found from the balance sheet 资产负债表:

Here current assets 流动资产 are things that become cash within a year (cash, inventory, money owed by customers), and current liabilities 流动负债 are debts due within a year. Too little working capital is dangerous — the firm may not be able to pay its bills.

This is a key idea.

• profit 利润 is what is left when total costs are taken from total revenue over a period.
• cash 现金 is the money the firm actually has right now to spend.

A firm can be profitable but still run out of cash — for example, if it sells goods but customers have not paid yet. Many firms fail not from low profit, but from running out of cash.

Profit and cash are different: a firm can look profitable on paper yet have no cash to pay its bills — which is why many fail

A stock exchange: public limited companies raise finance by selling shares.

Finance can come from inside the business (internal sources 内部来源) or from outside (external sources 外部来源). It can also be short-term 短期 (paid back within a year) or long-term 长期.

Sources of finance come from inside the business (internal) or outside it (external)

There is no single best source. The choice depends on:

• the amount needed — large amounts may need shares or a long loan.
• the purpose — long-term assets should use long-term finance.
• the cost — interest and fees differ between sources.
• the legal structure — only a company can sell shares.
• how much the firm already owes, and whether it can offer collateral 抵押品 (an asset the lender can take if the loan is not repaid).

Match the finance to the purpose: short-term needs use short-term finance, long-term assets use long-term finance

A cash-flow forecast 现金流量预测 predicts the cash coming in and going out each month. It helps a firm spot a shortage early.

• cash inflows 现金流入 — money coming in, mostly from sales.
• cash outflows 现金流出 — money going out, such as wages and rent.
• net cash flow 净现金流 — inflows minus outflows for the period.

The opening balance 期初余额 is the cash at the start of the month. Adding net cash flow gives the closing balance 期末余额, which becomes next month's opening balance.

A cash-flow forecast tracks the closing balance each month, warning of a shortage early

Common causes of cash-flow problems are: too many sales on credit, holding too much stock, buying too many assets at once, and overtrading 过度交易 (growing too fast for the cash available).

Ways to improve cash flow:

• bring cash in sooner — ask customers to pay faster, or offer discounts for quick payment.
• delay cash going out — agree longer trade credit with suppliers.
• arrange an overdraft or short loan to cover a gap.
• hold less stock to free up cash.

Good working capital management keeps enough cash to stay safe without holding so much that money sits idle.

A cost 成本 is money the business spends to make its product. We sort costs in several ways:

• fixed costs 固定成本 — costs that do not change with output, such as rent.
• variable costs 可变成本 — costs that rise and fall with output, such as raw materials.
• direct costs 直接成本 — costs clearly linked to one product, such as its materials.
• indirect costs 间接成本 (overheads) — costs not linked to one product, such as manager salaries.
• marginal cost 边际成本 — the cost of making one more unit.
• average cost 平均成本 — the cost per unit, found by total cost ÷ number of units.

Total cost = fixed cost + variable cost; only variable cost rises with output

Cost information helps managers set prices, choose what to make, and control spending.

Contribution 贡献 is how much each sale adds towards paying the fixed costs:

Break-even 盈亏平衡 is the point where total revenue equals total costs, so profit is zero. The break-even point 盈亏平衡点 in units is:

The break-even point is where total revenue equals total cost — left of it is loss, right of it is profit

The margin of safety 安全边际 is how far current sales are above the break-even point:

Worked example. A product sells for £20 with a variable cost of £12 per unit. Fixed costs are £40,000, and the firm makes 6,000 units. Find the contribution per unit, the break-even output and the margin of safety.

A large margin of safety means sales can fall a lot before the firm makes a loss. Break-even analysis is quick and useful, but it has limitations 局限性: it assumes the selling price and costs stay the same, and that everything made is sold.

A budget 预算 is a financial plan for the future — a target for income or spending. Budgets help a firm plan, control money, and check performance. Two types are:

• incremental budget 增量预算 — last year's budget changed by a small amount.
• zero-based budget 零基预算 — every cost must be explained from zero each year.

A variance 差异 is the difference between the budgeted figure and the actual figure:

A variance is actual minus budget; favourable helps profit, adverse hurts it

Worked example. A firm budgeted £30,000 for wages but actually spent £34,000. Find the variance and say whether it is favourable or adverse.

Costs came in higher than planned, so this is an adverse variance.

• a favourable variance 有利差异 is better for profit (costs lower, or revenue higher, than planned).
• an adverse variance 不利差异 is worse for profit (costs higher, or revenue lower, than planned).

Studying variances shows managers where the plan went wrong, so they can act.

• Show that cash is not profit — a profitable firm can still fail from a cash-flow shortage.
• For break-even: contribution per unit $=$ price $-$ variable cost; break-even $=$ fixed costs $\div$ contribution; margin of safety $=$ actual $-$ break-even output.
• Match a source of finance to the need (short-term for cash flow, long-term or equity for assets) and to the type of business.
• Calculate a variance and label it favourable or adverse (actual against budget).