Understanding Finance in a Business Context

Know key costs and expenditure for businesses.

Learning Outcome 1: Indicative Content 

Key costs of running a business may include:

• start-up costs
• operating costs (variable and fixed costs)
• Variable costs change in proportion to the amount of output produced or amount sold (e.g. raw materials. employee wages, energy, commission to sales staff);
• fixed costs do not change in relation how much output a business produces (e.g. Premises/rent, management salaries, insurance, marketing)

Types of expenditure may include:

• staffing
• premises e.g. rent, lighting, heating
• equipment

Assessment Criteria

• 1.1
  
  Identify the key costs associated with running a business.
  
• 1.2
  Identify different types of expenditure associated with running a business

Know about key records needed to manage finance in a business context.

Learning Outcome 2: Indicative Content 

For 2.1 learners need to define key business terms.

Examples of financial records that may be kept include:

• invoices, receipts
• income and expenditure
• income tax

Importance of financial records may include:

• know costs, income and expenditure to make sure you can afford what to do
• report income and expenditure to appropriate authorities eg Inland Revenue, shareholders, managers, owner
• helps with forecasting future plans
• required for auditing purposes

Assessment Criteria

• 2.1
  Define key business terms, for example, income, expenditure, turnover, cash flow, gross and net profit.
  
• 2.2
  Describe the financial records that a business needs to keep.
  
• 2.3
  Explain why financial records are important, including legal requirements.
  

Know why managing cash flow is important to businesses.

Learning Outcome 3: Indicative Content  

The role and importance of cash flow may include:

• to pay for immediate expenses
• indicates net change of a business from one period to the next
• lack of cash may mean insufficient money to pay for next period
• key indicator of the financial health of a business

Factors that affect cash flow may include:

• poor or good sales
• loans
• increased costs and overheads
• timing of payments by the business and to the business

How cash flow problems can lead to business failure:

• poor management of cash flow may mean lack of accessible funds to finance day to day expenses
• loss of key accounts
• limited or no new customers
• lack of management control
• inadequate or inappropriate financing

Ways to monitor and manage cash flow may include:

• analysis of cost, revenue and profit
• breakeven analysis
• cash flow analysis

Assessment Criteria

• 3.1
  Explain the role and importance of cash to the operation of a business.
  
• 3.2
  Describe factors that affect cash flow in a business.
  
• 3.3
  Explain how cash flow problems can lead to business failure.
  
• 3.4
  Describe how to monitor and manage cash flow.
  

Be able to produce and use financial documents

Learning Outcome 4: Indicative Content  

Learners must provide sufficient and valid evidence to achieve this outcome.

Assessment Criteria

• 4.1
  Produce a basic spreadsheet showing income and expenditure.
  
• 4.2
  Interpret simple accounts over a specified period.