Finance and Accounting

• Working capital and why businesses need finance; business failure (bankruptcy, liquidation, administration).
• Internal vs external, short- vs long-term sources of finance.
• Cash flow forecasts and ways to improve cash flow.
• Costs: fixed, variable, direct, indirect; full vs contribution costing; break-even analysis.
• Budgets: incremental, flexible, zero; variances (adverse/favourable).

Why finance is needed

Working capital = current assets − current liabilities. Too little causes liquidity problems even for profitable firms.

Matching source to need

Use short-term finance (overdraft, trade credit) for short-term needs and long-term finance (share capital, loans, debentures, venture capital) for long-term investment. Consider cost, flexibility, control and legal structure.

Opening + net = closing

Closing balance = opening balance + net cash flow (inflows − outflows).

Contribution and break-even

Contribution per unit = price − variable cost. Break-even output = fixed costs ÷ contribution per unit. Margin of safety = actual output − break-even output. A special order is worth accepting (with spare capacity) if its price exceeds variable cost.

Planning and control