Edexcel Business A Level Revision

Interest Rates - is the price of borrowed money. Getting a loan will mean repaying with interest. If you borrow £10,000 at an interest rate if 5%, the repayment will, by the end of the year, be £10,000 + £500 (5%) i.e. £10,500. Interest rates vary depending on the level of risk involved in the loan. At any one time there are a variety of different interest rates operating within the external environment; for example: Interest rates on savings in bank and other accounts Borrowing interest rates Mortgage interest rates (housing loans) Credit card interest rates and pay day loans Interest rates on government and corporate bonds   Interest rates increase… Interest rates decrease… ·        Businesses are less likely to borrow money expand ·          Investment may increase; existing businesses may expand ·        ...

Profit - surplus of revenue when costs are covered Gross profit -  Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Operating profit -  Records how much profit has been made in total from the trading activities of the business before any account is taken of how the business is financed. Statement of comprehensive income - A formal financial document that summarises a business' trading activities and expenses to show whether it has made a profit or loss. Profit margin - tells the business just what percentage of its turnover is actually profit. It is the ratio of profit to sales revenue as a percentage PROFIT = TOTAL REVENUE - TOTAL COSTS There are 3 types of profit; Gro...

Overdrafts - An overdraft is the facility to overspend on a current account up to an agreed sum temporarily. This money is needed only when working capital is insufficient to pay debts and bills. The business in effect can withdraw money from the account that is not there meaning they go overdrawn or in the red. Interest is charged on the overdrawn amount at a much higher rate compared to interest on a loan. Good short-term source of finance An external source of finance provided by the banks and building societies. ADVANTAGES OF OVERDRAFTS Only borrowed when required allowing flexibility Only pay for the money borrowed Quick and easy to arrange No charges for paying off the overdraft Not secured on assets of the business DISADVANTAGES OF OVERDRAFTS The bank can call it in at any time Only available from a current bank account Interest payments tend to be variable making it more difficult to budget Banks may secure the overdraft against the business' assets

Share capital -   Finance raised through the sales of shares by ONLY private and public limited companies. SHARE CAPITAL IS A FORM OF EQUITY CAPITAL e.g. the shareholder becomes a part owner of the business. Shareholders will be rewarded for their investment by the repayment of dividends but may also benefit from an increase in share pricing increasing the value of their shares. Issuing shares is a complex and costly process so only really an option for raising larger amounts of finance to fund long term projects. ADVANTAGES OF SHARE CAPITAL Only need to pay dividends if a profit is being made and the amount of dividend is not fixed. Possible to raise large amounts of finance No interest repayments DISADVANTAGES OF SHARE CAPITAL Loss of ownership as shareholders are part owners (ownership diluted) Potential risk of loss of control for a Plc with a threat of hostile takeovers. Complex and costly process of issuing shares, especially for a Plc.

Loans - A set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time. Loans are vital for many businesses, providing long term funds for a given period to help finance investment projects. A fixed sum including interest and repayment is payable monthly, making planning and managing the cash flow much easier. Loans may be secured against an asset and if there is a default on repayments the asset can be taken. Financial institutions can vary interest rates depending on the amount of risk placed on a loan An external source of finance generally considered to be more suitable for longer-term projects. However, this will depend upon the size of the loan and the repayment period. ADVANTAGES OF LOANS Quick and easy to secure Fixed interest rates allow a firm to budget Improved cash flow The borrower retains ownership of the company. Appropriate method of financing fixed assets DISADVANTAGES OF LOANS Interest must be paid r...