Topic 5 of 5 · Form 2
Financial management and record keeping
To know whether the business is making a profit, control cash, plan, pay tax, and borrow money.
Notes for this topic 1 file, in order
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Why keep records
To know whether the business is making a profit, control cash, plan, pay tax, and borrow money.
Basic records
- Sales and purchases records, receipts and invoices.
- Cash book: money in and out.
- Stock (inventory) records.
- Debtors (who owes you) and creditors (whom you owe).
Costs, revenue and profit
- Fixed costs (rent, licence) and variable costs (raw materials).
- Total revenue = price × quantity sold. Profit = total revenue − total costs.
- Break-even point: the output where total revenue equals total costs. Break-even = fixed costs ÷ (price − variable cost per unit).
Worked example: A juice business has fixed costs of US$120 a month. Each bottle costs US$0.40 to make and sells for US$1.00. Find the break-even output.
Contribution per bottle = 1.00 − 0.40 = 0.60
Break-even = 120 ÷ 0.60 = 200 bottles a month
Cash flow
A cash-flow forecast predicts money coming in and going out each month, helping avoid running out of cash.
Separating business and personal money
Pay yourself a fixed amount; do not take stock or cash for personal use without recording it.
Check yourself
- Give two reasons for keeping business records.
- Fixed costs are US$300, price US$5 and variable cost US$2 per unit. Find the break-even output.
- Why should business money be kept separate from personal money?
Show answers
- Any two: know profit, control cash, plan, tax, get loans.
- 300 ÷ 3 = 100 units
- To know the true performance of the business and avoid using up its capital.
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