Unit 3: Business Finance

Level: 3
Unit type: Internal
Guided learning hours: 90

Unit in brief

Learners develop the skills and knowledge required to analyse and interpret
financial data, enabling them to assess the financial health of a business and
suggest how its performance can be improved.
Unit introduction

Business finance enables a business organisation to operate on a day-to-day basis,

and over the long term, develop new products and invest in new equipment in order
to access new markets. Decisions relating to business finance require careful
planning and monitoring, which involve deciding where to obtain the finance,
calculating business costs, and understanding how to evaluate and improve the
overall performance of a business.
In this unit, you will consider the importance of business finance and the types of
business finance available in different contexts. The unit will introduce you to
accounting terminology, the purpose and importance of business accounts, and the
different sources of finance available to businesses. You will prepare and analyse
business finance planning tools such as cash flow forecasts and break-even
analyses. Measuring the financial performance of an organisation will require you to
prepare and analyse statements of comprehensive income, and statements of
financial position, in relation to the organisation’s profitability, efficiency and
liquidity.
This unit will give you a background to business finance and accounting as you
progress to employment and further training.

Learning aims

In this unit you will:

A- Explore types of business finance available at different stages in the growth of
a business
B- Understand how financial planning tools can be used to analyse financial data
and
assess business risks
C- Understand how financial statements for a sole trader are prepared and used to
analyse and evaluate business performance.
Summary of unit
Learning aim Key content areas Assessment approach
A Explore types of business finance available at different stages in the growth of a
business
A1 Sources of income
A2 Sources of revenue
A3 Business finance and types of business
A report identifying the sources of finance applicable in different business scenarios.
B Understand how financial planning tools can be used to analyse financial data and
assess business risks
B1 Cash flow forecasts and statements
B2 Break-even analysis
B3 Business risks Present financial information on behalf of a sole trader which
analyses the performance of the business, identifies current business risks and
suggests ways in which business performance could be improved.
C Understand how financial statements for a sole trader are prepared and used to
analyse and evaluate business performance
C1 Statement of comprehensive income
C2 Statement of financial position
C3 Measuring performance using financial ratios
C4 Preparation of financial performance reports
Content
Learning aim A: Explore types of business finance available at
different
stages in the growth of a business
A1 Sources of finance
Features of the main sources of internal and external business finance and their
advantages and disadvantages.
• Internal sources of finance, including owner’s capital, retained profit and the sale
of assets.
• The importance of net current assets.
• External sources of finance distinguished between long-term, medium-term and
short-term:
o long-term sources of finance, including mortgages, shares and debentures
o medium-term sources of finance, including leasing, hire purchase, bank loans,
peer-to-peer lending and venture capital
o short-term sources of finance, including bank overdrafts, crowd funding, debt
factoring, invoice discounting and trade credit.
A2 Sources of revenue
Features of the main sources of revenue received by a business and factors that
influence the amount received from each source of revenue.
• Revenue received from selling activities, including cash sales and credit sales.
• Revenue received from supplementary activities, including rental income, interest
payments on deposits and commission received (e.g. social media).
A3 Business finance and types of business
The relationship between business finance and the characteristics of a business, its
objectives and the stage in its development.
• Types of business and the stages in their development to include: start-up, sole
trader partnerships, private and public limited companies.
• Business objectives to include: expansion, product development, market
development and relocation.
Learning aim B: Understand how financial planning tools can be
used to analyse financial data and assess business risks
B1 Cash flow forecasts and statements
Methods and processes used to prepare, complete, revise and analyse cash flow
forecasts and statements of cash flow.
• The importance of cash flow.
• Inflows/receipts and outflows/payments.
• The difference between a cash flow forecast and a statement of cash flow.
• Analysis of cash flow forecasts and statements.
• Actions that can be taken by a business to address cash flow difficulties.
• Benefits and limitations of cash flow forecasts.
B2 Break-even analysis
Methods and processes used to prepare, complete, revise and analyse a break-even
chart.
• Distinguishing between types of cost: fixed, variable, semi-variable.
• Sales: calculations of total revenue from output and sales per unit.
• Constructing a break-even chart from given data to determine the break-even
point and the margin of safety.
• Calculating the margin of safety and the break-even point using the break-even
formula (units and/or sales value).
• Calculation of total contribution, contribution per unit benefits and limitations.
• The implications of contribution analysis for short-term decision making.
• Benefits and limitations of break-even analysis.
B3 Business risks
Assessment of financial risks using cash flow and break-even analysis.
• Risks related to costs (fixed costs, variable costs, semi-variable, total costs),
including changes in suppliers, changes in the cost of imported materials, factors
impacting labour costs.
• Risks related to cash inflows and revenue streams (changes in market conditions,
overambitious forecasts, changes in economic conditions including interest rates).
Learning aim C: Understand how financial statements for a sole
trader are prepared and used to analyse and evaluate business
performance
C1 Statement of comprehensive income
Methods and processes used to prepare, complete, revise and analyse a statement
of comprehensive income for a sole trader.
• Purpose and use of a statement of comprehensive income.
• Completion, calculation and amendment to include gross profit (revenue, opening
inventories, purchases, closing inventories, cost of goods sold), calculation of
profit/loss for the year (expenses, other income).
• Adjustments in a statement of comprehensive income for depreciation using both
the straight line and reducing balance methods.
C2 Statement of financial position
Methods and processes used to prepare, complete, revise and analyse a statement
of comprehensive income for a sole trader.
• The purpose and use of a statement of financial position.
• Completion, calculation and amendment of a statement of financial position of a
sole trader to include: non-current assets (tangible and intangible, cost,
depreciation and amortisation, net book value), current assets (inventories, trade
receivables, prepayments, bank, cash), current liabilities (bank overdraft, accruals,
trade payables).
• Non-current liabilities (bank loan and mortgage).
• Adjustments in a statement of financial position for depreciation, prepayments
and accruals.
• Accounting for changes in capital, including opening capital, transfer of profit or
loss and drawings.
• Extracting financial data from a statement of financial position to determine net
current assets/liabilities, capital employed.
C3 Measuring performance using financial ratios
Methods and processes used to analyse financial statements against financial
targets.
• Measuring profitability: calculation, interpretation, analysis and evaluation of:
o gross profit margin – (gross profit/revenue) × 100
o mark-up – (gross profit/cost of sales) × 100
o net profit margin – (net profit/revenue) × 100
o return on capital employed (ROCE) – (profit/capital employed) × 100.
• Measuring liquidity: calculation, interpretation, analysis and evaluation of:
o current ratio – current assets/current liabilities
o liquid capital ratio – (current assets – inventory)/current liabilities.
• Measuring efficiency: calculation, interpretation, analysis and evaluation of:
o trade receivable days – (trade receivable/credit sales) × 365
o trade payable days – (trade payables/credit purchases) × 365
o inventory turnover – (average inventory/cost of sales) × 365
o comparative analysis of business performance against own performance,
competitors and industry benchmarks
o actions taken by a business to improve its profitability, liquidity and efficiency and
the benefits and limitations of such actions.
• Limitations of ratios when assessing business performance.
C4 Preparation of financial performance reports
Importance of using a business report format for the presentation of financial
performance review outcomes.
• Format, layout:
o title and details of the report
o introduction
o set of calculations based on the financial data provided for the business
o risks faced by the business based on financial data provided by the business and
the previous decisions it has taken
o analysis of the performance of the business
o conclusions
o recommendations.
Assessment criteria
Pass Merit Distinction
Learning aim A: Explore types of business finance available at different
stages in the growth of a business
A.D1 Evaluate appropriate types of business finance applicable in a specific
business context.
A.P1 Explain sources and suitability of finance available in different business
contexts.
A.P2 Explain sources and suitability of revenue available in a specific business
context.
A.M1 Analyse the types of business finance required in a specific business context.
Learning aim B: Understand how financial planning tools can be used to
analyse financial data and assess business risks
B.D2 Evaluate the impact of different factors that impact on financial risks in a
given business context.
B.P3 Explain the purpose of financial planning tools in reviewing financial data in a
specific business context.
B.P4 Perform appropriate calculations using financial planning tools to identify
financial risks in a specific business context.
B.M2 Analyse the factors that impact on financial risks in a specific business
context.
Learning aim C: Understand how financial statements for a sole trader are
prepared and used to analyse and evaluate business performance
C.D3 Justify recommendations for improvements to business performance for a sole
trader, arising from own preparation and interpretation of business financial data.
C.P5 Prepare and interpret financial statements for sole trader businesses.
C.P6 Explain ways to improve profitability, liquidity and efficiency in a given
business context.
C.M3 Assess business performance of a sole trader by manipulating financial data
and making suggestions for improving business performance.