GCSE Applied Business

Unit 3 Business Finance

Chris Lane: Back Streets

Scenario: Chris Lane is a sole trader who owns Back Streets an independent record shop chain located in Pembroke, Carmarthen, Swansea and Cardiff. Alongside selling the usual CD range, he also has a range of rare and collectable vinyl records. He is expanding his business, so he has reassessed the accounting techniques used within the business. Chris has asked for your help to advise him on the following aspects.

1. To track financial transactions between Back Streets and customers/suppliers, a variety of financial documents are used. Chris has asked you to explain the following documents to him:

  • Purchase Order
/
  • Remittance Advice
/
  • Receipt

  • Credit Note
/
  • Cheque
/
  • Invoice

  • Goods Received Note
/
  • Delivery Note
/
  • Statement of Account

2. List the problems that might occur for Chris if one of his employees completes the financial documents incorrectly.

3. Chris has ordered a batch of the new REM Greatest Hits CD. Draw a diagram to show the flow of financial documents between Warner Bros. Records Inc. (supplier) and Back Streets (customer).

Up until now Chris has kept all documentation for the business using a paper-based system. As Chris wants to expand the business and open more shops he now realises that he must keep his accounts on a computer.

4. Advise Chris on the advantages and disadvantages of using a computer system to complete all his financial transactions.

5. Apart from keeping his financial records on the computer, list other uses his computer could be for the business.

Chris is aware that there are several ways of making and receiving payments.

6. Advise Chris on how each payment is made and what would be the advantages and disadvantages to Back Streets in receiving these payments.

  • Cash
/
  • Direct Debit
/
  • Credit Transfer

  • Cheque
/
  • Debit Card
/
  • Credit Card

7. Explain to Chris which method of payment is best from the point of view of the customers of Back Streets? Which is the best from the point of view of Back Streets?

Chris is expanding Back Streets and is hoping to open up more shops across Wales.

8. Explain the difference between start-up costs and running costs.

9. Chris feels he has too many running costs and wants to cut back in order to help fund his expansion plans. How can Chris reduce his running costs?

10. Chris is going to open a new shop in Brecon. He has produced a list of costs, yet is unsure which are start-up costs and which are running costs. List the following costs according to which group they belong.

  • Shop premises
/
  • Insurance
/
  • Fixtures

  • Tills
/
  • Market Research
/
  • Business Rates

  • Shop Sign
/
  • Staff Wages
/
  • Stock

  • Computer
/
  • Printer ink
/
  • Electricity bill

  • Carrier Bags
/
  • Telephone costs
/
  • Advertising

Chris knows that the income and expenditure of his business is an important part of developing plans for the future.

11. Construct a cash flow forecast for Chris, using the following information:

  • The cash flow is to run from April to September.
  • Sales are predicted as £1500 in April, £2000 in May, £2200 in June, £2400 in July, £2500 in August and £2700 in September.
  • Rent is £200 per month.
  • Sundry costs of £200 in April and £100 each month after.
  • Wages to staff will be £500 per month.
  • Stock of £1000 in April, £1050 in May, £800 in June, £1000 in July, £900 in August and £700 in September.
  • Electricity of £150 per month
  • Opening bank balance is £200

12. Comment on the cash flow forecast with regards to:

a) Sales

b) Expenses

c) Losses

d) Profits

13. How could Chris ensure that he does not have minus figures in his cash flow?

Each shop with Back Streets is given money to perform their various tasks during the financial year and they are set targets of how much they have to earn. These allocations and targets together are called a budget.

14. To explain budgets to Chris, draw up a budget for yourself showing your income and expenditure over one month. (Draw a column for each week) What spending would you reduce if you wanted to increase your savings?

Chris has been to the bank to ask for funding for his new outlet plans. The bank has asked him to produce a brake-even analysis.

15. Calculate, using the formula, the break-even point if fixed costs are £2000, the selling price is £10 and the variable costs are £6.

16. After seeing your break-even calculation, Chris has reassessed his costs and revenues. Fixed costs are still £2000, the selling price is £12 and the variable costs per item are £7. Construct a table to draw a break-even graph (hint units in 50’s).

17. Explain to Chris who his stakeholders are and why would they be interested in the financial position of Back Streets.

Chris wants to expand his business and open up more shops throughout Wales. He needs money to expand Back Streets. Chris has read up on many different sources of finance available to him and has now got confused.

18. Explain to Chris the good and bad points of the following sources of finance:

  • Own funds
/
  • Back Street Profits
/
  • Bank Loan

  • Overdraft
/
  • Hire Purchase
/
  • Leasing

  • Asset selling
/
  • Government Grant
/
  • Venture Capital

  • Selling shares

19. Advise Chris which would be most appropriate for him.

The profit and loss account is a summary of the total of Back Streets purchases and sales over a given time period, usually one year. The Balance Sheet shows the value of Back Streets on a particular day.

20. Complete a profit and loss account for Chris using the following information:

  • Electricity £1250
/
  • Sales £18000
/
  • Rent £2400

  • Cost of goods £7800
/
  • Wages £5000
/
  • Sundry £1500

21. Complete the balance sheet for Chris using the following information:

  • Fixed Assets: Van £1000
  • Current Assets: Stock £1500, Debtors £1000, Cash in till £150 and Bank £2250
  • Current Liabilities: Creditors £2500
  • Capital Introduced: £4400
  • Drawings: £1050

22. Give definitions of the following terms:

  • Assets
/
  • Break-even
/
  • Budget
/
  • Capital

  • Cash flow
/
  • Credit
/
  • Creditor
/
  • Debit Card

  • Depreciation
/
  • Drawings
/
  • Expenditure
/
  • Fixed Costs

  • Interest
/
  • Investor
/
  • Liability
/
  • Premises

  • Profit
/
  • Remittance
/
  • Revenue
/
  • Running Costs

  • Shareholders
/
  • Start-up costs
/
  • Variable costs
/
  • VAT

Applied Business/Unit 3/SWJ- 1 -