10
Operations and Finance
Back in Business · Strand 2: Understanding Enterprise
3 Learning
Outcomes
Outcomes
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10.1
Outline the main elements that are key to the operational model of a business and explain why these may change over time
Outline / Explain
▼
OUTLINEGive the main points. Name each element, briefly explain what it covers and give an example. For why they change, link to growth, technology, ethics or legal factors.
Operational model: How a business organises its key partners, activities and resources to deliver its product or service and create value for customers. The model must evolve as the business grows, markets shift or external pressures change.
Key Partners
External people or organisations that support the business in delivering its product or service. These are not employees but other parties the business depends on.
Examples: suppliers, couriers, IT service providers, accountants, licensing partners, joint ventures.
Why they change: business growth may require bigger suppliers; expansion needs logistics partners; digital transformation changes IT needs; ethical pressures push brands to change to fair-trade or sustainable manufacturers; new laws (e.g. GDPR) require expert compliance partners.
+Examples: suppliers, couriers, IT service providers, accountants, licensing partners, joint ventures.
Why they change: business growth may require bigger suppliers; expansion needs logistics partners; digital transformation changes IT needs; ethical pressures push brands to change to fair-trade or sustainable manufacturers; new laws (e.g. GDPR) require expert compliance partners.
Key Activities
The essential tasks and processes a business must perform to deliver its value and meet customer needs. A gym's key activities include delivering fitness classes, managing memberships, maintaining equipment and customer service.
Examples: product design, manufacturing, marketing campaigns, app updates, order fulfilment, customer support.
Why they change: customer habits shift; the business grows into new areas; digital tools automate tasks; competitors force new approaches to service delivery.
+Examples: product design, manufacturing, marketing campaigns, app updates, order fulfilment, customer support.
Why they change: customer habits shift; the business grows into new areas; digital tools automate tasks; competitors force new approaches to service delivery.
Key Resources
The essential assets a business needs to operate effectively and compete in its market.
Examples: skilled staff, funding, software, data systems, brand reputation, equipment, licences, intellectual property.
Why they change: resources age and need replacing; expansion requires new equipment or staff; digital tools replace older systems; entering new markets requires different skill sets or local knowledge.
+Examples: skilled staff, funding, software, data systems, brand reputation, equipment, licences, intellectual property.
Why they change: resources age and need replacing; expansion requires new equipment or staff; digital tools replace older systems; entering new markets requires different skill sets or local knowledge.
10.2
Identify the key costs and sources of finance for a business and explore why these may change over the lifecycle of the product or service
Identify / Explore
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IDENTIFYName and briefly state each type of cost, revenue stream and source of finance. For lifecycle changes, explain how the financial picture evolves from start-up to maturity.
Costs
Fixed Costs
Costs that stay the same each month regardless of how much the business produces or sells. They must be paid even when sales are zero.
Examples: rent, insurance, manager salaries, loan repayments, rates.
Change over time: they increase when the business grows, takes on new premises or restructures. A business that closes a location reduces its fixed costs.
+Examples: rent, insurance, manager salaries, loan repayments, rates.
Change over time: they increase when the business grows, takes on new premises or restructures. A business that closes a location reduces its fixed costs.
Variable Costs
Costs that rise and fall depending on how much is produced or sold. When sales increase, variable costs increase. When sales fall, variable costs fall.
Examples: raw materials, packaging, delivery costs, hourly wages, electricity for production.
Change over time: they grow as output increases but can fall per unit with bulk buying or better supplier deals.
+Examples: raw materials, packaging, delivery costs, hourly wages, electricity for production.
Change over time: they grow as output increases but can fall per unit with bulk buying or better supplier deals.
Revenue streams
Single transaction (once-off)
The customer pays once for a product or service. Income is unpredictable as it depends on individual sales.
Examples: buying a pair of runners, purchasing a coffee, a one-off haircut, buying a new phone.
Simple to operate but revenue can be inconsistent, especially in seasonal businesses.
+Examples: buying a pair of runners, purchasing a coffee, a one-off haircut, buying a new phone.
Simple to operate but revenue can be inconsistent, especially in seasonal businesses.
Recurring revenue
The customer pays on a regular, ongoing basis. This gives the business more predictable and stable income.
Examples: Netflix subscription, gym membership, insurance premium, SaaS software licence, magazine subscription.
Change over lifecycle: start-ups often begin with single transactions, then add subscriptions or licensing as they grow. Mature businesses may automate recurring streams or remove underperforming ones.
+Examples: Netflix subscription, gym membership, insurance premium, SaaS software licence, magazine subscription.
Change over lifecycle: start-ups often begin with single transactions, then add subscriptions or licensing as they grow. Mature businesses may automate recurring streams or remove underperforming ones.
Sources of finance -- short, medium and long term
| Short-term (under 1 year) | Medium-term (1-5 years) | Long-term (5+ years) |
|---|---|---|
| Bank overdraft | Term loan | Long-term loan / debenture |
| Trade credit | Leasing | Equity (selling shares) |
| Accrued expenses | Hire purchase | Venture capital |
| Factoring | Retained earnings / grants | |
| Use for: stock, wages, bills, short-term cashflow gaps | Use for: equipment, vehicles, IT systems | Use for: premises, major expansion, entering new markets |
How costs and finance change over the product lifecycle
1. Introduction
High costs -- R&D, marketing, setup. Revenue is low. Finance typically from personal savings, grants or seed investment. Cash deficits are common.
2. Growth
Variable costs rise as output grows. Revenue streams expand (e.g. adding subscriptions, licensing). Medium-term finance (loans, leasing) to fund equipment and new capacity.
3. Maturity
Revenue established and refined. Business may remove underperforming streams or automate income. Focus moves to efficiency and optimising cost structures.
4. Renewal / Exit
Business pivots to new revenue streams (e.g. digital, licensing) to stay relevant -- or reduces activity, focusing on passive income or preparing for sale.
10.3
Analyse the cashflow of a business and recommend a suitable course of action to address the issues arising from the analysis
Analyse
▼
ANALYSEExamine the data in detail. Identify the deficit months, find the main cause from the data, and recommend specific actions. Always justify recommendations using figures from the forecast.
Key cashflow terms
Cashflow forecast -- definition
A future projection of all the money coming into (receipts) and going out of (payments) a business over a period, usually month by month. It helps the business plan ahead to ensure it can always meet its payments.
+Net cash
Net cash = Total receipts minus total payments for the month.
A positive net cash means more came in than went out.
A negative net cash means more went out than came in.
+A positive net cash means more came in than went out.
A negative net cash means more went out than came in.
Opening cash
The cash balance available at the start of the month. This is always the same figure as the previous month's closing cash balance.
+Closing cash
Closing cash = Opening cash + Net cash.
A positive closing cash is a closing cash surplus.
A negative closing cash is a closing cash deficit -- the business does not have enough cash to meet payments this month.
+A positive closing cash is a closing cash surplus.
A negative closing cash is a closing cash deficit -- the business does not have enough cash to meet payments this month.
Why prepare a cashflow forecast?
1. Avoid deficits: spot shortfalls in advance and arrange finance before the problem hits.
2. Financial control: compare actual vs planned cashflow to prevent overspending.
3. Raise finance: banks and investors require a cashflow forecast as part of a business plan.
4. Plan for surpluses: decide how to use positive cash balances (invest, repay debt, expand).
+2. Financial control: compare actual vs planned cashflow to prevent overspending.
3. Raise finance: banks and investors require a cashflow forecast as part of a business plan.
4. Plan for surpluses: decide how to use positive cash balances (invest, repay debt, expand).
Limitations of a cashflow forecast
1. Based on estimates: predicted figures may not match actual results if sales or costs differ from expectations.
2. Unexpected events: sudden cost increases, bad debts or economic shocks can make the forecast inaccurate very quickly.
+2. Unexpected events: sudden cost increases, bad debts or economic shocks can make the forecast inaccurate very quickly.
Interactive cashflow -- tap any closing cash figure to see analysis
Tap any closing cash cell to analyse that month
| Lakeview Inn 2025 | JAN | FEB | MAR | APR | TOTAL |
|---|---|---|---|---|---|
| RECEIPTS | |||||
| Room Sales | 18,000 | 23,000 | 22,000 | 30,000 | 93,000 |
| Food & beverage | 8,000 | 10,000 | 11,000 | 15,000 | 44,000 |
| Other | 5,000 | 6,000 | 5,500 | 8,000 | 24,500 |
| Total Receipts | 31,000 | 39,000 | 38,500 | 53,000 | 161,500 |
| PAYMENTS | |||||
| Purchases | 14,000 | 18,000 | 16,500 | 22,000 | 70,500 |
| Wages | 10,500 | 13,000 | 11,500 | 16,000 | 51,000 |
| Equipment Purchase | -- | -- | 36,000 | -- | 36,000 |
| Other | 4,000 | 6,000 | 3,000 | 6,000 | 19,000 |
| Total Payments | 28,500 | 37,000 | 67,000 | 44,000 | 176,500 |
| Net Cash | +2,500 | +2,000 | -28,500 | +9,000 | -15,000 |
| Opening Cash | 500 | 3,000 | 5,000 | -23,500 | 500 |
| Closing Cash | 3,000 | 5,000 | (23,500) | (14,500) | (14,500) |
Recommended actions for a cashflow deficit:
1. Spread large costs over time -- use a medium-term loan, leasing or hire purchase to pay for equipment in instalments rather than one lump sum that creates a deficit.
2. Increase cash receipts -- run a promotion or discount offer to boost sales in the months before the deficit. The hotel could also sell investments (e.g. shares) to raise cash quickly.
3. Cut spending -- switch to cheaper suppliers or postpone non-essential purchases until the cash position improves.
4. Arrange short-term finance -- set up an overdraft facility in advance to cover deficit months and make sure all payments can be met.
1. Spread large costs over time -- use a medium-term loan, leasing or hire purchase to pay for equipment in instalments rather than one lump sum that creates a deficit.
2. Increase cash receipts -- run a promotion or discount offer to boost sales in the months before the deficit. The hotel could also sell investments (e.g. shares) to raise cash quickly.
3. Cut spending -- switch to cheaper suppliers or postpone non-essential purchases until the cash position improves.
4. Arrange short-term finance -- set up an overdraft facility in advance to cover deficit months and make sure all payments can be met.
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📌 10.1 Operational Model
Operational
Model
Model
Key Partners
External people/organisations that support the business -- suppliers, couriers, IT services, accountants
Change due to: growth, expansion, digital transformation, ethical sourcing, legal compliance
Key Activities
Essential tasks to deliver value -- manufacturing, marketing, customer service, app updates, order fulfilment
Change due to: shifting customer habits, business growth, automation of tasks
Key Resources
Essential assets -- staff, funding, software, data, brand reputation, equipment, licences
Change due to: ageing assets, expansion, digital tools replacing old systems, new market entry
📌 10.2 Costs, Revenue and Finance
Costs &
Finance
Finance
Costs
Fixed: same every month regardless of output -- rent, insurance, manager salaries
Variable: rise and fall with output -- raw materials, packaging, delivery, hourly wages
Revenue Streams
Single transaction: once-off payment -- buying a product, one-off service
Recurring: regular ongoing payment -- subscription, membership, licence fee
Sources of Finance
Short-term (<1 yr): overdraft, trade credit, accrued expenses, factoring
Medium-term (1-5 yr): term loan, leasing, hire purchase
Long-term (5+ yr): long-term loan, equity, venture capital, retained earnings, grants
📌 10.3 Cashflow Forecast
Cashflow
Forecast
Forecast
Key Terms
Net cash = Total receipts minus total payments
Opening cash = previous month's closing cash
Closing cash = Opening cash + Net cash (deficit if negative)
Why prepare one?
Avoid deficits | Financial control | Raise finance | Plan for surpluses
Actions for a deficit
Spread large costs (leasing/HP) | Increase receipts (promotion/sell investments)
Cut spending (cheaper suppliers) | Arrange short-term finance (overdraft)
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Filter by LO then tap Start.
10.2Identify a suitable source of finance EverGlow Organics Ltd may use to fund their international expansion plans. Give a reason for your choice.OL Paper 1 · Q1(f)▼
IdentifyName the source of finance and give one reason why it suits EverGlow's situation.
Model solution
Source of finance: long-term loanEverGlow Organics Ltd is planning international expansion, which involves large-scale spending on entering new markets, hiring staff and building supply chains in new countries. A long-term loan provides the significant capital needed for this type of large investment and can be repaid in regular instalments over five or more years, making it manageable for the business.
Other acceptable answersEquity (selling shares): allows the business to raise large amounts without taking on debt, though it involves giving up some ownership. Venture capital: a venture capital firm may provide both funding and strategic expertise for a business entering international markets. Grants: if entering markets that qualify for Enterprise Ireland or EU funding, grants would not need to be repaid.
10.2Classify the following as variable or fixed costs for a restaurant: (i) chef salaries (ii) food ingredients (iii) electricity for ovens (iv) insuranceOL Paper 2 · Q5(a)(i)▼
IdentifyState whether each cost is fixed or variable and briefly explain why.
Model solution
Chef salariesFixed cost. Chef salaries are agreed in employment contracts and stay the same each month regardless of how many covers the restaurant serves.
Food ingredientsVariable cost. The cost of food ingredients rises when the restaurant is busy and serves more meals, and falls when fewer meals are served. It moves directly with output.
Electricity for ovensVariable cost. The more meals prepared, the more the ovens are used. Electricity consumption rises and falls with the level of production.
InsuranceFixed cost. Insurance premiums are agreed annually and do not change based on how many customers visit the restaurant each week.
10.3Examine the Lakeview Inn cashflow forecast and answer (i)-(iv).OL Paper 2 · Q4(a)▼
ExamineLook closely at the data. Identify specific figures, find trends and justify your answers using the numbers in the forecast.
The forecast
| Lakeview Inn 2025 | JAN | FEB | MAR | APR | TOTAL |
|---|---|---|---|---|---|
| Total Receipts | 31,000 | 39,000 | 38,500 | 53,000 | 161,500 |
| Total Payments | 28,500 | 37,000 | 67,000 | 44,000 | 176,500 |
| Net Cash | +2,500 | +2,000 | -28,500 | +9,000 | -15,000 |
| Opening Cash | 500 | 3,000 | 5,000 | -23,500 | 500 |
| Closing Cash | 3,000 | 5,000 | (23,500) | (14,500) | (14,500) |
Model solution
(i) Highest closing cash surplusFebruary has the highest closing cash surplus of 5,000.
(ii) Months with a closing cash deficitA closing cash deficit is expected in both March (-23,500) and April (-14,500).
(iii) Main reason for the deficitIn March, the Lakeview Inn plans to purchase equipment for 36,000. This one-off payment pushes total payments to 67,000 against receipts of only 38,500, creating a net cash outflow of -28,500. This is what causes the large deficit and the knock-on effect into April.
(iv) Two pieces of advice1. Spread the equipment cost over time using a medium-term loan, leasing or hire purchase. Paying 36,000 in a single month causes the deficit. Spreading it over 24 or 36 months would eliminate this problem entirely and allow the hotel to manage its cash comfortably.
2. Arrange an overdraft facility before March arrives. The hotel can see from the forecast that a deficit is coming. Setting up an overdraft in advance ensures the business can still pay wages, suppliers and bills in March and April without missing any payments.
2. Arrange an overdraft facility before March arrives. The hotel can see from the forecast that a deficit is coming. Setting up an overdraft in advance ensures the business can still pay wages, suppliers and bills in March and April without missing any payments.
