Unit 5 - Management of finance

Question 1

Sources of finance

Answer 1

• Retained Profits
• Sales of Assets
• Share Issue
• Bank Loan
• Commercial Mortgage
• Debt Factoring
• Debentures
• Grants
• Venture Capital
• Crowd Funding

Question 2

Retained profits (Advantages & Disadvantages)

Answer 2

This is when a business saves a portion of its profits and reinvests back into the company

Advantage: Profits belong to the company, so owner is on control

Disadvantage: Relying on profits is risky, as some months a business may not make profits

Question 3

Sales of Assets (Advantages & Disadvantages)

Answer 3

A short term method, such as machinery, vehicles or even land and buildings which are idle, can also be a large source of cash to fund new projects

Question 4

Share Issue (Advantages and Disadvantages)
Selling shares

Answer 4

Selling more shares raises capital for the business
Advantage:
- Large sums of money can be raised
- The money doesn’t need to be paid back

Disadvantage:
- More shareholders means more dividends
(profits are shared)
- Selling shares may result in less control of the
business

Question 5

Bank Loan (Advantages & Disadvantages)

Answer 5

Banks will lend businesses money over a set period of time

Advantages:

• Payments are in regular fixed instalments
• This makes it easier to budget for

Disadvantages:

• Interest must be paid along with the amount borrowed
• Small businesses often pay higher interest rates

Question 6

Commercial Mortgage (Advantages & Disadvantages)

Answer 6

A commercial mortgage is a long term source of finance
It is a sum of money borrowed from the bank that is secured against a business property and paid back in instalments

Advantages:

• Mortgage is given for a long period of time
• Large amounts of finance can be raised quickly

Disadvantages:
- Interest is charged on the loan
- Property can be lost to the mortgage lender if
repayments are missed

Question 7

Debt Factoring (Advantages & Disadvantages)

Answer 7

Debt Factoring is a short term source of finance where firms sell their invoices to a factor such as a bank
They do this for some instant cash, rather than waiting 28 days for the full amount.

Advantages:
- Time and effort is saved as the company is no longer required to recover unpaid debts

Disadvantages:
- Money is lost from the businesses as unpaid debts are sold at a reduced value

Question 8

Debentures (Advantages & Disadvantages)

Answer 8

• Sold by companies to investors as a way of
  raising finance for use within the company
• They pay the holder a fixed amount of money every year until its maturity date
  Then the holder can sell it back to the company for market price

Advantages:
- Control of the business is not lost
Disadvantages;
- Interest must be paid even if the company 
 makes a loss

Question 9

Grants (Advantages & Disadvantages)

Answer 9

• Money given to a business from central or local
  government or princes trust
• Government grants are a one time payment
  from the government to a business

Advantages:

• The grant doesn’t need to be repaid
• The grant isn’t taxable

Disadvantages:

• The payment is a one of payment
• The application process can be quit tedious

Question 10

Venture Capital (Advantages & Disadvantages)

Answer 10

Venture capitalists provide finance when banks decide a loan is too risky

Advantages:
- Organisations with poor credit ratings might be able to get finances

Disadvantages:

• They expect high interest return rates
• They may want part ownership of the company (Loss of ownership)
• They are usually only interested in large investment ventures
• Not suitable for small businesses

Question 11

Crowd Funding (Advantages & Disadvantages)

Answer 11

Small amounts of money from a large number of people are raised to fund a new business or project.

Advantages:

• Finance can be raised from individuals when banks see a venture as too risky
• Some funds are donated so there is nothing to repay

Disadvantages:
- There is a low success rate. Only a small
percentage of crowd funded ventures get off
the ground, often because they don’t reach
target amount
- Privacy can be a problem as ideas become public and can therefore be copied

Question 12

Solutions to improve cash flow

Answer 12

• Reduce level of trade credit given to customers.
• Obtain additional finance eg a loan
• Offer discounts to customers who pay on time
  as this will encourage them to pay more quickly
• Inform the bank of any shortage and organise an overdraft in advance
• Increase sales revenue by increasing selling price or carrying out additional advertising to increase amount sold.
• Spread cost of large capital purchases by purchasing through hire purchase or by leasing equipment

Question 13

The purpose of budgeting

Answer 13

A business will use a Cash Budget to make projections into the future. They will use this to ‘manage’ their cash and as a basis for decision making, e.g. whether or not there will be sufficient cash to purchase fixed assets or to continue trading.

Question 14

The interpretation and analysis of cash budgets

Question 15

The purpose, main elements & interpretation of income statements

Answer 15

PURPOSE:
- This section of an income statement compares the value of sales generated with the value of the sales at cost price (purchase price paid to suppliers)

MAIN ELEMENTS:

• Sales revenue
• Expenses
• Gross Profit
• Profit for the year

Question 16

Sales Revenue

Answer 16

the amount of money received for selling goods or services

Question 17

Gross Profit

Answer 17

• the profit made from buying and selling goods. Gross profit is calculated by deducting cost of sales from sales revenue

Question 18

Profit of the year

Answer 18

• the profit made after all other operating expenses have been deducted from the gross profit

Question 19

Interpretation of an income statement

Answer 19

The income statement keeps track of how much revenue the company generated during a period and what costs it incurred in connection with generating that revenue