Unit 6: Finance

Question 1

Why do Firms need Finance?

Answer 1

1) To start up a Business
2) To expand
3) If struggling; may need finance to meet its day-to-day costs

Question 2

Sources of finance for a Start-Up?

Answer 2

1) Government Grants; [Pro: Don’t have to pay Back - Con: Strict Criteria to qualify for them]

2) Overdrafts; Taking out more money than you have from bank account [Pro: Make payments on time even if you don’t have the money - Con: High Interest Rate]

3) Loans; Being Lent Money over a long period of time and paying it back in regular instalments. [Pro: Help finance a start-up - Con: Take Assets if money isn’t paid back]

Question 3

Sources of Finance for established Firms?

Answer 3

1) Profits Earned
2) Selling Assets
3) Issue More shares [Limited Company]

Question 4

What is Internal Finance?

State a Pro and a Con.

Answer 4

Finance that comes from Inside the Business [Profits etc…]
(+) Quick and Easy, No interest must be paid
(-) May not have enough Internal finance

Question 5

What is External Finance?

State a Pro and a Con.

Answer 5

Finance from Outside the Business [Bank Loans etc…]
(+) Can raise the amount you need
(-) High Interest rates

Question 6

Factors that affect the Choice of Finance

Answer 6

• Size of Company [whether they are established or not]
• Amount Needed

Question 7

What is an Investment?

Answer 7

Money put into a Business so that it can be improved, in order to make the business more profitable.

[Example; Purchasing New Machinery etc…]

Question 8

What Average Rate of Return (ARR)?

State the Formula for ARR.

Answer 8

The amount of Profit you receive [Per Year] After your investment.

[Average Annual Profit/ Investment] x 100 = ARR

Question 9

What is Break-Even Analysis?

• Look up Break even chart *

Answer 9

It is how Companies Work out at what point they will cover their costs

Question 10

What is the Margin of Safety ?

Answer 10

The gap between current level of output and the break even output [where the total revenue = total costs]

Question 11

Advantages of a Break-even Analysis?

Answer 11

• Easy to work out
• Allows businesses to predict how changes in sales affect profit earned
• Can help persuade investors to invest

Question 12

Disadvantages of a Break-Even Analysis?

Answer 12

• Break even output point may be unrealistic depending on the product
• Assumes there wont be any sudden rises in cost etc
• Can become Complex if used by a business with a large Product Portfolio

Question 13

What is Cash Flow?

Answer 13

The money that is coming into and going out of a business

Question 14

What is Cash Inflow

Answer 14

Money that flows into a business [The selling of products etc…]

Question 15

What is Cash Outflow

Answer 15

Money that flows out of the business [Buying Material etc…]

Question 16

What is Net Cash Flow.

State what a Positive and Negative Cash Flow are.

Answer 16

The difference between the Cash Inflows and Cash Outflow.

Positive Cashflow: Cash Inflow > Cash Outflow [≠ High Profit]
Negative Cashflow: Cash Inflow < Cash Outflow

Question 17

What is Liquidity

Answer 17

How easy an asset can be converted into money

Question 18

What dos a Cashflow Forecast do?

Answer 18

Attempts to predict when a firm may a lack of cash

Question 19

What do Credit Terms tell you?

Look at page 77 of CGP Business Book.

Answer 19

How long after buy a product does the customer have to pay

Question 20

What is Poor Cash Flow and what does it mean for a Business

Answer 20

Poor Cashflow: When Cash Inflow is too little to meet the needs of the Business

• Staff may not get paid on time [lead to poor productivity]
• Creditors [people who loan money] may not get paid on time [Can lead to legal action taking place]
• Not enough cash in a business to meet its day-to-day expenses

Question 21

3 Main reasons for Poor Cash Flow

Answer 21

1) Poor Sales; Hardly any revenue coming in [inflow]
2) Overtrading; Purchasing too many raw materials and Hiring too many staff to work
3) Poor Business Decisions

Question 22

How can a Business Improve Cash Flow

Answer 22

• Increase Cash Inflow [Increase Price etc…]
• Reduce Cash outflow [JIC -> JIT]
• Find New Sources of Finance

Question 23

What is an Income Statement

Answer 23

A financial Statement showing how income has changed overtime.

Question 24

When looking at either an Income Statement or a Cash Flow Forecast , what does it mean if a number is in brackets?

Example: Expenses = (9,000)

Answer 24

Negative [Money Spent]

Question 25

What are Assets

Answer 25

A valuable Item owned by a Business

Question 26

What are Fixed Assets

Answer 26

Assets that are purchased for long-term use. [Factories, Land etc…]

Question 27

What are Current Assets

Answer 27

Assets expected to be turned into Cash within a year [Stocks, Debtors; People who receive the product and pay later]

Question 28

What are Current Liabilities

Answer 28

What a business owes in the short run

Question 29

What are Net Current Assets

Answer 29

What a Firm is worth.

Current Assets - Current Liabilities = Net Current Assets

Question 30

What is Share Capital

Answer 30

Money Put into the Business when shares where originally issued

Question 31

What is Retain Profit

Answer 31

Profit that is put back into the business

Question 32

What are Long term Liabilities

Answer 32

The money the business has borrowed for a period of more than a year [Bank Loan]