Chapter 5.2 (Financial function)

Question 1

Define permanent capital

Answer 1

=Amount of assets, funds, or money required by the business at all times

Question 2

Define variable capital

Answer 2

=The additional amount of assets/money required from time to time

Question 3

What factors should you consider when choosing sources of capital (finance)

Answer 3

-Availability and accessibility

-Costs associated with a specific source

-Freedom of application

-Effects of financial leverage

-Taxation considerations

Question 4

What problems would you usually face when obtaining finance ?

Answer 4

-Own capital contribution is too small

-Lack of experience in financial management

-Lack of financial expertise

-Too much emphasis on collateral by suppliers of finance

-Lack of planning

-Credit-worthiness

Question 5

Define debtors

Answer 5

The sum total of all the monies owed to an enterprise by customers/clients at any given time

Question 6

Define creditors

Answer 6

The sum total of all the monies owed by the enterprise to suppliers of the business

Question 7

Define trade creditors

Answer 7

Monies owed to the suppliers of good and services intended for resale purposes

Question 8

Define other creditors

Answer 8

Money owed to the suppliers of good and services meant for supportive operational purposes

Question 9

Define credit transaction

Answer 9

Any business activity where goods and/or services are supplied but where the receiver doesn’t immediately pay them in full

Question 10

List the various forms of credit

Answer 10

-Open account
-Revolving credit
-Instalment credit

Question 11

Explain open account credit

Answer 11

-Credit is extended regularly to s customer/client but the customer/client has to pay the full amount of each of the specific purchases within the following agreed period

Question 12

Explain revolving credit

Answer 12

The client/debtor is restricted to a maximum limit of the accumulated debt owed

Question 13

Explain installment credit

Answer 13

-It applies mainly where high priced goods/services are supplied on credit and the client is obliged to make regular installment payments until the full debt is paid

Question 14

What are the forms of instalment credit

Answer 14

-Hire-purchase
-Leasing
-Renting

Question 15

Advantages of granting credit

Answer 15

-Increasing sales
-Increasing market share
-Increasing profit
-Facing competitionD

Question 16

Disadvantages of granting credit

Answer 16

-Higher administrative and operational costs
-Possibility of late payments by debtors
-Increased need for capital
-Slowdown in cashflow

Question 17

What is the importance of a sound and realistic credit policy

Answer 17

It gives guidance and information to the owner/manager and employees and customers

Question 18

List the 7 C’s of assessing creditworthiness

Answer 18

-Credit history
-Capital
-Capacity
-Common sense
-Collateral
-Conditions
-Character

Question 19

Define financial structure

Answer 19

The composition of the business’ assets in relation to its sources of capital

Question 20

Define ROI

Answer 20

Indicates the rate of return on total capital

Question 21

Define ROE

Answer 21

Indicates the rate of return on own capital

Question 22

Define Liquidity

Answer 22

The ability of an enterprise to pay its short-term financial commitments continuously an on time

Question 23

Define solvency

Answer 23

The degree to which the total assets of the business cover its total liabilities

Question 24

Financial activities

Answer 24

-Obtain external information

-Preparing financial budgets

-Recording all financial transactions

-Analysing financial performance

-Financial Reporting

-Safe guarding cash

-Debt collection

-Formulating the credit policy

-Salary administration

-Negotiating with suppliers of capital

Question 25

Typical problems when obtaining finance

Answer 25

-Own Capital Contribution is too Small

-Lack of Experience in Financial Management

-Lack of Financial Expertise

-Lack of Planning

-Too much emphasis on collateral

-Creditworthiness

Question 26

Implementing Credit Decisions

Answer 26

-Confirming the outcome of an application

-Signing a formal agreement

-Ensuring efficient and effective administration

-Controlling debtors’ accounts

-Follow-up