2.1 Managing Business Activities

Question 1

Definition of Sources of Finance

Answer 1

A place where a business can find money that they may need to pay off debts or for investment

Question 2

Definition of Expenditure

Answer 2

Spending

Question 3

Definition of Capital Expenditure

Answer 3

Spending on items that naught be used over and over again

Question 4

Definition of revenue Expenditure

Answer 4

Payments for goods and services that have already been consumed or will be very soon

Question 5

Definition of Internal Sources of Finance

Answer 5

Money funds found within the business

Question 6

Definition of External sources of finance

Answer 6

Money funds found outside the business

Question 7

Examples of internal sources of finance

Answer 7

Owner’s capital - money provided by the owner
Retained profit - money made by the business but has not yet been spent
Sale of assets - items that the business owns that have value that they can sell

Question 8

Pros and cons of internal sources of finances

Answer 8

Pros :
Capital is available immediately
It is cheaper - no interest
No third parties involved
Cons :
May not have enough money - funds limited
Is inflexible - not many sources to choose from
Can’t use the money else where if it is spent

Question 9

Examples of external sources of finances

Answer 9

Crowd funding - local community is asked to give the business money as they may like the product or it provides jobs
Family and friends
Banks - apply for money through an overdraft or a loan
Peer to peer lending - someone directly influenced or no relation to the business lends the business money
Business angels - someone invest into the business and provides both money and expertise
Other businesses - Someone lends to the business influenced or no relation
Leasing/hire purchase
Trade credit
Venture capital
Share capital
Mortgage
Government grant

Question 10

Pros of external sources of finance

Answer 10

Crowd funding - no interest , increase reputation , way to test the market
Family and friends - no/low interest , probably won’t want to intervene in the running of the business , may be a gift
Banks - gain large amounts , pre-arranged
Peer to peer lending - lower interest rates then bank , more convenient
Business angels - they want it to be successful
Other business - lower interest rates then banks , more convenient

Question 11

Cons of external sources of finances

Answer 11

Crowd funding - not reliable , may only be used once , time consuming , small amounts of money raised
Family and friends - don’t have the right amount
Banks - interest rates , higher risk of debt
Peer to Peer lending - not secure , hard to organise
Business angels - lose share of business , inter free with decision making
Other businesses - not secure , hard to organise

Question 12

Types of sources of finance

Answer 12

Short term - used to rains finance quickly - designed to support a business in maintains a positive cash flow , used to cover costs of meeting customer needs
Long term - funds that raise finance over a longer period of time , used to cover the costs of large one off expenses

Question 13

Examples of short term sources of finances

Answer 13

Selling assets , retained profits , owner profits , leasing/hire purchase , trade credit , overdraft

Question 14

Examples of long term finances

Answer 14

Retained profit
Venture capital
Share capital
Loans
Crowd funding
Mortgage
Government grant

Question 15

Definition of Liability

Answer 15

The ability to ensure that debts are paid

Question 16

Definition of Limited liability

Answer 16

The business and owner are seen as separate and so the personal assets of the owner cannot be used to pay business debts

Question 17

Definition of Unlimited liability

Answer 17

Business and the owner are seen as the same and so the owner personal assets could be used to pay off debts

Question 18

Factors of a business plan

Answer 18

Executive summary
Business idea and opportunity
Aims and objectives
Market research
Financial forecasts
Sources of finance
Premises and equipment
Personal
Buying and production

Question 19

Key purposes of a business plan

Answer 19

Minimise Risk
Obtaining Finance

Question 20

Definition of Cash flow

Answer 20

Money in and out of the business

Question 21

Definition of positive cash flow

Answer 21

more money coming into the business then going out

Question 22

Definition of negative cash flow

Answer 22

More money going out of the business then coming in

Question 23

Examples of inflows

Answer 23

Sales
Bank loan
Shareholder investment

Question 24

Examples of outflows

Answer 24

Wages
Supplier bills
Electricity bills
Interest
Advertising
Tax

Question 25

Definition of a cash flow forecast

Answer 25

A prediction/estimate of how much money will flow in and out of the business over a set period of time

Question 26

Definition of opening balance

Answer 26

The cash balance at the start of the month

Question 27

Definition of net cash flow

Answer 27

The amount added to the opening balance to get the closing balance

Question 28

Definition of closing balance

Answer 28

Will become the opening balance for the next month

Question 29

How to calculate net cash flow

Answer 29

Total inflows - total outflows

Question 30

How to calculate closing balance

Answer 30

Net cash flow + opening balance

Question 31

Causes of cash flow problems

Answer 31

Overtrading Allowing too much trade credit to customers Poor credit control Inaccurate cash flow management Unforeseen costs

Question 32

Ways to speed up inflows

Answer 32

Incentive early repayment - discounts for paying early Reduce trade credit given Sell off stock at a discounted price to free up cash Inject fresh capital into the business

Question 33

Ways to slow down outflows

Answer 33

Delay payments to suppliers Increase trade credit with suppliers Cut costs

Question 34

Pros and cons of cash flow forecasting

Answer 34

Pros : Support an application for lending Support budgeting process Identify any potential cash flow crisis Cons : Some figures will be based on estimates Variables are constantly changing so the forecast needs to be updated to be valid Don’t consider other important variables only looking at one