2.3 - Managing Finance

Question 1

Explain the distinction between cash and profit

Answer 1

Profit and cash operate on different time scales. For example, profit may be recorded as soon as a sale is made, although customers may be paying on credit, meaning that the cash is not yet provided.

Profit often calculated annually

Question 2

What is a fixed asset?

Answer 2

A fixed asset is a long-term tangible property or equipment a company uses to operate its business (e.g. buildings, computer equipment, software, furniture, land, machinery, and vehicles). Classified as a non-current asset unless a business is about to sell it.

Question 3

Give external causes of business failure

Answer 3

Factors outside of the businesses direct control such as:
* Economic challenges - e.g. recession, interest rates, exchange rates
* Changing tastes / trends - dated stock becomes unsellable, frequent market research costs
* Legal - products need redesigning, legislation increase labour costs .etc
* Market Challenges - competitors undercut prices, new competition
* Technological change - increased innovation costs

Question 4

Give internal causes of business failure

Answer 4

• Poor planning - poor budgeting, poor contingency / business plan, lack of R&D lead to low innovation
• Lack of leadership - poor descision making, failure to delegate, low employee motivation / productivity, low adaptibility to change
• Ineffective marketing - lack of market research - misunderstanding cutomer needs (product orientation) - inappropriate promotion & pricing
• Cash flow poblems - overtrading, inability to pay suppliers, unfulfilled orders, insolvency, inability to cover unforseen expenses
• Lack of funds - business may have been undercapitalised when set up (insufficient seed capital), unable to attract investment

Question 5

Define operating costs and give examples

Answer 5

Expenses incured through normal business operations
* Rent or property purchase costs
* Equipment costs
* Marketing and advertising fees
* Payroll and benefits
* Insurance
* Utility costs
* Licensing fees
* Property taxes
* Maintenance and repairs

Differs from administrative expenses like receptionists, telephone bills or postage bills shared by all departments.