Business Finance - process of financial management

Question 1

what is planning and implementing in financial

Answer 1

it is essential in determining how a business’s goals will be achieved. they involve the;

• financial needs
• developing budgets
• record systems
• financial risks
• financial controls

Question 2

What is developing budgets (planning and implementing)

Answer 2

budgets provide quantitive information on the requirements to achieve a particular task. reflect planning decisions about how resources are to be used

they allow for comparisons of actual results with the initial plan and evaluation process

three main types of budgets;

• operating
• project
• financial

Question 2

what are financial needs (planning and implementing)

Answer 2

financial needs will be determined by ;

• the size of the business
• current phase of the BLC
• future plans for growth and development
• capacity to source finance (debt/equity)

Question 3

what are operating budgets (planning and implementing)

Answer 3

relates to the main activities of a business. they may relate to;

• sales
• productions
• raw materials
• direct labour
• expenses
• cost of goods sold

Question 4

what are project budget (planning and implementing)

Answer 4

relates to the capital expenditure and research development. these include information about;

• the purpose of asset purchases
• lifespan of the asset
• revenue

Question 5

what are financial budgets (planning and implementing)

Answer 5

relates to the financial data of a business. they are the predictions of the operating and project budgets
they include;
- income statements
- balance sheets
- cash flow statement

Question 6

what are record systems (planning and implementing)

Answer 6

mechanisms employed by a business to ensure that data + information recorded is accurate, efficient and accessible
these data’s include;
- collection of revenue payment of employees
- accounts payables (suppliers)
- taxes

70-80% businesses use MYOB

Question 7

what are financial risks (planning and implementing)

Answer 7

the result of a business being unable to cover its financial obligations such as debts that a business incurs through borrowing
- can result in bankruptcy

Question 8

what are financial controls (planning and implementing)

Answer 8

policies + procedures that ensure a business will achieve profit in most efficient way

they are important in assets such as ;

• accounts receivable
• inventory
• cash

some policies + procedures include;

• clear authorisation + responsibility for tasks
• separations of duties
• rotations of duties

Question 9

What are the advantages of debt (debt and equity financing)

Answer 9

• funds are readily available
• increased funds –> increase earnings in profits
• tax deduction for interest payments

Question 10

disadvantages of debt (debt and equity financing)

Answer 10

• increased risk because of additional charges that have to be repaid
• regular payments need to be made
• lenders have first claim if business ends in bankruptcy

Question 11

advantages of equity (debt and equity financing)

Answer 11

• does not have to be repaid (unless owner leaves)
• cheaper than other sources of finance because no interest
• control over the finance
• low gearing
• less risk

Question 12

disadvantages of equity (debt and equity financing)

Answer 12

• lower profits and returns
• expectation that the owner will have a ROI
• funds are not easily accessible and owners may struggle finding investors

Question 13

what is matching the terms and sources of finance to business purpose (debt and equity financing)

Answer 13

it is important to find a source of finance that is most appropriate to fund specific activities 
these will be influenced by;
- the terms of finance
- the costs of each source funding
- the structure of the business
- availability of finance
- costs

Question 14

what is terms of finance (debt and equity financing)

Answer 14

where finance must be suitable for the structure of the business and the purpose for which the funds required

E.g. short-term finance should be suitable to meet short-term obligations –> such as managing temporary cash flow shortfall

Question 15

costs of each source of funding (debt and equity financing)

Answer 15

equity capital and debt capital such as borrowings + rate of return needs to be taken into consideration and balanced against the cost of each source

Question 16

structure of the business and sources of finance (debt and equity financing)

Answer 16

equity for unincorporated businesses has to be raised from private sources or by taking on another partner
- small businesses have fewer opportunities for equity capital than larger

Question 17

availability of funds in sources of finance (debt and equity financing)

Answer 17

heavy dependence on smaller number of investors can increase risk if an investor pulls out and commitments cannot be met

Question 18

costs in sources of finance (debt and equity financing)

Answer 18

set-up costs and interest rates must be measured against available sources of funds

Question 19

how to calculate current ratio (liquidity)

Answer 19

current assets / current liabilities

Question 20

debt to equity ratio (gearing)

Answer 20

total liabilities / total equity

Question 21

gross profit ratio (profitability)

Answer 21

gross profit / sales

Question 22

net proft ratio

Answer 22

net profit / sales

Question 23

return on equity ratio

Answer 23

net profit / total equity

Question 24

expense ratio (efficiency)

Answer 24

total expenses / sales

Question 25

what is liquidity ratio (current ratio)

Answer 25

current assets / current liability

Question 26

what is gearing (debt to equity ratio)

Answer 26

total liabilities / total equity

Question 27

what is profitability (gross profit ratio)

Answer 27

gross profit / sales

Question 28

what is accounts receivable turnover ratio

Answer 28

sales / accounts receivable