Chapter 10: Finance Function

Question 1

Statement of comprehensive income

Answer 1

• Where all the business’s income will be reflected(capital contribution, loan, selling assets)
• Where all the business’s expenses will be reflected

Current income is from services rendered

Question 2

Owner’s equity

Answer 2

• The money the owner contributes to the business
• The value of the owner’s money in the business
• The more income that the business generates, the higher the Owner’s Equity
• When the owner takes money or assets out of the business(drawings) it decreases the Owner’s Equity
• Owner’s equity is shown in the Statement of Financial Position

Question 3

Current Assets

Answer 3

• Trading inventory
• Debtors
• Cash

Question 4

Current Liabilities

Answer 4

• Creditors
• Bank overdraft

Question 5

Non-current liabilities

Answer 5

• Mortgage bond

Question 6

Fixed costs

Answer 6

• Costs that stay the same regardless of the units produced, ie. salaries/wages

Question 7

Variable costs

Answer 7

• Costs that change depending on the units produced, i.e. water, electricity

Question 8

Cost per unit

Answer 8

• Is calculated by dividing the total cost by units produced

Question 9

Break-even point

Answer 9

• The point where the costs of the business are exactly equal to the income the business earned, so neither a profit or a loss was made
• Business only makes a profit once they surpass this point, and they made a loss if they can’t reach it
• Fixed cost/(price per unit-variable cost per unit)

Question 10

Saftey Margin

Answer 10

• How far from the break-even point the business has to function to safely continue working

Question 11

Feasibility Study

Answer 11

• Used to assess how successful a business venture or idea will be

Question 12

Imprtance of a feasibility study

Answer 12

• Helps determine whether an idea will be successful enough
• Helps owner remove emotions from decision making/perspective to focus on only facts (objectivity)
• Helps the entrepreneur to think critically
• Must be in paper because it can be refered to to develop a business

Question 13

Three steps to a feasibility plan

Answer 13

• Describe the business/project idea
• Describe the market
• If viable, determine next step

Question 14

Describe business or project plan

Answer 14

• Write a very detailed description of the good/service (who will manufacture, patents/trademarks, any distribution channels)
• Describe how this product stands out from competitors and why consumers would choose it over others

Question 15

Describe the market

Answer 15

• Does the product have a market
• Does the market have space for a new competitor
• The growth potential of the market
• Whether the market expects a cheaper product or more expensive product than pre-existing ones
• Strengths and weaknesses of the competitors

Question 16

If viable, formulate the next step

Answer 16

• The amount od capital needed to initiate the business for at least 6-8months
• Any equipment needed and where it an be sourced for how much
• Where the business will be located, why, and any municipal regulations relevant
• Any special skills needed and where those workers will be found

Question 17

Money management

Answer 17

The ability for the entrepreneur to gain an optimum return on their money(ROI), allowing them to preserve their money and make it grow

Question 18

Profit vs Cash flow

Answer 18

• Profit is when there is more income than expenses
• Cash flow is the physical money in the bank that is used to pay expenses

Question 19

Using profit

Answer 19

Can either:
* Withdraw the money and use to their personal capacity (not recommended)
* Withdraw the money and invest it somewhere else
* Reinvest the money back into the business

Question 20

Investing to generate monthly income

Answer 20

• To generate monthly income the business may consider investing into the bank to gain interest or in property to gain rent income

Question 21

Investing for capital growth criteria

Answer 21

• Type of industry
• Business brand strength
• Liquidity
• Management team

Question 22

Type of industry

Answer 22

Certain industries are more successful than others due to the current affairs and trends that happen within them

Question 23

Brand strength

Answer 23

The way a brand is viewed by consumers will affect the support on their products

Question 24

Management Team

Answer 24

• If a business has a good management team the business will run smoothly as the people in charge will know how to deal with problems and maintain a healthy bottom line
• Also consider whether the CEOs of the business are investing their own money into that business, if not ask yourself why

Question 25

Insurance

Answer 25

* Protects business from unexpected events that would cost a lot of money to recover from * Allows the business to be in the same financial position as before the problem

Question 26

Assurance

Answer 26

* Covers a long-term risk that is definetly going to happen * Policy holder is the person who signed the policy and the beneficiary is the person who the money will be paid out to

Question 27

Types of insurance

Answer 27

* Insurance on the building- covers any structural damage to building * Business Interruption insurance- Covers any incident that disturbs the business's usual operation * Fidelity- Covers theft from employees * Public liability- Covers if employee/er causes damage to a customer's property, if some gets injured at work, or if someone dies at work * Insurance on vehicles- Usually only cover the other party's vehicle if it's an accident and not the business's. If covers the repairs of vehicle, it may a provide a temporary vehicle * Theft, Burglary, robbery- To cover the stock stolen, there must be a reliable EPOSSE system to keep record of stock to know how much there was and how much was stolen * Bad Debt- very expensive