Finance

Question 1

SOURCES OF FINANCE
What are examples of Sources of Finance?

Answer 1

Trade Credit
* the length of time the business has to pay for goods they have purchased from suppliers, on credit, e.g. 28 days

Hire Purchase
* when a business buys an asset such as a delivery van and pays it back over period of time, e.g. 36 months

Bank Loan
* a fixed amount of money is borrowed, which is paid back tot he bank in fixed instalments with interest over a period of time, e.g. 3 years

Mortgage
* a large amount of money borrowed from the bank, over a long period of time to purchase land or premises, e.g. shop or factory

Question 2

SOURCES OF FINANCE
Advantages and Disadvantages of Sources of Finance:

Answer 2

Trade Credit
Advantages
* products can be sold at a profit before the business has to pay their suppliers

Disadvantages
* suppliers may be reluctant to sell more goods on credit if the business does not pay on time
* will not benefit from prompt payment discounts

Hire Purchase
Advantages
* only a deposit is required when the asset is acquired
* the business can purchase machinery and equipment with only a small initial outlay of money

Disadvantages
* the business does not legally own the machinery or equipment until the last payment has been made
* interest is usually charged and so it can be a more expensive way of purchasing large items.

Bank Loan
Advantages
* the business can purchase machinery now and use it in the business to start generating profit
* repayments are spread over a period of time which improves cash flow

Disadvantages
* the business must ensure it can pay all monthly instalments on time and in full
* interest is charged on top of the initial loan amount so the business will pay back more than borrowed.

Mortgage
Advantages
* the business is given a long period of time (25 years) to pay the mortgage back

Disadvantages
* interest is paid in addition to the initial amount borrowed
* if the business cannot pay the mortgage back the bank can claim ownership of the property or land.

Question 3

CASH BUDGET
Sources of Cash Flow Problems:

Answer 3

• too much money tied up in inventory
• customers not paying within agreed time limits
• purchasing assets e.g. a van, computer, or machinery when the business cannot afford it
• borrowing more than the business can afford to repay

Question 4

CASH BUDGET
Ways to Resolve Cash Flow Problems:

Answer 4

• sell unnecessary fixed assets
• offer discounts to customers to pay quickly
• if buying expensive assets, use a lease or hire purchase to spread the cost in small payments
• arrange an overdraft or loan from the bank in advance

Question 5

INCOME STATEMENT
Reasons for an Income Statement:

Answer 5

• assist with decision making
• calculate the cost of sales for the year
• calculate the total income for the year
• compare performance with previous years
• calculate the total expenditure for the year
• calculate the profit or loss made in the year
• legally required to produce an income statement
• calculate the tax payable by the business (calculated based on profit made for the year)

Question 6

INCOME STATEMENT
How to Increase Sales Revenue:

Answer 6

• increased advertising
• expanding channels of distribution
• short term promotions, e.g. BOGOF

Question 7

INCOME STATEMENT
How to Reduce Costs:

Answer 7

• find a cheaper supplier of inventory
• buy inventory in bulk to receive discounts
• reduce the number of hours worked by employees, e.g. overtime

Question 8

TECHNOLOGY
How is Technology used in Finance?

Answer 8

Spreadsheets
* financial information can be presented in charts to make it easier to understand
* used to perform quick, accurate calculations and are central to the work of a Finance function

Databases
* databases are used to hold information about customers and suppliers, including contact person, address, and telephone number
* databases can be linked to spreadsheets to produce invoices to customers

PowerPoint
* powerpoint can be used when presenting financial information
to staff and customers, to make it easier to understand

Email
* it is an efficient method of communication as is
received almost instantly by the recipient
* email can be used to send information and attachments to various people, including, staff within business, suppliers and customers