Finance

Question 0

When a business decides to increase or deuce the price of its products or services to increase sales, it needs to consider what effect a change in price will have. What factors do these considerations depend on?

Answer 0

Number of competitors (Raising the price will not reduce the amount sold by a lot, especially of there are no or few competitors).
What competitors do (If competitors also raise prices, the amount sold is unlikely to fall very much).
Whether the product is a necessity (If so, people will have to buy it regardless of a price increase).
How much people spend on the product (If already very cheap, people may not be put off paying more).

Question 1

What is a business’ sales revenue? How is it calculated?

Answer 1

The money a business receives for selling goods and services. It depends on how much a business sells and for what price.
Quantity sold x Selling price

Question 2

What are fixed costs?

Answer 2

Costs that do not change as output changes. They remain the same at all levels of output.
E.g. Warehouse, rent, bills, research, etc.

Question 3

What are variable costs?

Answer 3

Costs that are part of the production of more goods. They are directly related to output. The more a business produces, the more it has to pay.
E.g. Raw materials, piece rate pay, electricity, etc.

Question 4

What is break-even? How is it calculated?

Answer 4

This is the point where the total costs of the business are equal to the total revenue (can be seen on a graph).
Fixed Costs / (Selling Price - Variable Costs)

Question 5

What is a margin of safety?

Answer 5

The difference between what a business expects to sell from previous sales figures and the point at which sales will break-even.

Question 6

What is cash flow?

Answer 6

The money flowing into and out of a business over a period of time.

Question 7

Why is too much cash bad for a business?

Answer 7

Opportunity cost.

Cash could be used to invest in and improve future prospects rather than just gaining interest in a bank.

Question 8

What is meant by cash flow forecasting?

Answer 8

The process of estimating the expected cash inflows and outflows over a period of time.

Question 9

What is the net cash flow?

Answer 9

Total cash inflows - Total cash outflows

Question 10

Why would a business produce a cash flow?

Answer 10

• To identify cash flow problems.
• To guide appropriate actions.
• To support overdraft application.
• To prevent the business from running out of money.

Question 11

Why might firms have cash flow problems?

Answer 11

• Seasonal demand
• Overtrading (buying more stock than can sell)
• Over-investment in fixed assets
• Customer credit too generous
• Poor stock management
• Unforeseen changes
• Poor market research

Question 12

What are the dangers of cash flow forecasting?

Answer 12

1. Changes in economy
2. Changes in consumer tastes
3. Inaccurate market research
4. New unanticipated competition

Question 13

How could a company combat a cash flow problem?

Answer 13

OVERDRAFT (flexible and easy to obtain but bank may need convincing)
FACTORING- selling debts on (Quick, providing cash injection, but you would obtain less money than if you were to collect the debt yourself)
SALE AND LEASEBACK of assets (cash injection, but cost of renting is high in the long term and may lose asset afterwards)
IMPROVING WORKING CAPITAL (cheap but is not easy to do and may not solve the problem).

Question 14

What is the importance of cash flow and profit?

Answer 14

Profit is needed in the long run in order to stay in business.
Cash flow is needed in the short term in order to stay in business.

Question 15

What are the two main reasons for business failure?

Answer 15

Not profitable.

Poor cash flow/lack if cash in business

Question 16

How can a firm have high profitability but low cash flow?

Answer 16

Level of stocks: with too much stock, there will be no cash available to you.
Debtors: people may not pay you in the long term, so you will run out of cash.
Purchase of fixed assets: takes time to reimburse the money used to pay for these.

Question 17

How are gross profit and the gross profit margin calculated?

Answer 17

Sales revenue - variable costs

Gross profit/sales revenue x100

Question 18

How are net profit and the net profit margin calculated?

Answer 18

Sales revenue - total costs

Net profit/sales revenue x100

Question 19

In what ways can profit be improved?

Answer 19

• Increase units sold (advertising, promotions, quality of raw materials).
• Increase profit per unit (increased price or reduced cost)

Question 20

Why is negative cash-flow a problem for consecutive months?

Answer 20

The business could go out of business, not because it is unprofitable, but because it has RUN OUT OF MONEY. Money is always needed to pay for day-to-day running costs.

Question 21

Why is it important for businesses to make a profit?

Answer 21

Dividends to shareholders
Drawings to owners
Retained profit for investment.

Question 22

What is the purpose of a profit and loss account?

Answer 22

To calculate net profit.

Question 23

What are the limitations to a profit and loss account?

Answer 23

It is a record of trading in the past and therefore it cannot be assumed that this will continue in the future.
Accounts must never be treated with 100% confidence.

Question 24

What does it mean if a business’ gross profit margins are increasing but their net profit margins are falling?

Answer 24

They are paying proportionately more in expenses than their should be.
Thus may be that they have large fixed costs or excess stock is not being sold.

Question 25

Who may want to see a company’s Annual Report and Accounts document?

Answer 25

Potential investors

Current shareholders

Question 26

What does a balance sheet show?

Answer 26

What the business owns and what it owes.

Payment the business has made for its assets is capital expenditure.

Question 27

What headings do items in the balance sheet appear under?

Answer 27

Fixed assets (not bought to be resold)
Current assets (used in trading for future profit)
Current liabilities (deducted from the current assets to give the working capital)
Capital (share capital, reserves and loan capital)

Question 28

What are some internal sources of finance?

Answer 28

Retained profit
Sale of assets
Owners investment

Question 29

What are some external sources of finance?

Answer 29

Bank loan
Overdraft
Mortgage
Trade credit
Share issue
Grant
Taking a new partner
Lease
Hire purchase

Question 30

What are the three types of budget?

Answer 30

Expenditure budget
Income budget
Profit budget

Question 31

Why do businesses budget?

Answer 31

To control income and expenditure (avoid cash-flow problems)
To set goals for the business and staff
To allocate resources efficiently
To monitor the performance of the business
To measure against business objectives
To motivate individual staff
To promote forward thinking within a business
To establish priorities for the business and staff

Question 32

What is the purpose of a budget?

Answer 32

To plan and control

Question 33

What are the disadvantages of budgeting?

Answer 33

A person must be trained and managed to set budgets.
Difficult to allocate funds correctly based on budgets (misallocated/not put in the business’ best interests).
External factors may influence whether the budget is reached.
Budgets only look at an annual plan and so fail to take a longer term view.