Finance

Question 1

Methods of internal finance

Answer 1

Owners capital
Retained profit
Sale of assets

Question 2

Advantages to internal finance

Answer 2

Capital available immediately
Cheep no interest
Not subject to credit checks
Doesn’t involve third parties

Question 3

Disadvantages to internal finance

Answer 3

Can be limited.
Opportunity cost as could be conflict with shareholders who have a short term view and don’t want dividends cut to increase retained profit.

Question 4

Sources of finance

Answer 4

Internal 
Owners capital 
Retained profit
Sales of assets 
External 
Family and friends
Banks 
Peer to peer funding
Business angles( v capitalists)
Croudfunding
Loans 
Share capital
Overdrafts
Leasing
Trade credit

Question 5

What is a limited liability company

Answer 5

Business has separate identity to owners
Business can be sued but owners cant
Shareholders cant be legally forced to sell personal assets to meet debts

Question 6

Whats an unlimited liability business

Answer 6

No legal difference between owners and business
Personal assets at risk
Can be sued for unlawful acts if employees
More cautious as higher risk for them
Tend to be small

Question 7

Finance appropriate for unlimited liability businesses

Answer 7

Personal savings
Retained profit
Peer to peer lending
Croudfunding

Question 8

Finance appropriate for limited liability businesses

Answer 8

Share capital 
Debentures-long term loan 2 business 
Retained profit 
venture capitalists- want share
Business angles

Question 9

Whats a business plan

Answer 9

A plan for the development of a business, giving details such as the products to be made, resources needed and forecasts such as costs, revenues and cash flow.

Question 10

Content of business plan

Answer 10

Executive summary= overview of business start up,oppertunities, marketing, sales strategy, operations and finaince
Personnel

Question 11

Whats a cash flow forcast

Answer 11

Forecast to show inflows and outflows of the business

Inflows-outflows = net cash flow

Question 12

Cash flow disadvantages

Answer 12

Not accurate 
Tastes and fashions may change
New competition
Interest rates change 
Could be a recession

Question 13

Cash flow advantages

Answer 13

Used to present to bank for loan
Predict surplus of cash and shortage
Plan ahead
Arrange overdraft before running out of cash

Question 14

How can u improve cash flow

Answer 14

Make sure credit customers pay on time
Obtain loan 
Use JIT
Lease or rent equitment instead of buying 
Obtain trade credit

Question 15

What is Sales forecasting

Answer 15

Projection of future sales revenue often based on previous sales data

Question 16

Purpose of sales forcasting

Answer 16

Allows managers to set sales targets

Accurate predictions reduce uncertainty and allow planning

Question 17

Factors effecting sales revenue

Answer 17

Economic variables = interest rates, inflation, unemployment, exchange rates, economic growth

Customer trends

Actions of competitors

Question 18

Advantages of sales forecasting

Answer 18

Plan ahead to avoid surprises
Eg

Personnel dept. Plan staff needed
Production dept. Plan output to meet demand

Finance dept. Forecast cash flow profit and loss to allocate budgets

Marketing dept. Measure sales performance against targets (motivation)

Question 19

Implications of sales forecasts

Answer 19

Past trends may not continue in the future

External influences

Incorrect market research

Long term forcasts harder to predict than short term

Question 20

Revenue

Answer 20

Total sales made by business over period of time

Total revenue =

Volume sold x average selling price

Question 21

Fixed cost

Answer 21

A cost that doesn’t change with output

Question 22

Profit

Answer 22

Total sales - total costs

Question 23

Total costs

Answer 23

Fixed cost + variable costs

Question 24

Contribution and contribution per unit

Answer 24

Amount of money left over after variable costs have been subtracted from revenue

C per unit =

Selling price per unit - variable cost per unit

Total c =
Contribution per unit x no of units sold

Question 25

breakeven formula

Answer 25

Fixed cost / contribution per unit

Question 26

Sales revenue calculation

Answer 26

Units sold x sales price

Question 27

Adv of breakeven

Answer 27

- quick and simple. - easy to understand. - helps spot potential problems. - can assist when applying for a loan - focuses on what output is required before a business reaches profitability

Question 28

Dis of breakeven

Answer 28

Most businesses sell more than one product Unrealistic assumptions fixed costs can change when output changes Assumed all products made are sold Sales are unlikely to be the same as output - may be some build up of stocks or wasted output too

Question 29

What is margin of safety

Answer 29

The difference between actual output and the breakeven output

Question 30

Axis of breakeven chart

Answer 30

``` Y = sales and costs X = units of output ```

Question 31

Variance calculation What is - Adverse Favourable

Answer 31

Actual - budgeted Favourable = costs lower than expected = revenue/ profits higher than expected Adverse = costs higher than expected = revenue/profits lower than expected

Question 32

Causes of favourable variances

Answer 32

Stronger market demand than expected Selling prices increased higher than budget better productivity than expected Competitor weakness

Question 33

Causes for adverse variances

Answer 33

Sales forecasts over optimistic market conditions eg competitors actions Over spend by budget holders

Question 34

Budget implications

Answer 34

If unrealistic demotivate Cause department rivalry If isn’t flexible opportunities can be missed Time consuming to do and monitor and may have used inaccurate data

Question 35

Benefits of budgets

Answer 35

Can be motivating for staff when budgets are met Provide direction and coordination Helps employees focus on costs Highlights losses, wastes and inefficiency Method to control finance

Question 36

Types of budgets

Answer 36

Profit budget =based on combined sales and cost budgets Cost (or expenditure) budget = expected cost based in sales budget Revenue (or income) budget =expected revenue and sales

Question 37

Gross profit

Answer 37

Sales revenue - cost of sales Measure of how much profit is generated from revenue before overheads and other expenses are taken into account

Question 38

Gross profit margin

Answer 38

(Gross profit/sales revenue) x 100 Tells us if business is able to add value during production process (high margin business must be doing something right)

Question 39

Operating profit

Answer 39

Gross profit - overheads Records how much profits made in total from trading activities of the business before any account is taken of how the business is financed

Question 40

Operating profit margin

Answer 40

(Operating profit/ revenue) x 100 Shows how efficiently a business turns sales into profit How efficiently a business is run

Question 41

Net profit

Answer 41

= operating profit +/- finance costs Profit for the year Amount of profit left after tax has been accounted for. Directors then decided how much is paid to owners in dividends and how much is left in business (retained profits)

Question 42

Net profit margin

Answer 42

Net profit(profit for the year) (Net profit /sales revenue) x 100

Question 43

Current ratio

Answer 43

Current assets/current liabilities

Question 44

Acid test ratio

Answer 44

(Current assets - stock) / current liabilities

Question 45

Increase profit by...

Answer 45

``` Increasing selling price = depends on elasticity of demand =competitors may react = sales may fall switch to competitors But = customers may think product higher quality ``` Reduce cost per unit =added value per unit sold mean higher profit margins customers don’t notice change in price = will work if customers don’t notice a change in price they may notice change in quality reducing sales

Question 46

How can a business improve liquidity

Answer 46

Get receivables quickly before paying suppliers

Question 47

Whats GDP

Answer 47

The total value of a country’s output over the course of a year