finance (the last one)

Question 1

owners savings

Answer 1

Owner invests their own savings into the company.

Advantage - The owner has complete control and it reduces the amount
which needs to be borrowed

Disadvantage - Owners with unlimited liability would risk losing their
savings

Question 1

bank loan

Answer 1

Money from the bank that needs to be repaid, with interest.

Advantage – Payments are made in regular fixed instalments improving
cash flow.

Disadvantage – Interest can be expensive

Question 2

bank overdraft

Answer 2

Bank Overdraft

Allows a business to withdraw more money from a bank account than is
available.

Advantage - Easy to set up, quick to access finance

Disadvantage - Must be paid back quickly otherwise can be expensive

Question 3

government grant

Answer 3

Money from the Government that does not need to be repaid but there
is conditions attached.

Advantage - Provides finance which does not have to be repaid

Disadvantage - Tend to be one off payments – difficult to achieve (lots
of paperwork)

Question 4

retained profits

Answer 4

This is when a business saves a portion of its profits and reinvests back
into the company.

Advantage - Profits belong to the company, so owner is in control

Disadvantage - Relying on profits is risky, as some months a business
may not make profits

Question 5

trade credit

Answer 5

This is when a business can purchase goods from suppliers with a
delayed payment.

Advantage - Can sell goods using materials not yet paid for, improving
cash flow.

Disadvantage - Trade credit is at the discretion of the supplier

Question 6

sale of assets

Answer 6

Selling machinery, vehicles or even land and buildings which are idle.

Advantage – Large amounts of money can be raised that was originally
tied up in assets.

Disadvantage – Equipment may then need to be rented when required
which can be expensive

Question 7

share issue

Answer 7

Selling shares to new or current shareholders. Can only be used for
Limited Companies.

Advantage – large sums of money can be raised

Disadvantage – more shareholders = more dividends = less profit

Question 8

hire purchase

Answer 8

Paying the item up in monthly instalments but eventually the business will
own the item (unlike Leasing)

Advantage – Will receive the item immediately without paying for it.

Disadvantage – The item isn’t actually owned until all payments have been
made - interest is added on could make this expensive.

Question 9

venture capitalists

Answer 9

Provide finance to a business when banks decide a loan is too risky.

Advantage - Organisations who have poor credit rating might be able to
get finance

Disadvantage – Control and a share of the profits is given up to the
Venture Capitalists

Question 10

debt factoring

Answer 10

Unpaid customer invoices are sold to a factoring company at a discount.
They then collect and keep the customer debts. They will get some cash
quicker rather than waiting to be paid the full amount.

Advantages - Responsibility is then passed on to the factoring company -
saving time and effort

Disadvantages - Business will receive less money than is actually owed.

Question 11

crowdfunding

Answer 11

This is finance that is raised by online appeals. The idea is that lots of
people will donate money to a project or cause.

Advantages - large amounts of cash can be raised fairly quickly as many
individuals will donate small amounts if they believe in the cause

Disadvantages - some CF projects have equity attached to them, meaning
the individuals ask for a share in the business before they will invest

Question 12

mortgage

Answer 12

A special type of loan used to purchase property and land

Advantage - can be taken over a long period of time e.g. 25 years

Disadvantage - if interest rates change, repayments might increase

Question 13

factors that determine the source of finance

Answer 13

Ease of obtaining the source of finance; for example a successful
business can easily obtain a bank loan

The amount if finance the business is looking for. The business
might have to consider more than one source of finance

The length of time they have to pay back the finance. The business
might need a very long term source of finance, in which case an
overdraft is not suitable

The amount of interest that they have to pay back. Loans that
carry high rates of interest may not be suitable

The conditions attached to the source of finance eg a government
grant might have conditions attached that the business cannot
meet

Question 14

purpose of a cash budget

Answer 14

A cash budget is a financial statement used for the following reasons:

To predict a positive cash flow situation (SURPLUS)

To predict a negative cash flow situation (DEFICIT)

To allow investment to be planned during a surplus

To allow action to be taken to avoid a deficit

To be compared with actual figures used to measure the
performances of individual departments or divisions

Question 15

how to solve cash flow

Answer 15

Too much money tied
up in stock
Use JIT inventory stock control/sell of excess
inventory (through a sale)

Too long a payment
period for credit
sales
Charge higher interest on credit sales to
encourage customers to pay sooner

Not enough credit
purchases
Switch suppliers to those with interest-free
credit available on purchases

Increasing expense
costs
Try to reduce expenses – spend less on
rent/selling online through e-commerce

Question 16

cash budget analysis

cash sales are falling

expenses are increasing

negative closing balance

Answer 16

CASH SALES
ARE FALLING
Could be caused by seasonal factors
such as selling goods suitable for
summer months only
There may also be other EXTERNAL
FACTORS e.g. a recession
Business should engage in
marketing activities e.g.
lowering prices, launching
promotions (BOGOF) to
encourage custom

EXPENSES ARE
INCREASING

The business is paying
increasing costs for
expenses, e.g. rising rent
costs in a certain month

Switch to cheaper premises or sell
online to cut costs dramatically

NEGATIVE
CLOSING
BALANCE
The business had a
deficit in a certain
month which means their
payments outweigh their
receipts
Arrange more finance in the short
term, such as another loan,
overdraft or attract investment,
e.g. through venture capital or
business angels

Question 17

benefits of cash budget

Answer 17

It helps to highlight periods when cash flow problems may
occur — which allows the organisation to take corrective
action

Can be shown to a potential lender — which can then be used
to secure borrowing (bank loan etc.)

It can show periods of surplus cash — which can then be
used for capital investment (machinery/equipment)

It can be used to set departments/managers a budget —
which gives them a target to focus on.

It can be used to aid future financial planning — which can
help identify when an overdraft is required.

Question 18

income statement terms

PROFIT FOR
THE YEAR

SALES
REVENUE
COST OF SALEs
ROSS PROFIT
EXPENSES

Answer 18

SALES
REVENUE

The amount of money made form selling goods or services

COST OF SALES

The amount of money spent on selling goods, calculated by:

(opening inventory + purchases) – closing inventory

GROSS PROFIT

The profit made from buying and selling, calculated by:

sales revenue – cost of sales

EXPENSES

Running costs incurred throughout the year (wages,
advertising)

PROFIT FOR
THE YEAR

The profit made after expenses are deducted, calculated
by; gross profit - expenses

Question 19

statement of financial position terms

Answer 19

Non-current
assets

Items owned for a period of more than 1
year

Current
assets

Items owned for a period less than 1 year

Current
liabilities

Items OWED for a period of less than 1
year

Non-current
liabilities

Long term debts of the business, e.g. bank
loan, debentures etc.

Question 20

profitability - gross profit ratio

Answer 20

GROSS PROFIT PERCENTAGE:

This measure the % of profit
made from buying and selling.
The higher the % the better.

How to improve:

Increase sales revenue by
increasing prices

Switch to a cheaper supplier
of purchases

Question 21

profitablity - profit of the year ratio

Answer 21

PROFIT FOR THE YEAR PERCENTAGE:

This measure the % of profit made
ONCE EXPENSES ARE DEDUCTED.
The higher the % the better.

How to improve:

Reduce expenses by making staff
redundancies/cut overtime.

Increase sales revenue e.g.
increasing selling price.

Question 22

profitablity - return on capital employed

Answer 22

RETURN ON CAPITAL EMPLOYED:

This measure the % of investment
that is returned to investors such
as SHAREHOLDERS. The higher
the better!

How to improve:

Attempt to increase profit for
the year e.g. by reducing
expenses or improving revenue.

Question 23

liquidility - current ratio

Answer 23

CURRENT RATIO:

Measures the ability of a business to pay back
short term debts.

It is always expressed at X:1, over 2:1 is ideal, as it
has twice the current assets as current liabilities
and therefore a healthy cash flow.

How to improve:

If a business has less than 2:1 they need more
assets e.g. sell non-current assets for cash.

They should reduce current liabilities.

Question 24

liqudility - acid test ratio

Answer 24

Measures the ability of a business to pay back short term debts IN A CRISIS
SITUATION!

How to improve:

If a business has less than 1:1 they must try to secure more assets e.g. encourage
cash sales to improve cash flow.

If CR is ok but acid test is too low, it indicates too much money is tied up in
inventory therefore JIT inventory control to avoid this

Question 25

efficiency - rate of inventory turnover

Answer 25

Measures the amount of times a business re-stocks its inventory
during the year.

The result is expressed in times, e.g. 9 times – this indicates its
ordered more 9 TIMES A YEAR!

How to improve:

Most businesses want a high figure as it indicates that products are
selling well and money is not tied up in inventory.

If the result is too use JIT to avoid overstocking, sell of excess
stock or negotiate with suppliers.

Question 26

Too much money tied
up in stock

How to solve cash budget

Answer 26

Use JIT inventory stock control/sell of excess
inventory (through a sale)

Question 27

purpose of income statement

Answer 27

shows the profit/loss made by the company from the buying and selling of goods

can be used to compare gross profit and profit for the year over different years of trading to identify any trends and to aid decision making

comparisons can be made with similar companies in the same industry

can be used to compare expenses and sales over the years or between department to see if there are any areas where they can be minimised or improved

Question 28

purpose of statement of financial position

Answer 28

investors and potential investors can use a statement of financial position to determine whether they will get a good return on their investment.

Suppliers and creditors can use it to determine the level of risk involved in lending or supplying to the business

A statement of financial position can be used to analyse ratios which can be compared with previous years or those of competitors. This will better aid future decision-making
A statement of financial position can be used to show the value of all current assets non-current assets liabilities and
non-current liabilities

Question 29

spreadsheets

Answer 29

The
formulae function
within the spreadsheet can be used to carry out instant calculations accurately. Formulae will also amend calculations automatically when the spreadsheet is updated.

‘What if’ scenarios can be carried out using spreadsheets set up with
IF statements
and appropriate formulae.

Information held within a spreadsheet can be easily secured using a password.

Time can be saved in the finance department by using spreadsheet templates for financial statements and spreadsheets can be easily amended or edited.

Question 30

limitations of ratio analysis

Answer 30

Ratio Information might be historical - this means it is not relevant to the current position of the business.

Competitors may not be willing to share information - this means it is difficult to compare with other businesses.

Ratio analysis does not take into account external factors e.g. recession.

Ratio analysis does not take into account internal factors e.g. staff morale levels.