Management Of Finance

Question 1

Describe what a bank overdraft is and discuss the advantages and disadvantages.

Answer 1

A bank overdraft is when a business takes out more money than it has in its bank account.This is usually a short-term source of finance.

Advantages

• allows a business to take out more than it has in its bank account;
• useful for addressing short-term cash flow issues.

Disadvantages

• daily interest or daily charges may apply;
• not useful for addressing long-term cash flow problems.

Question 2

Describe what a bank loan is and discuss the advantages and disadvantages.

Answer 2

A bank loan is when a business borrows money from a bank and repays it over a specified period of time in regular instalments with interest.

Bank loans can be short or long term.

Advantages
• easier to budget as a business is paying the loan back in regular instalments instead of a
one-off payment;
• can be taken out over a long period of time.

Disadvantages
• interest can be expensive, which means monthly repayments can be expensive;
• can affect credit ratings if a business does not keep up with monthly repayments.

Question 3

Describe what a government grant is and discuss the advantages and disadvantages.

Answer 3

A government grant is money that is given to a business by the government which is not repaid.

This is sometimes given to entrepreneurs when they first start up a business.

Advantages
• does not need to be repaid;
• can gain good publicity as grants can be given due to something positive that a business is
doing.

Disadvantages
• usually only a one-off payment;
• can come with strict conditions, e.g. a business must be located in a particular area or take on a set number of employees;
• can be time-consuming as there can be many forms to fill out etc.

Question 4

Describe what a hire purchase is and discuss the advantages and disadvantages.

Answer 4

Hire purchase is paying for an item with regular instalments over a specified period.

Advantages
• easier to budget as payment is made with regular instalments instead of a one-off payment;
• can be taken out over a medium/long-term;
• once a business has made its final payment then it will own the item.

Disadvantages
• interest has to be paid on top of regular repayments;
• the item is not owned until the final payment is made;
• if a business does not keep up with repayments then it can face repossession of the item.

Question 5

Describe what leasing is and discuss the advantages and disadvantages.

Answer 5

Leasing is when a business ‘rents’ an item. This can be used for IT equipment, vehicles and
equipment.

Advantages
• easier to budget as payment is made with regular instalments;
• once the leasing period is over, the item can be updated and a new leasing period can begin.

Disadvantages
• a business does not own the leased item;
• can be more expensive than hire purchase or using a bank loan to pay for the item.

Question 6

Describe what a mortgage is and discuss the advantages and disadvantages.

Answer 6

A mortgage is a type of loan which is used to pay for property/land. This is a long-term source of finance.

Advantages
• taken out over a long period of time;
• easier to budget as it will be paid back over a long period of time.

Disadvantages
• a business can face repossession if it does not keep up with monthly repayments;
• interest has to be paid on top of repaying the loan.

Question 7

Describe what a loan from family / friends is and discuss the advantages and disadvantages.

Answer 7

A loan from family/friends is when a business borrows money from a family member or friend, usually with no interest.

Advantages
• no interest or very little interest to be paid;
• family/friends may offer a loan if a business has been turned down from a bank.

Disadvantages
• can cause disagreements.

Question 8

Describe what share issue is and discuss the advantages and disadvantages.

Answer 8

Share issue is selling shares to existing or new shareholders. This is only available to LTDs.

Advantages
• can raise a large amount of capital.

Disadvantages
• can be expensive to issue more shares;
• a private company can only have a maximum of 50 shareholders.

Question 9

Outline what the fixed costs of a business are.

Answer 9

Costs which stay the same no matter how many units are produced

Question 10

Outline what variable costs are to a business.

Answer 10

Costs which change depending on the level of output.

Question 11

Describe what the break-even point is.

Answer 11

The break-even point is when a business is making no profit or loss.

Question 12

How can the break-even point be identified on a chart?

Answer 12

The point where the sales revenue and total costs meet.

Question 13

How do you calculate total profit?

Answer 13

Total Profit = sales revenue — total costs

Question 14

How do you calculate selling price?

Answer 14

Selling Price = sales revenue / output

Take your numbers from the break even point

Question 15

How do you calculate the break even point?

Answer 15

Break-even point = fixed costs / (sales — variable costs)

Question 16

Describe how spreadsheets can be used by finance departments.

Answer 16

• Calculate profit using formulae
• Create accounts such as income statements - templates may be used which make it less time consuming for the user.
• Create charts / graphs which allow the business to show profit levels over time.

Question 17

Describe how a finance dept can use word processing.

Answer 17

• Create financial reports for shareholders
• Create letters to send to customers reminding them to pay their bills on time

Question 18

Describe how a finance dept can use presentation software.

Answer 18

• Create *(presentations to show financial performance** to shareholders.

Question 19

Describe out a finance dept can use databases.

Answer 19

• Store contact details of customers to remind them of their payment dates.

Question 20

Describe how a finance dept can use email.

Answer 20

Remind customers of outstanding payments.

Question 21

Describe how a finance dept uses online banking.

Answer 21

• Pay bills online (eg: electricity)
• Transfer money to a customer or receive payment from a customer.

Question 22

Describe how a finance dept can use accounting software.

Answer 22

• Create final accounts such as income statements

Question 23

Describe how a finance dept can use electronic payment systems.

Answer 23

• Receive payment from customers

Question 24

What is a cash budget?

Answer 24

A cash budget is a plan of how a business expects to spend money (payment) and receive money (receipts)

Question 25

What is the opening balance?

Answer 25

The money that you have at the **start** of the week/month

Question 26

What is the closing balance?

Answer 26

The money you have at the **end** of the week/month (this is also the next week/month’s opening balance)

Question 27

What are receipts?

Answer 27

The money **you get** during the week/month

Question 28

What are payments?

Answer 28

The money **you spend** during the week/month

Question 29

What is a surplus?

Answer 29

A **positive** balance. This will happen when **receipts are greater than payments**

Question 30

What is a deficit?

Answer 30

A **negative** balance. This will happen when **payments are greater than receipts**

Question 31

Outline reasons why a business may experience cash flow problems.

Answer 31

• **low sales** - sometimes there simply aren't enough sales coming in, e.g. people watching their outgoings after spending lots at Christmas • an **increase in expenses** • a **one off payment of new assets**, e.g. machinery; • a **deficit closing balance**, i.e. more money is going out than coming in; • **money is tied up in inventory**, e.g. inventory can't be sold because it has gone out of date or out of fashion;

Question 32

Describe reasons as to why a business may produce a cash budget.

Answer 32

- To see if it’s facing a **surplus or deficit**. If it is facing a **deficit**, it can take steps as to how it can be **avoided** - To see whether another **source of finance** is needed - To highlight periods where **expenses** are particularly **high** - To help with **decision-making** - To avoid **cash flow problems**. This is when more money is **going out than coming in**. - To get a **loan/mortgage** from the bank - To compare **projected** and **actual** figures. This can help see **discrepancies** between the figures that were planned and the actual figures.

Question 33

Describe ways in which a business can resolve cash flow problems.

Answer 33

• Introducing a **new marketing campaign** to **increase sales** eg: introducing new promotions • Cutting down on **staff overtime** to **reduce wage cost** • Find a **cheaper supplier** or negotiate **better prices/credit terms** • Finding a **cheaper energy supplier** to cut down on electricity/gas costs • Using a **bank loan/hire purchase/leasing** to fund buying new assets • Encourage customers to **pay earlier** by offering **discounts** on earlier payments • Selling any **unnecessary assets** that are no longer used eg: old machinery