Management of finance

Question 1

What is a bank overdraft?

Answer 1

When a business takes out more money than it has in its bank account.

Question 2

What are some advantages of a bank overdraft?

Answer 2

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

Question 3

What are some disadvantages of a bank overdraft?

Answer 3

-Daily interest or daily charge may apply.
-Not useful for addressing long term cash flow problems.

Question 4

What is a bank loan?

Answer 4

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

Question 5

What are advantages of bank loans?

Answer 5

-Easier to budget as a business is paying the loan back in regular instalments instead if one big payment.
-Can be taken out over a long period of time.

Question 6

What are disadvantages of bank loans?

Answer 6

-Interest can be expensive.
-Can effect credit ratings if business doesn’t keep up with monthly repayments.

Question 7

What is a government grant?

Answer 7

Money given to a business by the government that doesn’t need re-payed.

Question 8

What are advantages of a government grant?

Answer 8

-Doesn’t need repaid.
-Can gain good publicity as grants are given due to something positive a business is doing.

Question 9

What are disadvantages of a government grant?

Answer 9

-Usually only a one off payment.
-Can come with strict conditions.
-Can be time consuming as there are many forms to fill out.

Question 10

What is hire purchase?

Answer 10

Paying for an item with regular instalments.

Question 11

Advantages of hire purchases?

Answer 11

-Easier to budget as payment is made in regular instalments instead of one big payment.
-Can be taken out over medium or long term.
-Once a business has made its final payment it will own the item.

Question 12

Disadvantages of hire purchases?

Answer 12

-Interest has to be paid on top of regular payments.
-The item is not owned until the final payment is made.
-If a business doesn’t keep up with repayment then it can face repossession of the item.

Question 13

What is leasing?

Answer 13

When a business rents an item, e.g. IT, vehicles, equipment.

Question 14

Advantages of leasing?

Answer 14

-Easier to budget as payment is made in regular instalments.
-once leasing period is over the item can be updated and a new leasing period can begin.

Question 15

Disadvantages of leasing?

Answer 15

-A business doesn’t own the leased item.
-Can be more expensive than hire purchasing or using a bank loan to pay for an item.

Question 16

What is a mortgage?

Answer 16

-A loan used to pay for property/land.

Question 17

What are advantages of a mortgage?

Answer 17

-Taken out over a long period of time
-easier to budget as it will be paid back over a long period of time.

Question 18

What are disadvantages of a mortgage?

Answer 18

-A business can face repossession if it doesn’t keep up with repayments.
-Interest has to be paid on top of repaying the loan.

Question 19

What are advantages of a loan from family/friends?

Answer 19

-no interest to be paid.
-Family/friends may offer a loan if a business has been turned down by a bank.

Question 20

What are disadvantages of a loan from family/friends?

Answer 20

-Can cause disagreements.

Question 21

What is a share issue?

Answer 21

Selling shares to existing or new share holders. This is only available to private limited companies.

Question 22

Advantages of a share issue?

Answer 22

-Can raise a large amount of capital.

Question 23

Disadvantages of a share issue?

Answer 23

-Can be expensive to issue more shares.
-A private company can only have a maximum of 50 shareholders.

Question 24

What are personal savings?

Answer 24

A sole trader or partner invest personal money from their bank account into a business.

Question 25

Advantages of using personal savings?

Answer 25

-Money doesn't need repaid

Question 26

Disadvantages of using personal savings?

Answer 26

-Unlikely to be able to inject large sums of cash from personal savings. -Once the savings have been used they cant be used again. -If in a partnership, the terms of the partnership agreement may need to be rewritten as a result of the extra capital being paid in.

Question 27

What is trade credit?

Answer 27

Something that might be offered by a supplier to encourage businesses to purchase goods form them. The supplier will provide a business with goods and the business wont need to pay for the goods until a set date in the future.

Question 28

What are advantages of trade credit?

Answer 28

-Good for cash flow, a business can sell on the goods and gain an income from customers before they have to pay the supplier. -A business is unable to take advantage of any discounts, offered for intermediate payments.

Question 29

What are disadvantages of trade credit?

Answer 29

-Less likely to be offered to new businesses because a supplier will want to check that a business has a good payment history. -If payments aren't made on time penalties may occur.

Question 30

What are fixed costs?

Answer 30

Costs that stay the same no matter how many units are produced. e.g. rent that has to be paid whether a business make 0 or 1000 units.

Question 31

What are variable costs?

Answer 31

Costs that change depending on the level of output, e.g. the more a business is producing the more money spent on electricity

Question 32

What are total costs

Answer 32

The fixed and variable costs added together.

Question 33

What is the break even point?

Answer 33

When a business is making no profit or loss. A business needs to work out a break even point to find out how many units need produced to start making a profit.

Question 34

What are the titles on a break even chart?

Answer 34

-Costs and revenue -Number of units produced -fixed costs -variable costs -total costs -Sales revenue.

Question 35

What are the reasons for a business drawing up a cash budget?

Answer 35

-To see if its facing surplus (More money coming in than going out), or a deficit (more money going out than coming in). -To see whether another source of finance is needed. e.g. a bank overdraft. -To highlight period where when expenses are particularly high. -To help with decision making, e.g when to make purchase. -To avoid having cash flow problems, e.g. When more more money is going out than coming in. -To try and get a lone or mortgage from the bank, the cash budget can be taken to the bank to show repayments are affordable. -To compare projected and actual figures.

Question 36

What are reasons for a business facing cash flow problems?

Answer 36

-Low sales -An increase in expenses e.g. wages. -A deficit closing balance, more money going out than coming in. -Money is tied up in inventory. -Customers aren't paying on time. -Suppliers aren't giving businesses credit, buying goods from the supplier and than paying them back at a later time.

Question 37

How may a business resolve a cash flow issue?

Answer 37

-Introducing a new marketing campaign to increase sales. -Cutting down on staff over time to decrease wage cost. -Finding a cheaper supplier of raw materials -Finding a cheaper energy supplier. -Using a bank loan/hire purchase/leasing to fund buying new assets. -Encouraging customers to pay earlier by offering discounts on early payments. -Selling any unnecessary assets that are no longer needed, e.g. old machinery

Question 38

What is an income statement?

Answer 38

A statement that shows the income and expenditure, and the profit and loss made by a business throughout the year.

Question 39

What are the key terms in an income statement?

Answer 39

-Sales revenue, sales a business has received through the year by selling to customers. -Cost of sales, Cost of producing or buying a product. -Gross profit, the profit made from buying or selling goods. -Expenses, items a business must pay for to keep running. e.g. electricity, wages, loan repayments. -Profit/loss for the year, profit made once expenses have been subtracted.

Question 40

How do you calculate gross profit?

Answer 40

Sales revenue - cost of sales

Question 41

How do you calculate profit/loss for the year?

Answer 41

Gross profit - expenses

Question 42

What is a spread sheet and what are some examples of them?

Answer 42

-A piece of software used for calculations using formula. Example: Microsoft excel, apple numbers.

Question 43

What are spreadsheets used by the finance department to do.

Answer 43

-Calculate profit using formulae. -Create accounts like income statements. -Create charts/graphs that allow businesses to show profit levels over time. -Copy and paste data into other software such as Microsoft word. -Change figures easier compared to paper based documents. -Perform what if scenarios.