Management of Finance

Question 1

What are four roles of the finance department in a business

Answer 1

Sourcing finance for business development

Maintaining financial records

Paying bills and expenses

Credit control - collecting money owed by customers

Question 2

What four things does looking at the bigger picture involve

Answer 2

Potential for increased market share

The product portfolio and stages of the product life cycle

Staff skills and levels of motivation

Future product developments

Question 3

What is debt factoring

Answer 3

When customers who buy on credit fail to pay on time or attempt not to pay at all the business can use a factoring service. The factor will buy debts of the business and they will then attempt to recover payment from the customers

Question 4

What is an advantage of debt factoring

Answer 4

This saves the business time pursuing customers and ensures the business receives most of the money it is owed

Question 5

What is a disadvantage of debt factoring

Answer 5

The factor charges the business a fee for their service and so this reduces the amount of cash they will actually receive

Question 6

What is hire purchase

Answer 6

Hire purchase allows a business to buy non-current assets, such as a delivery van and pay it back over 36 months . A deposit is required followed by monthly payments over a few years.

Question 7

What is an advantage of hire purchase

Answer 7

This allows the business to purchase items like vehicles with only a small initial outlay of money

Question 8

What is disadvantage of hire purchase

Answer 8

The business does not legally own the asset bought until the last payment has been made

Question 9

What is leasing

Answer 9

When a business uses a leasing system it never owns the asset. The business simply rents the asset

Question 10

What is an advantage of leasing

Answer 10

The advantage is that the leasing system will replace the asset every couple of years and they are also responsible for any repairs

Question 11

What is a disadvantage of leasing

Answer 11

Rental charges or leasing costs can build up over a long period of time and so it may actually work out cheaper to actually purchase the asset in the first place

Question 12

What is venture capital

Answer 12

A venture capitalist is a person or group of people that will seek part ownership of the business in return for taking the risk of lending money

Question 13

What are the three financial statements

Answer 13

Trading account
Income statement
Statement of Financial Position

Question 14

What are the three accounts and what do they calculate

Answer 14

Trading account(for gross profit)
Income statment ( for Profit for the year)
Appropriation account (for retained profit)

Question 15

What is the formula to calculate profit

Answer 15

profit = sales - expenses

Question 16

What is the formula for gross profit

Answer 16

revenue - cost of goods sold (cost of buying and storing)

Question 17

What is the formula for profit for the year

Answer 17

Profit for the year = gross profit - expenses

Question 18

What does the statment of financial position do

Answer 18

This account shows the value of the business at a particular date. It is a record of Assets and liabilities

Question 19

What three things does a statment of financial positions include

Answer 19

Non-current assets - items the business owns and will keep for longer than one year

current assets - items that a business owns that they will keep for less than a year

Current liabilities - items that a business owes and will pay back in the short term

Question 20

What is a budget

Answer 20

an estimate of income and expenditure for a set period of time.

Question 21

What are four areas a budget will include

Answer 21

profits

sales

production

purchases

Question 22

What are four uses of a budget for managementq

Answer 22

Planning - looking ahead to set aims and strategies which allows problem solving to be proactive rather than reactive

Organising - allows for the right resources to be in place at the right time

Commanding - due to having information on the future position of the business, informed decisions can be made and passed on to subordinates

Controlling - setting a budget and comparing it to actual performance means that changes can be quickly

Question 23

What four things can a cash budget be used to do

Answer 23

Identify cash flow issues

Forecast cash surpluses

Set targets for each department

Allow for actions to be taken to prevent overspending

Question 24

What are four methods to solve cash flow problems

Answer 24

Offer discounts and promotions to encourage customers to buy more and pay more promptly

Arrange better credit terms with suppliers

Find cheaper suppliers for purchases of supplies and overheads

Sell unecessary Non-current assets

Question 25

What are three areas of ratios

Answer 25

Profitability ratios Liquidity ratios - to measure the ability of the organisation to pay its debts Performance ratios - to measure how efficiently the organisation is running

Question 26

What is the gross profit ratio

Answer 26

formula = gross profit/sales * 100 This shows the percentage of gross profit for every £1 of sales

Question 27

What does gross profit ratio show

Answer 27

An increase in ratio means that more sales have been generated A decrease in ratio means that the cost of materials may have gone up

Question 28

What is profitability ratio

Answer 28

formula = profit for the year/sales * 100 This shows the percentage of profit for year for every £1 of sales The higher the figure the more profitable the business

Question 29

profit for the year analysis

Answer 29

An increase in ratio means that the business has better control over its expenses or it may be a 'knock-on effect' from an increase in the gp% A decrease in this ratio means that expenses may have gone up or may be out of control or it may be because the gp% was decreased

Question 30

What is return on capital employed

Answer 30

Formula = profit for the year/capital employed * 100 This shows the percentage of profit for every £1 invested in the company The higher the firgure the higher the profit for investors

Question 31

return on capital employed analysis

Answer 31

An increase in the ratio may be due to a higher profit for year caused by decreased expenses or increased sales A decrease in the ratio may be due to a lower profit for the year caused by higher expense and lower sales. It may also be due to additional capital being invested into the business, but the same level of profit for year being maintained

Question 32

What is current ratio

Answer 32

formula = current assets/current liabilities This shows the level of current assets to pay for every £1 of debt 2:1 is ideal less than 2:1 is a cash flow problem and greater than 2:1 it too many current assets

Question 33

What is the acid test ratio

Answer 33

current assets-stock/current liabilities This shows the level of current assets (-stock) to pay for every £1 of debt 1:1 ideal less than 1:1 there is too much capital tied up in stock greater than 1:1 too many current assets

Question 34

What is rate of stock turnover

Answer 34

formula = cost of sales/average stock (inventory) This ratio works out how many times stock is used up. This can be influenced by the type of stock held

Question 35

rate of stock turnover analysis

Answer 35

An increase in ratio over time means that more stock is being sold more quickly, which should result in higher sales. However, it may also be because there has been an increase in cost of sales A decrease in ratio means that less stock is being sold. However,it may also be caused by a decrease in the cost of sales or an increase in average stock holding

Question 36

What are four problems with accounting ratios

Answer 36

The figures used to calculate the ratios is historic and therefore do not show what will happen in the future Comparisons with other organisations must only be made with similar organisations or they may not be useful Do not take external factors into account Do not take new product development or declining products into account

Question 37

What are three advantages of software in finance department

Answer 37

A benefit of having dedicated software is that specialist reports can be embedded within the software meaning that reports relevant to the business's needs can be produced quikcly and accuratley. This can also speed up decision making Graphs and charts can be produced from the financial data the software can link to external bodies such as HMRC to allow electronic submission of forms such as VAT Returns

Question 38

What is cloud accounting

Answer 38

when businesses do not have dedicated software in their premises but access it on a rental basis from a remote site.`