unit 5

Question 1

why do businesses need finance?

Answer 1

1. start up capital: funds needed to purchase essentials
2. Working capital: finance needed to run the day to day operations
3. growth
4. special situations: finance just in case for survival

Question 2

state internal sources of finance

Answer 2

1. Owners’ saving:
2. Sale of assets
3. Working capital
4. Retained profits

Question 3

state advantages and disadvantages of each internal source of finance

Answer 3

page 138

Question 4

state 2 methods of SHORT TERM EXTERNAL sources of finance

Answer 4

1. bank overdraft: credit borrowed by a business up to an agreed upon limit
2. debt factoring: selling of claims over trade receivables to a org for immediate liquidity

Question 5

advantages & disadvantages of bank overdraft

Answer 5

1. advantages:
   a- quick
   b- flexible
2. disadvantages:
   a- high interest
   b- business has to pay immediately

Question 6

advantages & disadvantages of debt factoring

Answer 6

1. advantages:
   a- removes bad risk
   b- quick
   idk the disadvantages

Question 7

state and explain different types of LONG TERM EXTERNAL FINANCING sources

Answer 7

1. Hire purchase
2. mortgages
3. share capital
4. venture capital
5. bonds
6. bank loans
7. leasing
8. government grants
9. crowd funding

Question 8

advantages & disadvantages of some of the long term financial external sources

Answer 8

page 141

Question 9

Finance for unincorporated and new businesses

Answer 9

1. Loans from family and friends
2. Owner’s investment
3. Introducing new partners with capital to invest
4. Crowd funding
5. Bank overdrafts and bank loans,

Question 10

what is microfinance

Answer 10

providing financial services for poor and low-income entrepreneurs who do not have access to the banking services

Question 11

advantages of microfinance

Answer 11

1. Small amounts could be raised
2. Available when traditional banks are not willing
3. no security collateral needed

Question 12

disadvantages of microfinance

Answer 12

1. Repayment is expected
2. Interests are involved
3. some restrictive terms that the business should fulfil before receiving the finance

Question 13

list the factors that effect choice of finance used

Answer 13

1. use
2. cost
3. amount required
4. legal structure
5. size of existing borrowing
6. flexibility

Question 14

what is an Income
statement

Answer 14

Final account
that shows the profitability of the business
by showing the revenues made and costs incurred

Question 15

what is a Statement of financial position

Answer 15

Final account
that shows the value of a business’
assets and liabilities at a particular point in time

Question 16

Why is profit important?

Answer 16

1. Reward for risk taking
2. Measurement of business success
3. Acts as a source of finance and capital
4. Attracts investors

Question 17

List the current and none current assets

Answer 17

1- current:
a. cash
b. trade receivables
c. inventory
2. none current: (there are more but they are similar to the first 2)
a. land
b. machinery
c. Fixtures and fittings

Question 18

What are assets

Answer 18

Are those items of value which are owned by the business to benefit from.

Question 19

What are non-current assets

Answer 19

items owned by the business for
more than one-year

Question 20

Benefits of financial position data

Answer 20

1. Examine value of the business over time
2. figure out how expansion is being financed
3. know the liquidity
4. calculate financial ratios

Question 21

list the three profitability measures

Answer 21

1. net profit margin
2. gross profit margin
3. return on capital employed

Question 22

How the business can improve its profit margins?

Answer 22

1. Increase price
2. Reduce variable and fixed costs

Question 23

list and explain the liquidity ratios

Answer 23

1. current ratio: relationship between current assets and liabilities
2. acid test ratio: (current assets - inventory)/current liabilities

Question 24

state the uses of ratio analysis

Answer 24

1. financial support
2. judge performance over time
3. compare to other business

Question 25

users of final accounts

Answer 25

1. managers 2. shareholders 3. banks 4. other businesses 5. governments 6. trade unions 7. creditors

Question 26

what is cashflow?

Answer 26

amount of money entering and leaving the business

Question 27

examples of cashflow in

Answer 27

1. cash sales 2. sale of assets 3. settlements on credit 4. loans 5. back overdraft 6. capital invested

Question 28

examples of cashflow out

Answer 28

1. rent 2. wages 3. utilities 4. advertising 5. settlements for materials bought on credit 6. cash purchases

Question 29

why is cashflow important?

Answer 29

1. Avoid illiquidity: inability to pay the short-term financial obligations 2. Avoid liquidation: selling assets to raise cash to pay for day-to-day operations 3. Avoid bad reputation among suppliers, banks and tenants

Question 30

what is cashflow forecast?

Answer 30

estimation of future cashflow

Question 31

what is opening balance?

Answer 31

amount of cash held in business at the start of trading period

Question 32

uses of cashflow forecasts

Answer 32

1. start up the business 2. manage an existing business 3. set targets 4. predict and plan for variations in cashflow ( these are 2 separate points) 6. show to potential lenders

Question 33

what cause cashflow problems

Answer 33

1. over trading 2. rapid growth 3. cash out > cash in 4. time of receiving is after paying

Question 34

How to improve cash flow problems?

Answer 34

1. Bank overdraft 2. Debt factoring 3. Bank loan 4. Ask debtors to pay earlier 5. Delay payments to suppliers 6. Cut overheads 7. Delay or cancel capital expenditure

Question 35

what is working capital?

Answer 35

The capital required by the business to pay its short-term day-to-day expenses and all of the liquid assets of the business–