Unit 5: Decision-making to Improve Financial Performance

Question 1

Causes of cashflow problems

Answer 1

Low profits or losses
Too much production capacity
Excess inventories held
Allowing customers too much credit and too long to pay
Overtrading- growing business too fast

Question 2

Improving cashflow

Answer 2

Effective credit control
Improving cash flow from creditors
Improving cash flow from inventory

Question 3

Types of financial objectives

Answer 3

Cost minimisation
Profit
Cash flow
Investment objectives
Set objectives
Please shareholders

Question 4

Revenues

Answer 4

The amount value of a product the customers actually buy from a business

Question 5

Demand

Answer 5

The amount of a product that customers are prepared to buy

Question 6

What can influence the demand for products?

Answer 6

Prices & incomes
Taste & fashions
Competitor actions
Social & demographic change
Seasonal changes
Changing technology
Government decisions

Question 7

What can businesses improve revenue?

Answer 7

Increase quality sold
Achieve a higher selling price

Question 8

Ways to improve profit

Answer 8

USP
Reduce variable costs
Increase price
Increase productions
Reduce fixed costs

Question 9

Break-even

Answer 9

The output which total revenues equals total costs

Question 10

Contribution

Answer 10

Looks at the profit made on individual products

Question 11

M

Question 12

Margin of safety

Answer 12

The difference between the actual output and the break even output

Question 13

Benefits of Break-even

Answer 13

Focuses on what output is required before a business reaches profitability
Calculating are quick and easy
Illustrates importance of keeping fixed costs down to a minimum

Question 14

Drawbacks of Break-even

Answer 14

Most businesses sell more than one product
A planning aid rather than a decision making tool
Sales are unlikely to be the same as output- there may be some build up of stocks or wasted output too

Question 15

Revenue budget

Answer 15

Expected revenues & sales
Broken down into more detail

Question 16

Cost budget

Answer 16

Expected costs based on sales budget
Overheads & other fixed costs

Question 17

Profit budget

Answer 17

Based on the combined sales & costs budgets of great interest to stakeholders
May form basis for performance bonuses

Question 18

Favourable

Answer 18

Costs are lower than expected, sales are higher than expected- increase in profit

Question 18

Variance Analysis

Answer 18

Compares the actual figures against the budgeted

Question 19

Adverse

Answer 19

Costs are higher than expected, sales are lower than expected- decrease in profit

Question 20

Benefits of using budgeting

Answer 20

Motivates staff
Allows targets to be set
Eliminates waste
Provides financial control
Company are less likely to end up in debt
Could attract investors

Question 21

Drawbacks of using budgeting

Answer 21

Not always fair
It is time-consuming
Not always accurate - does not allow for unforeseen changes
May have to hire someone else or train staff to be able to do it - additional costs

Question 22

Disadvantages of Overdrafts

Answer 22

High interest
Limit on the amount
It’s short term

Question 22

Overdrafts

Answer 22

an agreement that allows you to keep making payments such as staff wages or day-to-day expenses even when there is no money in the business bank account.

Question 23

Advantages of Overdraft

Answer 23

Help in emergency situations
Flexible
Easy to get

Question 24

Debt factoring

Answer 24

When a business sells its accounts receivables to a third party at a discount

Question 25

Advantages of Debt factoring

Answer 25

Money straight away
Don’t have to worry about chasing up debts
Improves cash flow

Question 26

Disadvantages of Debt factoring

Answer 26

Won’t get full amount
Sold/offer credit

Question 27

Bank loans

Answer 27

Your business borrows a sum of money and pays it back over a set period of time, with interest charges added

Question 28

Advantages of Bank loans

Answer 28

Plan budgets
Lower interest
High amounts of capital

Question 29

Disadvantages of Bank loans

Answer 29

Interest
Difficult to get if bad credit
High fixed costs that need to be payed

Question 30

Mortgages and debentures

Answer 30

A form of security that a Company grants to a lender in exchange for funding

Question 31

Advantages of Mortgages and debentures

Answer 31

Lower interest
Helps buy assets
Lower in payments

Question 32

Disadvantages of Mortgages and debentures

Answer 32

Difficult to get
Not flexible
Tied in for a long period of time

Question 33

Retained profit

Answer 33

the amount of a business’s net income that is kept within its accounts, rather than paid out to shareholders

Question 34

Advantages of Retained profit

Answer 34

No repayments
Higher amounts

Question 35

Disadvantages of Retained profit

Answer 35

Shareholders not happy
Can’t get it if not profits

Question 36

Venture capital

Answer 36

a form of private equity and a type of financing for start-up companies and small businesses with long-term growth potential

Question 37

Advantages of Venture capital

Answer 37

More likely to invest in risky investments

Question 38

Disadvantages of Venture capital

Answer 38

Less control
Unlikely
Hard to get

Question 39

Share capital

Answer 39

the money invested in a company by the shareholders

Question 40

Advantages of Share capital

Answer 40

Low interest payments
More capital
More knowledge

Question 41

Disadvantages of Share Capital

Answer 41

Risk of takeover
Dividends
Conflict between shareholders and stakeholders