2.1 and 2.2

Question 1

§§§3 internal sources of finance

Answer 1

• personal savings
• retained profit
• sale of assets

Question 2

External sources of finance

Answer 2

• family and friends
• bank loan
• business angels
• crowdfunding
• share/venture capital
• overdrafts

Question 3

Business plans

Answer 3

• helps attract external finance
• helps identify potential problems
• has quantitative targets to aim for.

Question 4

Use of cash flow forecasts

Answer 4

• spot cash problems in advance

Question 5

How to improve cash flow

Answer 5

• producing and distributing products as quick as possible
• chasing customers to pay quickly
• keep stock to a minimum
• lease or rent equipment instead of buying it

Question 6

Limitations of cash flow forecasts

Answer 6

• only an estimation, could be bias by the business owner.
• could be lulled into a false sense of security by trusting the cash flow too much.

Question 7

Sales forecasting

Answer 7

• marketing budgets

Question 8

What is unlimited liability

Question 9

What is limited liability

Answer 9

Aren’t personally responsible for the debts of the business. Private and public limited companies.

Question 10

Limitations of cash flow forecasts

Answer 10

Need lots of experience and research into the market.
Don’t work in dynamic markets
Hard to make them accurate

Question 11

Use of sales forecasts

Answer 11

• Help business make decisions
  E.g finance, marketing and rescourses

Question 12

Factors that affect sales forecasts

Answer 12

• consumer trends
• economic variables
• actions of competitors.

Question 13

What are fixed costs

Answer 13

Don’t change with output. E.g rent or new machinery.

Question 14

What are variable costs

Answer 14

They rise and fall as output changes.

Question 15

What is contribution

Answer 15

Contribution per unit is the difference between selling price and variable costs.

Question 16

Equation for contribution.

Answer 16

Selling price - variable costs.

Question 17

Equation for break even point

Answer 17

Fixed costs/contribution per unit

Question 18

What is the margin of safety

Answer 18

Actual output - break-even output

Question 19

Advantages of break even analysis

Answer 19

-easy to do
-quick
-persuade external sources of finance to give them money.
-influence whether new products are released or not.

Question 20

Disadvantages of break even analysis

Answer 20

• assumes variable costs always rise steadily
• its simple for a single product but not if the business sells more than one.
• if data is inaccurate the results will be wrong
• assumes there’s no wastage.

Question 21

What is a budget

Answer 21

Forecasts future earnings and future spending. (Usually over a 12 month period).

Question 22

3 types of budgeting and what are they?

Answer 22

• income budgets, forecasts the amount of money coming into the business (revenue).
• expenditure budgets, predicts businesses total costs for the year.
• profit budget, uses income budget minus expenditure budget to calculate potential profit or loss for the year.

Question 23

Advantages of budgets

Answer 23

• motivating, give employees a target to work towards.
• help control income and expenditure.
• helps business focus on the priorities.
• helps persuade investors

Question 24

Disadvantages of budgets

Answer 24

• departments have to compete for money
• they can be restrictive, stop businesses responding to dynamic markets.
• time consuming
• inflation is hard to predict
• start up business’ budget may be inaccurate.

Question 25

What is historical budgeting

Answer 25

Based on a percentage increase or decrease of last years budget.
It is quick and simple but assumes conditions remain unchanged.

Question 26

Zero-based budgeting