2.3

Question 1

why do businesses need finance

Answer 1

to start up
to grow and expand
to pay debts
help in slow trading periods
to buy stock

Question 2

what are the 3 types of internal finance

Answer 2

owners capital
retained profit
sale of assets

Question 3

what are the advantages and disadvantages of owners capital

Answer 3

+/ don’t have to pay back
no debt
don’t pay interest
immediately available
-/ often not a large sum of money
may not get the money back

Question 4

when may owners capital be used

Answer 4

buying stock
small costs
some equiptment

Question 5

what are the advantages and disadvantages of retained profit

Answer 5

+/ not paid back
sustainable way to grow
immediately available
-/ can’t be used to start up
not a large sum of money
unpredictable

Question 6

when may retained profit be used

Answer 6

new staff
new location
equipment
stock
general expansion

Question 7

what are the advantages and disadvantages of sale of assets

Answer 7

+/ large sums of money can be raised
not paid back
short term finance
-/ no longer benefit from the asset
less attractive to investors
may take a while to sell

Question 8

define retained profit

Answer 8

profits which are reinvested back into the business

Question 9

what is a profit and loss statement

Answer 9

statement of comprehensive income, summary of profit & loss through the year

Question 10

what are the advantages and disadvantages of doing a profit & loss statement

Answer 10

+/ tracks the businesses performance
can be used for forecasting
-/ not a full representation
takes time

Question 11

what is a balance sheet

Answer 11

snapshot of a businesses assets & liabilities at a particular time

Question 12

what are the advantages and disadvantages of balance sheets

Answer 12

+/ helps investors judge if the business is worth investing in
evaluates effectiveness of assets
-/ doesn’t show how a business has done overtime
uses figures not margins so its harder to compare

Question 13

what is a cash flow forecast

Answer 13

predicts the amount of money that will flow in and out of the business

Question 14

what are the advantages and disadvantages of cash flow forecasts

Answer 14

+/ attracts potential investors
plan finance ahead of time
-/ bias may overinflate numbers
doesn’t take into account outside factors
needs regular updates

Question 15

what are the 3 profit margin calculations

Answer 15

operating profit/
sales revenue X100

net profit/
sales revenue X100

gross profit/
sales revenue X100

Question 16

what are the advantages and disadvantages of profit margins

Answer 16

+/ easier to compare
more accurate way of representing data
shows where costs could be reduced
-/ takes time to calculate

Question 17

what are liquidity calculations

Answer 17

focus on short term & makes use of current assets and liabilities

Question 18

what are the advantages and disadvantages of liquidity calculations

Answer 18

+/ shows if too much money is tied up in assets
prepares businesses for loss
checks debts can be paid
-/ goes off expected sales which can fluctuate

Question 19

define budgets

Answer 19

financial plan & agree spending limit within a business based on objectives

Question 20

what are the advantages and disadvantages of budgets

Answer 20

+/ better financial decisions made
can be used to measure success against objectives
anticipate problems
motivates managers
-/ business is dynamic
may feel the need to spend the entire budget

Question 21

why are business plans needed

Answer 21

to gain certain forms of finance and reduce risk, map out a route to a businesses objectives and helps to attract investors, they are important to give owners direction in where to lead the business

Question 22

what is cash inflow (give examples)

Answer 22

money coming into the business also known as receipts
owners capital
investors
loan
grant
sales revenue

Question 23

what is cash outflow (give examples)

Answer 23

money going out of the business also known as payments
loan repayment
rent
stock costs
wages
advertising

Question 24

what factors influence cash flow

Answer 24

customer trends
economic variables
competitors actions

Question 25

how can cash flow be improved

Answer 25

short term loan
reduce expenses
delay paying bills

Question 26

what are the limitations of cash flow forecasts

Answer 26

bias - overinflating figures
don’t take into account external factors
requires regular updates
takes a long time to create

Question 27

what is limited liability

Answer 27

when a business owner is only liable for their original investments should the business go into debt as they have a separate legal identity

Question 28

what is unlimited liability

Answer 28

if a business has debts the owner must pay all out of their own pocket

Question 29

how do you calculate gross profit

Answer 29

sales revenue - cost of sales

Question 30

how do you calculate operating profit

Answer 30

gross profit - expenses

Question 31

how do you calculate net profit

Answer 31

operating profit - interest

Question 32

what is a zero based budget

Answer 32

not allocated a budget instead you must justify the expense

Question 33

what is a historical based budget

Answer 33

budget based on previous performance of sales and costs

Question 34

what is variance analysis

Answer 34

variance is the difference between the budgeted and actual figure