2.5 Managing Finance

Question 1

What is the break even point?

Answer 1

The point at which revenue
equals cost so your business
is making neither a profit nor
a loss

Question 2

What is total cost?

Answer 2

They are fixed and
variable costs added together

Question 3

What is revenue?

Answer 3

Selling Price x Units Sold

Money into the business through sales (cash in). Also known as turnover, or just sales.

Question 4

What are fixed costs?

Answer 4

These are costs that do NOT vary with the level of output or sales. E.g. stall rental.

Question 5

What are variable costs?

Answer 5

These are costs that DO change with the level of output or sales. For example, the plastics used in a Bobblehead. The more a business sells/produces, the more plastic they will need.

Question 6

What is contribution?

Answer 6

Selling Price – Variable Costs

Before calculating Break-Even, we need to know the contribution that selling the item makes towards the
profit. Contribution looks at the profit made on individual products.

Question 7

What is the margin of safety?

Answer 7

The difference between the actual level of output and the breakeven output.

Question 8

Describe a budget?

Answer 8

This is a financial plan and an agreed spending limit within a
business.

Question 9

What are the parts of a budget?

Answer 9

-Planning
-Motivation
-Decisions
-Control

Question 10

Describe planning.

Answer 10

To anticipate problems and develop solutions before they arise e.g. New business books are needed for a new spec?

Question 11

Describe motivation.

Answer 11

For managers to be in control of their own budget shows that the business feels they are responsible and will hold them accountable for the money.

Question 12

Describe Decisions.

Answer 12

Gives power to make financial decisions to those in the best position to make them e.g. a
Headteacher may not know what kinds of books need to be ordered.

Question 13

Describe Control.

Answer 13

Budgets are set against objectives and targets and can be used as a comparison tool to measure success.

Question 14

What are the two types of budgets?

Answer 14

-Historical Figures budget
-Zero based budget

Question 15

What is a Historical figures budget?

Answer 15

This is a budget set for the business using current
financial figures.

Question 16

What is a zero based budget?

Answer 16

This is a budget set for a business by using figures based on potential performance.

Question 17

What are the benefits of a budget?

Answer 17

-Provide a method of allocating and using resources within the organisation
-Help to monitor and control
operations
-Promote forward thinking
-Show employees an overall
picture of the direction of the
organisation which can
motivate staff
-Help to co-ordinate different
departments and align them
towards shared objectives

Question 18

What are the diasadvantages of a budget?

Answer 18

-The time that workers give to
the budgeting process means
they are not available to carry
out other responsibilities.
-Errors and inaccuracies will still remain.
-Budgets involve and affect people.

Question 19

What are the two types of variances?

Answer 19

-Favourable variance
-Adverse variance

Question 20

What is favourable variance?

Answer 20

When the manager has underspent in there department.

Question 21

What is adverse variance?

Answer 21

When the manager has overspent there budget.

Question 22

What are the difficulties of budgeting?

Answer 22

-They are set for the year so they are not very flexible
-Managers tend to spend over the limit
-Takes time to prepare
-Unrealistic budgets can be demotivating

Question 23

What is a profit and loss account?

Answer 23

A profit and loss account is a financial document showing the company revenue or income over the
year and their costs and expenditure.

Question 24

What is profit?

Answer 24

Profit is recorded straight away.

Question 25

What is cash?

Answer 25

Cash will not be recorded until it is paid out.

Question 26

What is liquidity?

Answer 26

The ability of a business to turn assets into cash.

Question 27

What is a balance sheet?

Answer 27

A document showing a businesses assets and liabilities.

Question 28

What are non current assets?

Answer 28

The long term assets that a business does not expect to sell within the next year of trading.

Question 29

What are current assets?

Answer 29

These are short term assets that a business is likely to sell in the next year of trading.

Question 30

What are non current liabilities?

Answer 30

These are debts that are expected to not be paid of within the next year of trading.

Question 31

What are current liabilities?

Answer 31

These are debts that are expected to be paid within the next year of trading.

Question 32

How do you calcualte current ratio?

Answer 32

Current liabilities

Question 33

How do you calculate the acid test ratio?

Answer 33

Current liabilities

Question 34

How can a business improve their liquidity?

Answer 34

-Reduce the amount of stocl it holds
-Reduce credit periods offered to customers
-Pay suppliers later on agreed credit terms

Question 35

Why do businesses fail?

Answer 35

-Poor cash flow management
-Lack of funds to pay tax bill
-Lack of capital which leads to excessive borrowing
-Borrowing from expensive sources e.g. credit card or overdraft

Question 36

What are some non financial factors that lead to business failure?

Answer 36

-Failure to innovate
-Poor marketing
-Strong pound
-Competition
-Government policies
-Natural disasters