3.3.1 Planing and Implementing

Question 1

The planning cycle is ongoing and includes:

Answer 1

The planning cycle is ongoing and include:

• Determining financial needs
• developing budgets
• maintaining record systems
• minimising financial risks
• planning financial controls

Question 2

Explain the role of addressing financial needs in financial management

Answer 2

A situational analysis of the current financial position is the basis for effective financial planning. Data-driven identification of current financial issues and trends will assist the development of appropriate budgets, analyses, strategies and controls in the planning cycle. This analysis can be obtained from documents such as the income statement, cash flow statements and balance.

Question 3

What will acknowledging the financial position do?

Answer 3

Acknowledging the financial position will allow the development of accurate forecasts of sales and expenses associated with marketing, employment relations and operations.

Question 4

What does a business plan set out?

Answer 4

The business plan sets out the goals and future direction (vision) of the business, including where the business expects to be at the end of a particular time period.

Question 5

Outline the financial elements of a business plan

Answer 5

The financial elements of the plan will identify the amount of finance needed, the sources of finance available and the methods of reporting financial data to support the strategies developed to achieve the visions, goals and objectives of the business plan.

Question 6

What is a budget and what do they identify?

Answer 6

A budget is a plan predicting revenue (from sales and investments) and expenses of a business for a future time period. Budgets identify anticipated sources of revenue and expenses and are derived from the overall strategic business plan.

Question 7

What types of budgets are there?

Answer 7

Operating budgets and financial budgets.

Question 8

What is are operating budgets?

Answer 8

The operating budget, which relates to the day-to-day operation of the business and includes sales, labour costs and Administratie expenses

Question 9

What are financial budgets?

Answer 9

Financial budgets, which include the balance sheet, cash flow and income (profit and loss)

Question 10

Why are budgets offten adjusted?

Answer 10

Budgets are often adjusted because of the changing business environment.

Question 11

What are record systems?

Answer 11

Record systems are the processes and practices that a business uses to store data such as sales, expenses, assets, liabilities and customer-supplier product information.

Question 12

What does an effective record system do for a business?

Answer 12

An effective record system makes it possible for a business to improve efficiency, continuously monitor its performance, produce financial reports, comply with taxation requirements, identify issues of concern and opportunity, and respond faster to these changes.

Question 13

Define financial risk

Answer 13

Financial risk is the chance that a financial decision will result in a financial loss

Question 14

What is the main type of financial risk?

Answer 14

The main type of financial risk is that the business will not have enough cash flow to meet its financial commitments.

Question 15

Why do businesses take risks with regard to financing?

Answer 15

Businesses take risks in order to achieve the financial objectives of liquidity, profit, efficiency, growth and return on capital. It is recognised in business that the greater the risk taken the larger the possible financial return.

Question 16

What are strategies that reduce financial risk?

Answer 16

Strategies that reduce the level of risk include credit controls, hedging, derivatives, insurance, diversification and careful management of working capital and long term loan liabilities

Question 17

What are financial controls and what do they include?

Answer 17

A Financial control is a tool that provides feedback on the financial performance of the business. Financial controls include budgets, cash flow statements, income (revenue) statements and balance sheets.

Question 18

What are Ratio and comparative analysis used for?

Answer 18

Ratio and comparative analysis is used to assess the actual performance of the business against industry benchmarks and planned performance.

Question 19

What are some advantages of debt financing?

Answer 19

• Ownership and control of the business is retained by the business
• Interest repayments are tax-deductible
• Loan funds are often easier and quicker to obtain than equity funds
• Loans provide a business with the opportunity to grow
• Profits are not shared with the lender of the loan

Question 20

What are some cost disadvantages of debt financing?

Answer 20

• There are initial establishment costs and ongoing fees and charges.
• Interest has to be paid on the funds borrowed by the business
• Interest rates can vary over the life of the loan, making the loan more expensive than originally planned
• Repayments are often fixed and inflexible
• Amount must be repaid in a set period of time

Question 21

What are some risk disadvantages of debt financing?

Answer 21

• Intrest rates may increase, thus increasing the cost of the loan and repayments
• Cash flow difficulties may develop, causing the business to have difficulty repaying (servicing) the loan and this can lead to defaulting on the loan
• If it is a secured loan, defaulting on the loan may lead to loss of the asset
• The debt to equity ratio (gearing/ leverage) may increase, affecting the solvency and long term stability of the business.

Question 22

What are some advantages of equity financing?

Answer 22

• The capital does not have to be repaid with interest, within a set time
• Owners receive returns through both dividend repayments and increase in share value
• There is flexibility in timing of dividend payments
• There is greater potential for growth as owners have a vested interest in the success of the business
• The debt to equity (gearing/leverage) ratio decreases, lowering the risk to the business.

Question 23

What are some Cost disadvantages of Equity financing

Answer 23

• Increase the number of owners, reducing the level of control and increasing the sharing of profit and the time taken to make decisions
• In the longer term, it is more expensive than debt- dividends are paid to shareholders and owners expect higher returns on capital
• Equity is often hard to obtain and can take time to organise and, therefore, may limit growth
• Legal and administrative costs are high
• Equity funding is not tax deductable

Question 24

What are some risk disadvantages of equity financing?

Answer 24

• Central control of ownership is reduced, causing a loss of control in decision making.
• High demand for dividend payments to shareholders may reduce the level of retained profits.
• The business is more open to takeovers if another business buys a majority (51%) shareholding in the business

Question 25

What is gearing or leverage?

Answer 25

Gearing or leverage is the ratio of debt funding to equity funding in a business.

Question 26

Explain the gearing or leverage of a business

Answer 26

The gearing ratio or leverage of a business is important to the long term stability of a business. A highly geared business is one with greater levels of debt to equity finance.

Question 27

What is a high level of gearing for a business?

Answer 27

A high level of gearing would be 80%. This means that 80% cents worth of total liabilities debt there is $1 of owners equity. A high gearing ratio indicates a high risk for the business.

Question 28

Why is the high gearing of a business risky?

Answer 28

This is because the amount of owners’ funds available to cover liabilities of the business is low, increasing the risk of the business not meeting its liabilities and not remaining solvent.

Question 29

Why is gearing a business too low inefficient?

Answer 29

Too low a gearing, such as 30%, would mean that the business is not using its equity funds efficiently and is restricting opportunities available for business growth.

Question 30

What is an ideal gearing ratio for small businesses?

Answer 30

50%