3.5 Finance

Question 1

What are the Financial objectives?

Answer 1

Profit, Cash-Flow, Cost Minimalisation, Capital Structure, Revenue Target, Return on investment, Dividends

Question 2

What is Gearing?

Answer 2

The percentage of capital tied up in the business that is taken from long term borrowing.

Question 3

Ways of managing Gearing?

Answer 3

Focus on profit, Repay long term loans, Retained profits rather then dividends, issue more share and convert loans into equity.

Question 4

What Is The Formula For Capital Employed?

Answer 4

LTL + Share Capital + Reserves

Question 5

Ways of Increasing Gearing?

Answer 5

Focus on Growth, Convert short term debt into long term loans, Buy-back ordinary share and pay increased dividends

Question 6

What Is The Return On Capital (ROC) Formula

Answer 6

Operating Profit / Capital Employed X 100

Question 7

What are possible Cash flow objectives?

Answer 7

Reduce borrowing to target level, Minimise interest rates, Reduce average debtor days to target, Reduce seasonal swings in cash flow, Net cash flow as a percentage of net profit.

Question 8

What does ROI stand for and what is it?

Answer 8

Return on investment- The amount of profit you are getting off asset.

Question 9

What are the External influences on financial objectives?

Answer 9

Political, Economic, Social, Technological, Environmental, Legal

Question 10

What is overtrading?

Answer 10

When a business expands too quickly without having the financial resources to support it. If sustainable source of income isn’t found then it can cause a business failure.

Question 11

Why set Budget?

Answer 11

Set targets and priorities, Allocate resources, Improve efficiency, monitor performance, Control income and Expenditure.

Question 12

What is budget variance?

Answer 12

When there is a difference between actual and forecast budget

Question 13

How can a business set its budget?

Answer 13

Historical (based on previous year) or zero budget (research all predicted figures from scratch)

Question 14

What types of variance are there?

Answer 14

Profit variance, Revenue variance, Expenditure variance

Question 15

What is the disdavantage of historical budgeting?

Answer 15

Can’t be used for a new business and it might carry over inaccuracies from the previous year if market or business conditions have changed

Question 16

What is adverse variance?

Answer 16

When the difference between forecast and actual budget has a negative impact on the budget

Question 17

How Do You Work Out Closing Balance?

Answer 17

Net Cashflow + Opening Balance

Question 18

What is the opposite of adverse variance?

Answer 18

Favourable variance

Question 19

Give 2 sources of short time finance

Answer 19

Overdraft and Debt factoring

Question 20

Give 4 sources of long term finance

Answer 20

Selling shares, Retained profits, loans

Question 21

What is the disadvantage of using an overdraft?

Answer 21

High interest rates.

Question 22

How does debt factoring work?

Answer 22

Sell a businesses debts to a debt factor and the debt factor takes a percentage of the sum.

Question 23

What is the advantage of using venture capital?

Answer 23

Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation.

Question 24

What is venture capital?

Answer 24

Investment made by specialist funds to finance the launch, early development or expansion of a private company.

Question 25

What is the disadvantage of using venture capital?

Answer 25

Loss of control in the business

Question 26

What is meant by internal sources of finance, give an example?

Answer 26

A source of Finance that comes from within the business such as Retained Profits.

Question 27

What is meant by external sources of finance, give an example?

Answer 27

When Capital is funded by a sources from outside the business such as Venture Capitalist

Question 28

Give 3 ways a business can improve its cash flow?

Answer 28

Reducing inventory, Lease rather than buying capital equipment and Get better payment terms from suppliers.

Question 29

Explain how trade payables affects cash flow?

Answer 29

Trade payables are the supplier a business has credit with so a high number of payable days improves the cash flow position by delaying cash out

Question 30

Explain how trade receivables affects cash flow?

Answer 30

Trade receivables are the company’s debtors so a high number of debtor days makes the cash flow worse by delaying cash in

Question 31

Define cash flow?

Answer 31

Cash Flow is the amount of net cash being transferred into and out of a business

Question 32

How is cash flow different from profit?

Answer 32

Cash flow is about timing of money coming into the business. A business can have good revenue (cash in) but customers might delay payments so cash in is late. Or the business can make profit but there is a significant timing issue between Cash out to buy materials and cash in from customers.