5. Finance

Question 1

What’s the purpose of the finance function

Answer 1

Provide financial information
Support decision making and business planning 

Question 2

What is owners capital as a source of finance

Answer 2

The savings of owner usually used during start-up

Question 3

What advantages of using the owners capital

Answer 3

Capital doesn’t need to be repaid
No interest

Question 4

What’s the disadvantages of owners capital

Answer 4

If owner doesn’t have sufficient savings other sources will be needed

Question 5

What is retained profit as a source of finance

Answer 5

The profit made from the business is reinvested in the business

Question 6

What is the advantages of retained profit

Answer 6

No interest
doesn’t need to be repaid 

Question 7

What are the disadvantages of using retained profit

Answer 7

Only accessible if the business has made a profit

Question 8

What is sale of assets as a source of finance

Answer 8

Fixed assets such as machinery are sold to fund expenses or equipment 

Question 9

What are the advantages of sale of assets

Answer 9

It’s useful if the asset is not required

Question 10

What are the disadvantages of the sale of assets

Answer 10

Takes time to sell

Question 11

What is overdraft as a source of finance

Answer 11

An arrangement with a bank which allows the business to spend more money

Question 12

What’s the advantages of overdraft

Answer 12

Its meet short-term cash flow problems
Interest is only paid on the borrowed amount 

Question 13

What’s the disadvantages of using overdraft

Answer 13

If the money is not repaid interest will continue to be added onto the borrowed amount

Question 14

What is trade credit as a source of income

Answer 14

The business does not need to pay supplier for a period of time

Question 15

What’s the disadvantages of trade credit

Answer 15

Goods must be paid even if products don’t sell 

Question 16

What is the advantages of trade credit

Answer 16

Helps meet short-term cash flow problems


Question 17

What is the advantage of taking on a new partner

Answer 17

Brings in new skills
No cost

Question 18

What are the disadvantages of taking on a new partner

Answer 18

The partner will have a saying how the business operates
Partner will take profits

Question 19

What is a loan

Answer 19

Money is borrowed from a bank or lender

Question 20

What is the advantages of a loan 

Answer 20

Instalments help budgeting
Longer term solution

Question 21

What’s the disadvantages of a loan

Answer 21

Interest is paid
Business risks assets as security

Question 22

What is crowdfunding

Answer 22

Money is raised by sponsors who are either donators, lenders or partners

Question 23

What are the advantages of crowdfunding

Answer 23

Large capital can be raised
No security

Question 24

What’s the disadvantages of crowdfunding

Answer 24

Interest may need to be paid
Profits may need to shared

Question 25

How do you calculate revenue

Answer 25

Quantity sold x selling price

Question 26

What is revenue 

Answer 26

Income coming into a business from the sale of products and services

Question 27

What are the two types of costs

Answer 27

Fixed and variable

Question 28

What are fixed costs

Answer 28

Cost that don’t change based on output 

Question 29

What are variable costs

Answer 29

Cost that change based on output

Question 30

What is the equation for variable costs

Answer 30

Quantity sold x cost per unit

Question 31

How do you calculate gross profit

Answer 31

Revenue – cost of sales

Question 32

What is gross profit

Answer 32

The profit made by business as a result of buying and selling goods

Question 33

What is net profit

Answer 33

Gross profit – fixed costs

Question 34

How do you calculate gross profit margin 

Answer 34

Gross profit/revenue x100

Question 35

How do you calculate net profit margin

Answer 35

Net profit/revenue x100

Question 36

What is revenue affected by

Answer 36

Pricing strategy Competitors and their prices

Question 37

What is the impact of high variable cost

Answer 37

The business may need to change supplier which could alter the quality of products

Question 38

How do you calculate annual rate of return

Answer 38

1. Total income of investment – cost 2. Profit/number of years 3. Profit per year/ cost of investment 

Question 39

What is the importance of cash

Answer 39

Cash is required to meet short-term debts and expenses. Cash is also required to provide liquidity

Question 40

What is cash

Answer 40

The money held in bank accounts and as cash on the premises

Question 41

What is profit

Answer 41

Revenue received by a business minus the costs of the business

Question 42

What is a cash flow forecast

Answer 42

A prediction of the amount of money that is expected to flow into and out of the business

Question 43

How can negative cash flow be interpreted

Answer 43

- It may only be temporary and not necessarily a long term issue - The business may require additional finance to support cash shortage