5. Sources of finance

Question 1

In not for profit (NFP) organisations, what are the three E’s that often used instead?

Answer 1

1. Effectiveness
2. Economy (reduction of cost)
3. Efficiency

Question 2

A performance measure is only useful if what?

Answer 2

If compared with something else

Question 3

Define critical success factors (CSFs)

Answer 3

Product features that are particularly valued by a group of customers, and therefore, where the organisation must excel to outperform the competition

Question 4

One way of setting Key Performance Indicators is to use benchmarking- how is this defined?

Answer 4

The establishment, through data gathering, of targets and comparators, through who use relative levels of performance can be identified

Question 5

Beyond financial performance reporting frameworks, accountants can use the triple bottom line of SEE factors. What does this stand for?

Answer 5

Social
Environmental
Economic

Question 6

What does GRI stand for?

Answer 6

Global reporting initiative

Question 7

What is the Natural Capital Protocol?

Answer 7

A standardised framework for businesses to use, developed by the Natural Capital Coalition, when assessing natural capital

Question 8

What is the CDSB framework?

Answer 8

The Climate Disclosure Standards Board framework is for ensuring that information about natural capital is given the same prominence as financial capital in a company’s reports

Question 9

What does CSR stand for?

Answer 9

Corporate Social Responsibility

Question 10

What is a balanced scorecard?

Answer 10

An integrated set of performance measures linked to achievement of strategic objectives

Question 11

From what four perspectives does the balanced scorecard look at?

Answer 11

1. Customer
2. Internal business processes (e.g. product quality)
3. Innovation and learning (e.g. employee retention rates)
4. Financial (e.g. gross margin)

Question 12

Debt holders face ______ risk but ____ returns on their capital

Answer 12

Lower, lower

Question 13

Equity holders face ______ risk but ____ returns on their capital

Answer 13

Higher, higher

Question 14

What is financial intermediation?

State a benefit of it

Answer 14

Where banks take deposits from customers and then use those funds to lend money to other customers

1. Small amounts deposited by savers can be combined to provide larger loan packages to businesses
2. Short-term savings can be transferred into long-term borrowings
3. Search costs are reduced as companies seeking loan finance can approach a bank directly rather than finding individuals to lend to them
4. Risk is reduced as an individual’s savings are not tied up with one individual borrower directly

Question 15

What does EFT stand for?

Answer 15

Electronic Funds Transfer

Question 16

What does CHAPS stand for?

What items does it cover?

Answer 16

Clearing House Automated Payment System

It covers items of at least £10,000 and provides same-day clearing

Question 17

What does SWIFT stand for?

Answer 17

Society for Worldwide Interbank Financial Telecommunication

Question 18

What is the aim of monetary stability?

Answer 18

To meet a target for overall inflation in the economy

Question 19

What two authorities does the Bank of England use to ensure the financial stability of the UK’s financial system?

Answer 19

1. Financial Policy Committee (macro prudential responsibility)
2. Prudential Regulation Authority (regulation of firms)

Question 20

What is the difference between primary banks and secondary banks?

Answer 20

Primary bank: those which operate the money transmission service in the economy, operating cheque accounts and deal with cheque clearing

Secondary bank: made up of merchant banks and other banks, which do not take part in the clearing system

Question 21

What are a customer’s two duties to the bank?

Answer 21

1. Draw up cheques carefully to avoid facilitating fraud

2. Report known forgeries to the bank

Question 22

Does the bank have a right to use the customer’s money in any way provided that it is legal and morally acceptable?

Answer 22

Yes

Question 23

Define marketable securities

Answer 23

Short-term, highly liquid investments

Question 24

What is the minimum investment for a treasury bill?

Answer 24

£50,000

Question 25

Define commercial paper

Answer 25

IOUs issued by large companies which can be either held to maturity or sold
To third parties before maturity

Question 26

Capital markets provide a source of ______ for business and an _____ route for investors

Answer 26

Funds, exit

Question 27

What is the difference between a primary and secondary market?

Answer 27

Primary market: new sources of finance

Secondary market: for securities already in issue

Question 28

Preference shares usually carry ___ voting rights and have no right to share in ______ profits

Answer 28

No, excess

Question 29

Give an advantage and disadvantage of going public

Answer 29

Advantages:
Gives access to large source of finance
Improved marketability of shares, increasing value of company
Higher security therefore easier to raise finance

Disadvantages: 
High costs 
Dilution of control 
Need to have traded for three years 
Greater scrutiny 
Having to answer investors 
Possibility of take over 
Extra costs of control and reporting systems to meet the increased demands on the company

Question 30

What is debt factoring?

Answer 30

Where a business receives loan finance and insurance so that in the event the customer does not pay, the business does not have to repay the loan

Question 31

Define a term loan

Answer 31

A loan where the repayment date is set at the time of borrowing and is not repayable on demand

Question 32

What is loan stock?

Answer 32

Debt capital in the form of securities issued by companies, the government and local authorities

Question 33

What is a lease arrangement?

Answer 33

Under a lease arrangement, the purchaser pays the owner of an asset a regular payment for the right to use the asset for a particular period of time

Question 34

What is the essential difference between a finance lease and operating lease?

Answer 34

Finance lease: purchasing an asset when it is required

Operating lease: essentially rental of an asset

Question 35

A large business can access money markets, borrowing large amount on a ____-______ basis

Answer 35

Short-term

Question 36

Define securitisation

Answer 36

The pooling of relatively small, homogeneous and illiquid financial assets, which liquid assets and which are sold to other institutions

Question 37

Define venture capital

Answer 37

The provision of risk-bearing capital to companies with high growth potential

Question 38

What are three ways can a venture capitalist exit their investment?

Answer 38

1. Sale of shares/company
2. Flotation
3. Buyback of shares on refinancing

Question 39

Give an advantage of the Alternative Investment Market (AIM)

Answer 39

1. Less stringent regulations

2. Lower entry costs

Question 40

What is a bill of exchange?

Answer 40

A document that is drawn up by the exporter and sent to the overseas buyer’s bank, which accepts the obligation to pay the bill by signing it

Question 41

What is a letter of credit?

Answer 41

A method of payment in international trade which gives the exporter a risk-free method of obtaining access payment. The exporter receives immediate payment and the buyer has a period of credit

Question 42

What is export credit insurance?

Answer 42

Insurance against risk of non-payment by foreign customers for export debts

Question 43

What are green bonds?

Answer 43

Any type of bond instrument where the proceeds will be exclusively used to finance green projects