Business Theme 2 Page 146 - 176 Internal and External finance, Lability, Planning, Sales Forecasting, Sales and revenue costs

Question 1

Define sale and leaseback (1)

Answer 1

A company sells an asset to another party then rents it back from the buyer (1)

Question 2

List advantages and disadvantages of sales and leaseback (4)

Answer 2

ADVANTAGES:
Capital release (1) - provides immediate access to cash by selling an asset

Long term costs (1) - Over time lease payments can exceed the inital sale price of the asset making it a more expensive financing option

DISADVANTAGES:
Potential for Disputes (1) - disagreements with the new owner can disrupt business operations

Question 3

List advantages and disadvantages of Internal finance (4)

Answer 3

ADVANTAGES:
No Debt Obligations (1) - doesn’t take external debt so company doesn’t have to make interest payments or share profits with investors

Capital is available immediately (1) - no delay time between identifying a need for finance and obtaining it

DISADVANTAGES:
Opportunity cost (1) - funds use for internal finance may have been invested elsewhere, potentially generating higher returns

Cash Flow concerns (1) - using internal funds for large investments may impact the companys ability to manage day to day cash flow operations

Question 4

List and Explain sources of internal finance (2)

Answer 4

Sale of assets (1) - Selling unwanted assets to generate finance (e.g., machinery)

Delayed Payments (1) - extending payment terms to suppliers or collecting receivables more quickly that can improve cash flow

Question 5

List and Explain sources of external finance (2)

Answer 5

Family and Friends (1) -

Bank loan (1) -

Question 6

Define Crowdfunding (1)

Answer 6

Large number of individuals invest in a business or project on the internet, avoiding the use of a bank (1)

Question 7

Define Unsecured bank loan (2)

Answer 7

A business can borrow money from a bank (1) without having to provide any specific assets as a collateral (1)

Question 8

Explain the main advantage of an unsecured bank loan for a business when raising finance (3)

Answer 8

No asset risk (1) - the business will not risk losing specific assets if it faces financial difficulties and cannot repay the loan (1)

Question 9

Explain the difference between an ordinary share and a preference share (4)

Answer 9

Voting rights (1) - ordinary share holders have voting rights allowing them to participate in corporate decisions (1)

Preference share holders often do not have voting rights (1) so they may not be able to influence corporate decisions (1)

Question 10

Explain two implications of running a business with unlimited liability

Answer 10

Personal Financial Risk (1) - owners personal assets may be at risk if the business cannot pay its financial obligations (1)

Difficulty in Raising Capital (1) - Challenging to attract outside investors as they may not want to risk their personal assets in the business failure

Question 11

Describe two examples of appropiate finance for Limited and Unlimited liability (4)

Answer 11

LIMITED:
**Share capital **(1) - sale of shares allow limited companies to raise very large amounts of capital

Retained Profit (1) - Can be reinvested in the company for various purposes (e.g, expansion) fueling the companys growth

UNLIMITED:
Personal savings (1) - most business owners are more likely to use their own money to set up a business

Grants (1) - provide a free source of finance, however businesses have to prove they qualify for grants

Question 12

Explain why might a business with unlimited liability sometimes find it easier to raise finance than one with limited liability (4)

Answer 12

Personal Commitment (1) - The owners are personally responsible for all the business debts (1) so this commitment can demonstrate to potentional investors a high level of dedication and confidence in the business success (1)

Question 13

Define Undercapitalisation (2)

Answer 13

A business does not have enough capital or financial resources to support its growth and operations (1) so its capitalization is insufficient (1)

Question 14

Define Business Plan (2)

Answer 14

Written document that outlines a companys goals, objectives and detail plans (1) for achieving its mission and vision (1)

Question 15

Explain the advantages and disadvantages of using a cash flow forecasts (4)

Answer 15

Advantages:
Early Problem Detection (1) - forecasts can reveal potential cash shortages allowing businesses to take proactive steps to avoid crisis

Investor and Lender Confidence - accurate cash flow projections can instill confidence in investors making it easier to attract investment

Disadvantages:
Inaccuracy (1) - they are based on assumptionsabout future events and unexpected changes can lead to poor decision making (1)

Time Consuming (1) - creating and maintaining them can be a struggle especially for businesses with complex financial operations (1)

Question 16

Give two examples of cash inflows and outflows in a cash flow forecasts (4)

Answer 16

CASH INFLOWS:
Sales Revenue (1) - more money received from selling products/services
Loan Proceeds (1) - Funds received from a bank or lender

CASH OUTFLOWS:
Operating Expense (1)Payments made for day to day operational costs such as rent

Loan Repayments (1) - Money paid to service loans including interest payments

Question 17

Define Sales Forecasting (2)

Answer 17

Process of estimating and predicting future sales or revenue for a business over a specific period

Question 17

State five pieces of information that are likely to appear in a business plan (2)

Answer 17

• Executive summary
• Market analysis
• Marketing and Sales strategy
• Financial Projections
• Operations and Management

Question 18

Explain some of the advantages and disadvantages of Sales forecasting (4)

Answer 18

ADVANTAGES:
Informed Decision making (1) - provide data driven insights that help buisnesses make informed decisions about production

Goal Setting (1) - forecasts serve as benchmarks and goals for sales teams and management motivating employees

DISADVANTAGES:
Inaccuracy (1) - based on assumptions and historical data so they are suspectable to an error

Data Avaliability (1) - forecasts depend on the avaliability and quality of data which may be limited or unreliable

Question 19

Define Consumer Trends (2)

Answer 19

patterns and behaviours consumers show when it comes to purchasing goods or services

Question 20

Describe some economic variables that might affect the sales forecasts for a business

Answer 20

Consumer income (1) - A rise in income causes consumers to spend more leading to increase in sales

Inflation (1) - High inflation can make goods and services more expensive potentially leading to a decrease in sales

Unemployment Rate (1) - High unemployment rate can lead to reduced consumer confidence and spending