Finance

Question 1

What should a business consider when choosing a source of finance?

Answer 1

What the business intends to use the finance for

The amount of finance needed

The length of time it is needed

The repayment terms

The type of business

Question 2

Describe a loan from friends and family

Answer 2

This is borrowing money from family and friends

Question 3

What are the advantages of a loan from friends and family

Answer 3

Likely to be more flexible with repayment terms

May not add interest to the amount borrowed

Question 4

What are the disadvantages of a loan from friends and family

Answer 4

Disputes may occur between family members

Question 5

Describe a bank overdraft

Answer 5

This is an agreement between the bank and the business to withdraw more funds from a bank account than are currently available i.e. the business will have a negative balance.

Question 6

What are the advantages of a bank overdraft

Answer 6

A customer can spend more than they have in their bank account up to an agreed limit.

Interest is only charged on the amount overdrawn

Question 7

What are the disadvantages of a bank overdraft

Answer 7

Interest is charged daily and tends to be a higher rate than a bank loan.

The facility may be withdrawn immediately if the limit is exceeded.

Question 8

Describe trade credit

Answer 8

This is the length of time the business has to pay for goods they have purchased from suppliers, on credit e.g. 28 days

Question 9

What are the advantages of trade credit

Answer 9

The products can be sold at a profit before the business has to pay their suppliers

Question 10

What are the disadvantages of trade credit

Answer 10

Will not benefit from prompt payment discount.

Suppliers may be reluctant to sell more goods on credit if the business does not pay on time.

Question 11

Describe a grant

Answer 11

This is a source of finance from central or local government, Business Gateway or the Prince’s Trust.

Question 12

What are the advantages of a grant

Answer 12

In most cases the money does not have to be repaid.

Question 13

What are the disadvantages of a grant

Answer 13

It is usually a one-off payment and certain conditions, or criteria must be met before it can be obtained.

Usually the business is told what the money must be used for.

Question 14

Describe a bank loan

Answer 14

This is when the business borrows a fixed amount of money, which is paid back in fixed instalments over a fixed period of time e.g. 3–10 years.

Question 15

What are the advantages of a bank loan

Answer 15

The business can purchase machinery now and use it in the business to start generating profit

Repayments are spread over a period of time which improves cash flow.

Question 16

What are the disadvantages of a bank loan

Answer 16

The business must ensure it can pay all monthly instalments on time and in full

Interest is usually charged on top of the initial loan amount and so this can be a very expensive way of purchasing equipment and machinery.

Question 17

Describe hire purchase

Answer 17

This is when a business buys an asset such as a delivery van and pays it back over period of time e.g. 36 months.

Question 18

What are the advantages of hire purchase

Answer 18

Only a deposit is required when the asset is acquired

Therefore, the business can purchase items like machinery and equipment with only a small initial outlay of money.

Question 19

What are the disadvantages of hire purchase

Answer 19

The business does not legally own the asset (machinery or equipment) until the last payment has been made.

Interest is usually charged and so it can be an overall more expensive way of purchasing large items.

Question 20

Describe leasing

Answer 20

This is when a business rents an asset. The business never legally owns the asset.

Question 21

What are the advantages of leasing

Answer 21

The leasing company will replace the asset if it breaks or becomes obsolete

The leaser is responsible for any repairs and maintenance.

Question 22

What are the disadvantages of leasing

Answer 22

The business will never own the asset.

Rental charges or leasing costs could be higher than purchasing the asset in the first place.

Question 23

Describe mortgage

Answer 23

This is when a large amount of money borrowed from the bank, over a long period of time, specifically to purchase land or premises e.g. shop, factory.

Question 24

What are the advantages of mortgage

Answer 24

The business is given a long period of time (25 years) to pay the mortgage back

Question 25

What are the disadvantages of mortgage

Answer 25

Interest is paid in addition to the initial amount borrowed If the business cannot pay the mortgage back the bank can claim ownership of the property or land.

Question 26

Describe retained profits

Answer 26

This is when a business may set aside profits each financial year which can be used to reinvest in the business at a later date, e.g. to purchase equipment.

Question 27

What are the advantages of retained profits

Answer 27

There is no interest to be paid The business is not incurring any debts The business will own the assets straight away

Question 28

What are the disadvantages of retained profits

Answer 28

If a business spends all of its retained profits it can run into cash flow problems. The business may not be able to pay for unexpected costs or expenses as all profit has been spent.

Question 29

Describe a share issue

Answer 29

This source of finance is only available to private (Ltd) or public (plc) limited companies. Ltd.’s will invite new shareholders to purchase shares

Question 30

What are the advantages of a share issue

Answer 30

Large amounts of finance can be raised – particularly plc’s Finance raised does not have to be repaid

Question 31

What are the disadvantages of a share issue

Answer 31

Shareholders become part owners of the business Shareholders need to be paid dividends each year It is expensive to organise the sale of shares on the stock market (plc’s)

Question 32

Describe crowdfunding

Answer 32

This is when the business receives small amounts of finance from a large number of people. This is usually done through social media or crowdfunding websites.

Question 33

What are the advantages of crowdfunding

Answer 33

Access to a large amount of investors Finance can be raised by a business which banks etc view as too risky Usually the funds are donated so there is nothing to repay

Question 34

What are the disadvantages of crowdfunding

Answer 34

Privacy can be a problem as ideas become public and can be copied by competitors If the target amount is not reached the money raised is returned to investors and business is left with nothing

Question 35

Describe cash budgeting

Answer 35

All businesses will have money coming in (cash inflows) and money going out (cash outflows) A cash budget is used by a business to show when cash will come into and go out of the business – that is the timing of the cash flow This is important as a business needs to make sure they have enough inflows to pay for their outflows when needed e.g. wages, rent If a business does not have enough cash they could fail A cash budget does not show profit

Question 36

What are inflows

Answer 36

Money received from customers and other sources

Question 37

Give examples of inflows

Answer 37

Revenue from sales Capital invested by owners Bank loan Grant

Question 38

What are outflows

Answer 38

Money paid out by the business for expenses

Question 39

Give examples of outflows

Answer 39

Rent for premises Utility bills e.g. gas, electricity Suppliers Wages and salaries to employees

Question 40

What are receipts

Answer 40

Money coming in

Question 41

What are payments

Answer 41

Money coming out

Question 42

Describe the purpose of a cash budget

Answer 42

Highlights periods when a negative bank/cash balance is expected Highlights when surplus cash will be available for investment Allow corrective action to be taken for expected overspend Help to avoid liquidity problems e.g. secure overdraft, bank loan in advance of it being needed. Reduced uncertainty and allows a business to anticipate future problems

Question 43

Describe the sources of cash flow problems

Answer 43

Suppliers only offer a short period of credit e.g. 14 days instead of 28 days Purchasing assets e.g. a van, computer or machinery when the business cannot afford it The owners withdraw too much money from the business An unexpected increase in expenses Borrowing more than the business can afford to repay

Question 44

Describe ways to resolve cash flow problems

Answer 44

Increase advertising to make customers aware of product/service Offer discounts to customers who pay cash when they make the purchase Reduce borrowing by investing personal savings into the business Arrange an overdraft or loan from the bank in advance Reduce costs by cutting waste and increasing efficiency

Question 45

Describe income statements

Answer 45

An income statement shows how much profit a business has made over a period of time (usually one year). The income statement has two sections: Trading Account which shows the profit from buying and selling finished goods. This is known as the Gross Profit. Profit and Loss Account which shows the profit after deducting all other expenses from Gross Profit. This is known as the Profit for the Year.

Question 46

What are the trading account key terms?

Answer 46

Sales - The income (revenue) received by the business from selling its goods/services Opening Inventory - The inventory left over from last year which can be sold in the current year Purchases - The amount of inventory purchased in the current year Closing Inventory - The amount of inventory left at the end of the current year which has not been sold (this becomes the opening inventory for the following year). Cost of Sales - The cost of buying/making the products sold. The calculation is Opening Inventory add Purchases less Closing Inventory Gross Profit - This is the profit made from selling products/services before other expenses are deducted. The calculation is Sales less Cost of Sales

Question 47

What are the profit and loss account key terms?

Answer 47

Expenses - The expenses incurred in running the business e.g. telephone and utility bills (gas, electricity) Profit of the Year - This is the actual profit made by the business after all expenses have been deducted. The calculation is Gross Profit (from the Trading Account) less expenses

Question 48

What are the reasons for an income statement?

Answer 48

To compare performance with previous years To assist with decision making Legally required to produce an income statement To calculate the tax payable by the business (based on profit) To calculate the cost of sales for the year

Question 49

What is the information in income statements used for?

Answer 49

It will help the business to identify reasons a profit or loss has been made. Managers can then take action to solve any problems, this usually means: Increasing sales revenue Reduce costs

Question 50

Describe increasing sales revenue

Answer 50

Increased advertising Short term sales promotions e.g. BOGOF Expanding channels of distribution

Question 51

Describe reducing costs

Answer 51

Find a cheaper supplier of inventory Reduce number of employees Reduce number of hours worked by employees (e.g. overtime) Find a cheaper supplier of utilities e.g. gas Buy stock in bulk to receive discounts Use Just in Time inventory control