Finance

Question 1

Sources of Short-term Finance (4)

Answer 1

Bank Overdraft.
Debt Factoring
Retained Profits
Trade Credit

Question 2

Sources of Long-term Finance (6)

Answer 2

Bank Loans
Hire Purchase
Sell and leasing back
Grant
Share Issuing
Crowdfunding.

Question 3

Impacts of poor cashflow (7)

Answer 3

Inability to pay suppliers / expenses etc

May have to offer discounts to encourage customers on credit to pay early

Increased costs due to borrowing funds ie interest and bank charges

Reduced growth / expansion due to lack of disposable funds to invest eg to purchase new technology

Owner may need to reduce their drawings

May need to sell unused assets or reduce price of goods

Might lead to staff redundancies and closure of business

Question 4

Benefits of Cash Budget (5)

Answer 4

It shows whether the business will have a surplus of cash this will allow them to plan future purchases

Make adjustments to spending or arrange an injection of cash to avoid the deficit

Make comparisons between predicted and actual figures this will help monitor the performance of the business

It aids decision making as it provides cash flow information for decisions to be based on

It can be used to set targets for individual departments to achieve which will allow the business to stay within budget as predicted

Question 5

Too much money tied up in stock. (CASH FLOW PROBLEM)

Answer 5

Use just-in-time (JIT) stock control.

Sell off excess stock eg a sale

Question 6

Too many credit sales (CASH FLOW PROBLEM)

Answer 6

Offer cash discounts to encourage customers to pay in cash.

Question 7

Too long a payment period for credit sales (CASH FLOW PROBLEM)

Answer 7

Charge higher interest on credit sales to encourage customers to pay sooner.

Question 8

Not enough credit purchases (CASH FLOW PROBLEM)

Answer 8

Switch suppliers to those with interest-free credit available on purchases.

Question 9

High amounts of spending on non-current assets (CASH FLOW PROBLEM)

Answer 9

Pay for non-current assets in instalments, such as paying for a vehicle using hire purchase.

Question 10

Increasing expense costs (CASH FLOW PROBLEM)

Answer 10

Look for ways to reduce expenses, eg spend less on rent by selling online through e-commerce.

Question 11

Too many drawings by owners (CASH FLOW PROBLEM) (1)

Answer 11

Charge higher interest on drawings to discourage owners from withdrawing money from the business.

Question 12

Not enough sales revenue (CASH FLOW PROBLEM)

Answer 12

Adapt the marketing mix to encourage more sales eg lower prices

Question 13

Too many unpaid debts (CASH FLOW PROBLEM)

Answer 13

Sell debts to debt factoring companies.

Question 14

Opening balance

Total receipts

Cash available

Total payments

Closing balance

Answer 14

Opening Balance - The amount of cash available at the start of the month.

Total Receipts - The total cash received during the month.

Cash Available - The amount of cash available to spend:
= opening balance + total receipts

Total Payment - The total amount of cash spent during the month.

Closing Balance - The total amount of cash available at the end of the month.
= cash available – total payments

Question 15

Bank Overdraft (ST)

Answer 15

I - A facility which allows a business to spend more money than is in its bank account.

A- Can continue to pay expenses despite no money in the bank

D- High interest rates

Question 16

Debt Factoring (ST)

Answer 16

I - A business sells its unpaid customer invoices to a factoring company. The factoring company then collects and keeps the customers’ debts.

A - Cash flow improved by receiving advanced payment of debts from the factor

D- Has to sell customer debt for reduced amount

Question 17

Retained Profits (ST)

Answer 17

I - A business holding back profits from previous years to invest in the company.

A - Doesn’t need to be paid back

D - Will find difficult to expand in the long run if keeps using retained profits

Question 18

Trade Credit (ST)

Answer 18

I - Allows a business to buy goods from suppliers and pay for them at a later date.

A - Helps a business to keep going when cash flow is poor

D - Lose discount for prompt payment

Question 19

Bank Loan (LT)

Answer 19

I - Money borrowed from the bank that is repaid in regular instalments (over a fixed period of time) with interest.

A - Repaid in instalments which aids budgeting

D - Interest charges may affect cash flow in a negative way

Question 20

Hire Purchase (LT)

Answer 20

I - A business can buy an asset by paying an initial deposit and then monthly payments for a fixed period of time.

A - Repaid in instalments which aids budgeting

D - Ownership remains with the finance company until the last instalment is made

Question 21

Sell and lease back (LT) DESC 1A 1D

Answer 21

I - Sell an asset to gain funds and then lease it back. Lease - A contract that allows a business to rent an asset in return for regular, fixed payments usually on a monthly basis.

A - Gains funds for growth from sale of asset.

D - More expensive in the long term than buying the asset

Question 22

Grant (LT)

Answer 22

I - Money from the government to invest in specific projects that does not need to be paid back

A - Does not have to be paid back

D - Must meet specific conditions to secure grant

Question 23

Share Issue (LT)

Answer 23

I - Selling shares in the business. Plc sell on the stock market. Ltd sells shares privately.

A - Large sums of money can be raised by this method

D - Shareholders become owners of plc which may mean founders lose control

Question 24

Crowdfunding (LT)

Answer 24

I - getting small amounts of finance from a large amount of people. This is usually done through social media or crowdfunding websites

A - Access to large amount of investors

D - A public request for investment risks your idea being copied by competitors

Question 25

Financial Statement

Turnover or Sales Revenue

Answer 25

Amount of money received for selling goods or services during the year

Question 26

Financial Statement

Cost of Sales

Answer 26

Amount of money spent on selling goods.

Question 27

Financial Statement.

Gross Profit

Answer 27

Profit made from buying and selling>

GP = sales revenue – cost of sales

Question 28

Financial Statement Expenses

Answer 28

Running costs incurred throughout the year

Question 29

Financial Statement

Answer 29

Profit made after expenses are deducted from gross profit

Profit for the Year = gross profit - expenses