Finance

Question 1

Describe retained profits

Answer 1

Retained profits are profits which are not distributed to shareholders or taken as drawings by the owner. These profits are reinvested back into the business.

This is internal.

Question 2

Describe the advantages of retained profits

Answer 2

Can help with the businesses expansion.

There is no interest to pay back.

Can be spent in any way the owners see fit.

Question 3

Describe the disadvantages of retained profits

Answer 3

Shareholders may be unhappy that they are not receiving a higher return.

If all profits are spent, business may be unable to pay for unexpected costs.

Question 4

Describe sale of assets

Answer 4

This is when a business sells of its unused assets - usually machinery. This money is then reinvested back into the business.

This is internal.

Question 5

Describe the advantages of sale of assets

Answer 5

Can help with the businesses expansion.

There is no interest to pay back.

Can be spent in anyway the owners eye fit.

Frees up cash that was tied down.

Question 6

Describe the disadvantages of sale of assets

Answer 6

Expensive to repurchase any machinery if it was ever required again.

Question 7

Describe share issue

Answer 7

Share issue is available to limited companies (a business in the public sector unable to issue shares), whee they invite new shareholders to invest in the business by issuing extra shares.

Question 8

Describe the advantages of share issue

Answer 8

Large amounts of capital can be raised without interest.

Shareholders have limited liability.

Question 9

Describe the disadvantages of share issue

Answer 9

Loss of control as shareholders become part owners.

Question 10

Describe a bank loan

Answer 10

A bank loan is when a large sum of money is borrowed by a business from the bank for an agreed period of time. This money is then paid back by the business over a number of years (10-20) in equal monthly instalments with interest.

Question 11

Describe the advantages of a bank loan

Answer 11

Loans are fairly quick and easy to arrange if the business is trusted by the bank.

The business can spend the loan however they wish bu it is usually used for expansion.

Question 12

Describe the disadvantages of a bank loan

Answer 12

Interest is charged with each monthly repayment which is a cost to the business.

Question 13

Describe a mortgage

Answer 13

A mortgage is a sum of money borrowed from the bank that is purely for the purchase of land or property. This is paid back in instalments usually over a long period of time.

Question 14

Describe advantages of a mortgage

Answer 14

Large amount os finance can be raised quickly.

Given for a long period of time.

Question 15

Describe the disadvantages of a mortgage

Answer 15

Interest is charged.

Property can be lost to the lenders if payments are missed.

Question 16

Describe debt factoring

Answer 16

Debt factoring is when a business sells its accounts receivable (I.e, invoices) to a third party at a discount. The factor then deals with all outstanding payments and the business receives cash instantly.

Question 17

Describe the advantages of debt factoring

Answer 17

Improved cash flow.

Protection against bad debts.

Question 18

Describe the disadvantages of debt factoring

Answer 18

Interest is charged at a high rate.

Factor is responsible for collections, if they are unprofessional this may harm relationships.

Question 19

Describe debentures

Answer 19

Debentures are a long term source of finance. A debentures is a document issued by a lending company when providing another company with high-value funding, giving them security in case the borrowing company don’t re-pay.

The debenture typically carries a fixes rate of interest over the course of the loan.

This is external.

Question 20

Describe the advantages of debentures

Answer 20

Financial protection.

Fixed interest rate.

Question 21

Describe the disadvantages of debentures

Answer 21

No flexibility in payments - can lead to bankruptcy.

Debenture holders have no share in the company itself.

Question 22

Describe a grant

Answer 22

A grant is a fixed amount of money usually awarded by the government or charitable organisation.

These are usually only awarded if the business meets certain criteria such as providing jobs in areas of high unemployment.

Grants don’t usually need to be paid back.

This is external.

Question 23

Describe the advantages of a grant

Answer 23

No repayments need to be made.

Good image is generated as usually the business is helping out the local area.

Question 24

Describe the disadvantages of a grant

Answer 24

Criteria needs to be met.

Applications are time consuming.

Question 25

Describe venture capital

Answer 25

Venture capital is when people provide loans to businesses that banks find too risky - can be due to it being a new business.

They will take a % share of the business in return.

This is external.

Question 26

Describe the advantages of venture capital

Answer 26

Good because it enables businesses with a poor credit rating to obtain finance.

Question 27

Describe the disadvantages of venture capital

Answer 27

A large share of the business may have to be given away in return.

Question 28

Describe crowd funding

Answer 28

Crown funding involves getting small amount of finance from large amounts of people. This is usually done through social media or crowd funding websites.

This is external.

Crowd funding investors may donate money, get rewards for their investments or receive a small share of the profit.

Question 29

Describe the advantages of crowd funding

Answer 29

Access to large amounts of investors.

Fast source of finance.

Question 30

Describe the disadvantages of crowd funding

Answer 30

If you ask publicly for investments, risks your project being copied by others.

Question 31

Why would a business use a cash budget?

Answer 31

To show periods of surplus where cash can be put towards a project.

To show if and when additional finance is needed for operation.

To compare predicted spending with actual spending.

To measure performance of different departments and set targets.

To show to potential lenders and investors.

Question 32

What are the reasons for cash flow problems?

Answer 32

Too much money tied up in stock.

Owners taking large drawings.

Customers are given to long to pay.

Purchasing large amounts of fixed assets.

Sales revenue is not enough.

Sudden increase in expenses.

Question 33

What are the solutions to cash flow problems?

Answer 33

Offer discounts to customers for quicker payments.

Sell any unused assets.

Arrange overdraft/loan.

Cut costs.

Advertise to bring in more sales revenue.

Introduce just in time system.

Lower prices.

Offer promotions on products.

Question 34

Describe an income statement

Answer 34

An income statement shows the annual profit/loss figure. Shows how much money has come into the firm and what has been spent.

It is made up of two parts:
Trading account
Profit and loss account

Question 35

Describe a trading account

Answer 35

This calculates the gross profit/gross loss.

The amount of money made from buying and selling.

Calculation = Sales - cost os sales

Question 36

Describe a profit and loss account

Answer 36

This calculates the net profit/net loss.

The profit is made once the firms expenses have been deducted.

Calculation = gross profit/loss - expenses.