Finance

Question 1

Current ratio

Answer 1

current assets / current liabilities

Question 2

Gearing ratio

Answer 2

(non-current liabilities/ capital employed) x 100

Question 3

gross profit margin

Answer 3

(gross profit / total sales revenue) x100

Question 4

receivables

Answer 4

(Trade receivables / revenue) x 365

Question 5

payables

Answer 5

payables/ cost of sales x365

Question 6

evaluation of receivables

Question 7

operating profit margin

Answer 7

(operating profit/ revenue ) x 100

Question 8

net profit margin

Answer 8

net profit for the year/ sales revenue ) x 100

Question 9

ROCE

Answer 9

(operating profit/ capital employed) x 100

Question 10

internal influences on financial objectives

Answer 10

• overall business objectives
• business status = new businesses may be more ambitious with objectives as they try to grow quickly. established businesses may be happy with smaller increases in revenue.
• other functions of the business= HR

Question 11

External influences on financial objectives

Answer 11

• competitors
• available finance
• the economy = boom ambitious profit targets, recession restrained targets and focus on cost minimisation
• shareholders
• environmental and ethical factors

Question 12

Ways of improving cash flow

Answer 12

• overdrafts (Short term) -
• holding less stock = less cash tied up in stock = more working capital
• reduce the time between paying suppliers and getting money = longer credit periods for suppliers, shorter credit period for customers
• credit controllers who keep debtors in control
• debt factoring= selling debts to an external party for cheaper than the actual debt
• sale and leaseback = selling of equipment to raise capital and then lease the equipment back.

Question 13

Reasoning for cash flow forecasts

Answer 13

• make sure the business always has enough money
• allows future prediction of when they won’t have enough cash and therefore prepare for this
• can show forecasts to banks to then allow venture capitalists and loans
• check they aren’t holding too much cash
  HOWEVER
• based on previous experience= no way to tell what the future holds
• need for a lot of experience and data which small businesses cannot provide
• false forecasts can lead to the business running out of cash and becoming insolvent

Question 14

Advantages of setting budgets

Answer 14

• helps achieve targets
• helps business keep control of expenditure/income
• helps managers review decisions
• helps focus on priorities
• lets head departments delegate authority to budget holder= motivational
• allow departments to coordinate spending
• helps persuade investors that the business will be successful

Question 15

Disadvantages of setting budgets

Answer 15

• Can cause resentment and rivalry amongst departments as they have to compete for money
• can be restrictive = stop firms accurately responding to shifts in the market
• time consuming
• inflation
• start ups may struggle to find information so their budgets may be inaccurate

Question 16

Favourable variances

Answer 16

• more profits than budgeted
• lower costs than budgeted
• can lead to the business setting more ambitious targets
• increase productivity= setting higher targets
• may need to increase production to meet demand

Question 17

Adverse variances

Answer 17

When budgets were off and this negatively impacts profits

• costs were more expensive than budgets
• profit margins were lower than budgets

Question 18

Impacts/Causes of variances

Answer 18

• competitors behaviour
• change in economy
• change in the costs of raw materials
  INTERNAL:
• improving efficiency = favourable variance
• overestimate of money that it can save through its production process
• underestimate the costs of making changes in organisation
  suggest poor communication within the business

Question 19

Contribution per unit calc

Answer 19

selling price per unit - variable costs per unit

Question 20

Total contribution calc

Answer 20

Total revenue - total variable costs
OR
contribution per unit x number of units sold

Question 21

Break even point calc

Answer 21

fixed costs/ contribution per unit

Question 22

margin of safety

Answer 22

actual output - break even output

Question 23

advantages of break even analysis

Answer 23

• easy to do
• Quick
• allows businesses to forecast how variations in sales will affect costs, revenue, profits
• allow businesses to see how changes in price and costs will impact how much they need to sell
• can be used to persuade bank to give the business a loan
• influences on whether the business introduces a new product= if they would need to sell an unrealistic amount to break even they shouldn’t launch the product

Question 24

Disadvantages of break even analysis

Answer 24

• assumes variable costs rise steadily. NOT ALWAYS THE CASE = a business can get discounts from buying bulk
• simple for a single product but gets complicated when it is for a businesses whole product portfolio
• if data is wrong so too will the results
• ## assumes ALL products are sold with no wastage

Question 25

Internal sources of finance

Answer 25

Retained profits = good for short term and long term
- however if the business isn’t making enough profit this isn’t possible
- shareholders may object due to them loosing out on dividends
Rationalisation=
- where managers reorganise the company to make it more efficient.
- this can be done by selling machinery and leasing it back (sale and leaseback)
- Don’t need to pay interest
- however the business would loose out on their assets, also things like vehicles loose their value overtime and therefore won’t be worth as much as what they initially paid

Question 26

External sources of finance

Answer 26

Overdrafts: 
- short term 
- high interest payments 
- easy to arrange and flexible 
Debt Factoring: 
- instant cash 
- however loose a percentage of the money that was owed to the business
Bank loans

Question 27

Evaluation of bank loans

Answer 27

adv:
- guaranteed money for the duration of the loan
- only have to pay the loan interest back
- loan interest rates are usually lower than overdraft payments
Disadv:
- can be difficult to arrange
- keeping up with repayments can be difficult if cash issn coming into the business- the business may loose whatever the loan is secured on
- business may have to pay a charge if the decide to pay the loan back in one lump sum

Question 28

Share capital (external source of finance)

Answer 28

• money doesn’t need to be repaid
• new shareholders can bring additional knowledge and expertise
• loosing ownership of the business
• pay dividends
• also have a say in the running of the business