Finance

Question 1

+ retained profit

Answer 1

Can invest more risk free
Doesn’t have to borrow money, less debt
Doesn’t have to try to raise the profit by selling any shares

Question 2

Share (equity) capital

Answer 2

Money invested in business by shareholders or owners

Question 3

Long term funding

Answer 3

Capital employed
Where business has got their money from

Question 4

Capital employed includes

Answer 4

Share capital (equity)
Debt capital
Retained profits

Question 5

Debt capital

Answer 5

Banks-loans and mortgages that need to be repaid

Question 6

The proportion of long term funding that is debt equation - GEARING

Answer 6

Debt capital (NCL) / total CE (NCL+ EQUITY) x100

Question 7

Gearing

Answer 7

Measure of risk >50%, STRUGGLE OT TAKE OUT MORE LOANS
Higher= more debt used to fund the business
Higher= business is more vulnerable to changes in interest rate

<20%, investors may ask why, why haven’t they borrowed money to expand, do they not have any plans to grow -not ambitious enough

Question 8

Equity vs Debt capital

Answer 8

Equity
Shareholders investments
Expect dividends
More control, entitled to say how company is run , may have different objectives

Debt
Money borrowed by bak to invest
Money reaped over time depending on loan
Interest rate

Question 9

Income budget

Answer 9

Monetary target for revenues
Used to set sales targets for departments
Informed by past data , seasonality and market research
Used to generate cash flow forecast

Question 10

Why set budget s

Answer 10

Clear targets for team
Motivation
Allows purchasing decisions to be made by experts in that area
Enhances credibility of business plan( help gain investors)
Allows performance t be reviewed by variance analysis

Question 11

Difficulties in setting budgets

Answer 11

Reliant on accuracy of data
Reliant of skills of entrepreneur
Unforeseen changes in external environment
Changes in costs
Competitor actions
Time consuming and expensive

Question 12

Variance analysis

Answer 12

Comparing budget to actual performance

Budget - Actual

Question 13

Net cash flow

Answer 13

Cash inflows- Cash outflows

Question 14

Opening balance

Answer 14

Money left, last months closing balance

Question 15

Closing balance

Answer 15

Opening balance + net cash flow (Inflows-outflows)

Question 16

Why create cash flow forecast

Answer 16

Identify cash flow problems
Ensure b. Has sufficient working capital to operate (pay wages/suppliers)
Take actions to prevent problems
Show good financial performance, gain investors

Question 17

Improving cash flow

Answer 17

Increase/reduce selling price- depends on accurate PED, how consumers react

Increase marketing- high costs

Sell equity in business, ask partner, invest- but loose control

Question 18

Break even

Answer 18

Fc/cpu
CPU= sp-vcpu

Question 19

What does break even point mean

Answer 19

Total revenue is equal to total costs
B. Is not making profit or loss
If below BE= loss
If above BE=profit

Question 20

Contribution

Answer 20

Pays FC
When they are paid
Goes towards profit

Question 21

Calculate Total contribution

Answer 21

Either
CPU x output
or
TR-Tvc

Question 22

Strength of Break Even

Answer 22

Helps business see how many units need to be sold of any new product
Predicts profit with diff levels of output
Assess impacts fo changes of price and cost
Hello set target

Question 23

Weakness of break even

Answer 23

Depends on reliability of forecasts
Assumes constant returns
Doesn’t include unforeseen changes

Question 24

Gross profit

Answer 24

REV-COS

Question 25

OP

Answer 25

Gross profit-operating expenses

Question 26

Profit of the year

Answer 26

OP+proft from other-net costs+tax

Question 27

Internal sources of finance

Answer 27

Selling assets Owners investing

Question 28

Debt factoring - internal source of finance -short term

Answer 28

Only used if business needs help, not first place go to raise finance Buys debt from b, they collect the money from customer - increase receivable days, get cash immediately , reduce risk fo bad debt However. Harm rep, if debt factoring is agg when chasing customer May only receive 80% of sales value

Question 29

Overdraft- short term

Answer 29

Arrangement with bank to overspend on account Cover seasonal changes in demand and short term falls of cash ie awaiting customer payment However, high rate of interest May need to support evidence that can pay back to bank, time consuming

Question 30

Short term sources of finance

Answer 30

Debt factoring Overdraft

Question 31

Long term sources of finance

Answer 31

Retained profit Share capital Loans Venture capital

Question 32

Retained profit - internal

Answer 32

Money saved by you, ie pocket money Can be used for any purposes Invest in new capital, machinery, generate revenue for b. In long run Quick, easy accessible Not restrictions, in dividends or interest, no loss of control Reduces availability of dividends to shareholders Opportunity cost

Question 33

Share capital

Answer 33

Equity invested by shareholders in return for a share of profits an ownership of b- part ownership Limited liability, encourage investors Don’t have to pay dividends Additional expertise Investment is permanent Improves brand image- easier to raise loan capital But Pressure to pay dividends Loss of control

Question 34

Loans

Answer 34

Funds needed to be repaid with interest over fixed period Relatively quick and easy to secure , specific to business, fixed repayment scedule , no loss for ownership But Inflexible Interest payments

Question 35

Venture capital

Answer 35

Money invested into business by another businesss Used to finance expansion of small to medium size Useful if can’t find investment from other sources Source of advice snd support But Partial loss of ownership Conflict