Finance

Question 1

Define the source of Finance ‘Bank Overdraft’

Answer 1

-When the Business takes our more money than it has in its bank account (short term finance)
-Allows the business to take out more money than it has its account
-Daily interest or daily charges, not useful for long term cash flow problems

Question 2

Define the source of Finance ‘Bank Loan’

Answer 2

-When the Business borrows money from the bank to repay it back in regular installments
-Easier to budget as a business because of the regular installments, can be taken out over a long time period
-Interest is expensive, can effect credit rating of the business does not keep up with the payments

Question 3

Define the source of Finance ‘Government Grant’

Answer 3

-A government grant is money given to the business by the government
-Does not need to be repaid, can gain good publicity as grants are usually given to businesses doing something positive
-One off payment, can come with strict conditions and can be time-consuming as they are many forms to be filled out

Question 4

Define the source of Finance ‘Hire purchase’

Answer 4

-Paying for an item with regular installments. A deposit usually is included
-Easing to budget as it is payed in regular installments, can be taken over a medium/long time, once the business has made the final payment they own that item
-Interest is paid on top of regular payments, the item is not owned to the final payment, if the business does not keep up with payments they may face repossession of the item

Question 5

Define the source of Finance ‘leasing’

Answer 5

-When the business rents a item e.g. IT equipment, vehicles
-Easier to budget payments, once the leasing period is over the item can be updated and a new leasing period can begin
-The Business does not own the leased item
-Can be more expensive than hire purchase or using a bank loan

Question 6

Define the source of Finance ‘Mortgage’

Answer 6

-Special type of loan which is used to pay for property/land (long term finance, taken out over 20-25 years)
-Taken over a long period of time, easier to budget
-Can face repossession if it does not keep up with the payments. interest is payed on top of the payments

Question 7

Define the source of Finance ‘Loan from family/friends’

Answer 7

-When the business borrows money from family or friends
-No interest to be paid, offer if the business is turned down by the bank
-Can cause disagreements

Question 8

Define the source of Finance ‘Share issue’

Answer 8

-When LTD’s sell shares to existing or new shareholders by inviting them to join the company
-Can raise a large amount of capital, shareholders have limited liability therefore encouraging shareholders to invest
-Can be expensive to issue more shares, If a new shareholder is invited then ownership is diluted

Question 9

Define the source of Finance ‘Trade Credit’

Answer 9

-Suppliers allow the business to use goods/services before they pay for them (they agree on a credit period e.g. 30-60 days)
-Helps the business survive when cash flow is poor, allows the business to manufacture/sell the product before paying the supplier
-No discount for prompt payment, suppliers are reluctant to continue to offer credit if the business does not pay in the agreed time.

Question 10

Define the source of Finance ‘retained profit’

Answer 10

-Instead of profit going to owners/shareholders some profit is kept back in the business
-no need to pay interest, can be used for large purchases, the business does not go into debt
-money can be lost if the business does not make a profit, continually use

Question 11

Define the source of Finance ‘Owners Personal Savings’

Answer 11

-This is the owners personal savings
-Allows the owner to keep control of the business, can reduce the amount of money borrowed from out with the business
-It can be difficult to withdraw savings once they are invested into the business, there is a risk that the owner could lose their savings

Question 12

Define the source of Finance ‘Crowd Funding’

Answer 12

-Small amounts of money from a large number of people are raised to fund a new business/project
-Finance can be raised from individuals when banks see a venture as too risky, some funds are donated
-There is a low success rate/small percentage of crowd funded ventures get off the ground, Privacy can be a problem as the idea becomes public

Question 13

Define the Break Even Chart term ‘The Break-even point’

Answer 13

This is how many units of product they have to sell before they start to make a profit
Expenses=Sales

Question 14

Define the Break Even Chart term ‘Fixed costs’

Answer 14

These are costs the business has to pay on a regular basis that do not vary with output or sales e.g. council tax, rent/mortgage payments

Question 15

Define the Break Even Chart term ‘Variable Costs’

Answer 15

Variable costs vary directly with the level of output or sales e.g. raw materials, wages (staff may work overtime), gas, electricity

Question 16

Define the Break Even Chart term ‘Total Costs’

Answer 16

This is the cost of production (fixed costs+variable costs)
Once this has been calculated the business knows that money left over is profit

Question 17

Define the Break Even Chart term ‘Total Revenue’

Answer 17

This is the money that the business makes from selling its products at whatever price has been set.
The more products that are sold the higher the total revenue will be

Question 18

What are the ways to reduce costs?

Answer 18

-Change to cheaper supplier/new supplier
-Look to see if you can get bulk buying discounts
-Cut overtime
-Move to energy saving light bulbs
-Move to cheaper premises to reduce rent

Question 19

What are the advantages to reducing costs?

Answer 19

-More money to invest elsewhere e.g. new machinery
-An increase profits is possible as the cost to make each product will be less while maintaining the price
-The price could be reduced which may attract more customers and increase profits

Question 20

What are the 2 types of cash sales?

Answer 20

Cash Sales: they get the money through straight away, paid with physical money
Credit Sales: customer pays later usually at the end of the month, paid with credit card

Question 21

What does a business spend cash on?

Answer 21

-The business needs to pay its workspace in order to operate. If they do not have the money to pay their workers, the workers will not work.
-If they don’t have the money to pay their suppliers, then they will be unable to produce anything
-Other things they will have to pay include mortgage or rent, electricity, advertising etc.

Question 22

What are Cash flow problems?

Answer 22

-Spending too much money on purchases of new equipment or machinery
-Sales being low
-The owner taking out too many drawings
-Bills increasing (electricity, gas, telephone, duel)
-Too much money being tied up in stock

Question 23

What are ways to resolve cash flow problems?

Answer 23

-Sell assets: Organisations could consider selling assets that are no longer needed this means that the business could raise enough money to spend as it wishes
-Increase promotion activities: This will increase awareness of the business and the products/services on offer this means that customers will be encouraged to buy the product which will result in an increase in sales
-Move to a different utility provider: This could help reduce the organisations utility bills which means there would be more money for other things.
-Offer discounts for prompt payment: Offering customers a discount to entice them to pay earlier will result in its accounts being paid sooner which means more money is coming in to the business

Question 24

What is the purpose of a cash budget?

Answer 24

-It can highlight periods where a business has a cash deficit e.g. if the business have identified a cash shortage in a p[articular month then they can ask the bank for an overdraft to provide the cash needed
-It can highlight any periods of surplus which mean management are in a position to make informed decisions about new projects e.g. whether to buy new equipment
-To help with decision making, management may choose to lease rather than buy based of the information in the cash budget
-To highlight periods where expenses are particularly high. This will allow a business to look for a cheaper supplier or consider corrective action to reduce expenses

Question 25

What are the benefits of preparing a cash budget?

Answer 25

-To show if the business will have a surplus or a deficit
-It can show if additional finance is required e.g. overdraft or loan
-It can help control expenses by highlighting periods when expenses could be high
-It can help with decision making
-Help to set targets

Question 26

How do you produce a cash budget?

Answer 26

-For each month, you can calculate how much the business will have at the start
-Then add cash that the business expects to receive during the month
-Then deduct any money the business will spend that month
-And finally, calculate how much the business will have at the end to take forward to the next month

Question 27

Define the cash budget term ‘opening balance’

Answer 27

This is the amount of money estimated to be in the bank or in cash in the business at the start of the month

Question 28

Define the cash budget term ‘total receipts’

Answer 28

This is the money that is estimated to be left in the business e.g. from selling goods
This gives the total cash available for that month

Question 29

Define the cash budget term ‘total payments’

Answer 29

This is the estimated amount of money expected to go out the business
This is taken away from the total cash available

Question 30

Define the cash budget term ‘closing balance’

Answer 30

This is the amount of money estimated to be left in the business at the end of the months trading
The closing balance for the end of the month is the opening balance for the next month.

Question 31

What is an income statement?

Answer 31

This is a document prepared to show gross profit and profit for the year

Question 32

Define the Income Statement Term ‘Sales revenue’

Answer 32

Sales that a business has received throughout the year by selling to customers

Question 33

Define the Income Statement Term ‘Cost of Sales’

Answer 33

The cost of producing a product or buying a product in to sell to customers

Question 34

Define the Income Statement Term ‘Gross Profit’

Answer 34

The profit made from buying and selling goods

Question 35

Define the Income Statement Term ‘Expenses’

Answer 35

Items that a business must pay for to keep running e.g. electricity, rent, wages etc.

Question 36

Define the Income Statement Term ‘Profit for the year’

Answer 36

The profit made once expenses have been subtracted

Question 37

How do you avoid making a loss using an income statement?

Answer 37

-if the selling price of stock is too low the business must increase the selling price. However business must remain competitive if it is to retain customers
-If the purchase price of stock is too high then the business needs to find a cheaper supplier. However, care must be taken to not sacrifice quality
-if too much stock is left over at the year end then the business must review purchasing procedures and carry out market research. Care must be taken to purchase stock that customers want to buy
-if expenses are too high then the business must control expenses such as advertising.

Question 38

What is the purpose of an income statement?

Answer 38

-To calculate gross profit
-To calculate the cost of sales
-Help with decision making such as needing extra finance
-To calculate the total cost of expenses

Question 39

How is EPOS used in finance?

Answer 39

It is used to take payments from customers at the point of sale using a debit or credit card (also known as chip and pin)
Using this system means that money is received by the finance department a lot quicker than cheques.

Question 40

How are Spreadsheets used in the Finance Department?

Answer 40

A spreadsheet can be used to record and edit numerical information. Usually used to:
-Record cost information and calculate break-even
-Prepare cash budget
-Prepare income statements
-Create graphs showing income and expenditure

Question 41

How can online banking be used in the Finance Department?

Answer 41

Online banking is used to manage accounts remotely or to set up an overdraft without travelling to a branch

Question 42

How can data bases be used in the Finance department?

Answer 42

-Could be used to record suppliers/customer information
-Could be used to create reports on suppliers with overdue accounts

Question 43

How can the Internet be used in the Finance Department?

Answer 43

Can be used to compare lenders for the best deals and rates or it could be used to check customer credit ratings.

Question 44

How can E-mail be used in the Finance Department?

Answer 44

Could be used to remind customers when their payments are due

Question 45

How can Accounting software be used in the Finance Department?

Answer 45

Create final accounts such as Income statements