FINANCE in planning and decision making

Question 1

requirements for exam

Answer 1

SBL candidates are expected to understand the information underpinning the results contained within the financial statements.
u may be required to use ratios to interpret the financial statements for the current year and compare to prior period, another entity, or against industry averages.
dont just state facts like GPM has increased. show understanding.
-LINK TO SCENARIO

Question 2

ROCE

Answer 2

Profit before interest and tax/
Shareholders’ equity + debt
-primary profitability ratio
-shows how well a business has generated profit from its long-term financing
-increase in ROCE is generally an improvement
-movements in roce are best interpreted by examining profit margins and asset turnover in more detail

Question 3

asset turnover

Answer 3

Revenue /
Total assets - current liabilities

-shows how efficiently management have utilised assets to generate revenue
-change is linked to movement in revenue, or N.A or both.

Question 4

profit margins

Answer 4

Gross or Operating profit
Revenue

• looks at the performance of the business at the direct trading level

Question 5

Current ratio

Answer 5

Current assets
Current liabilities
-considers how well a business can cover the current liabilities with its current assets
-It is a common belief that the ideal for this ratio is between 1.5 and 2 to 1 so that a business may comfortably cover its current liabilities should they fall due.
-ideal varies from industry to industry eg. service industry dont have much inventory so could be less than 1. doesnt mean liquidity problems, best to compare to sector averages

Question 6

Quick ratio (sometimes referred to as acid test ratio)

Answer 6

Current assets - inventory
Current liabilities

-excludes inventory as it takes longer to turn into cash
-ideal ratio is 1:1 but again it varies from industry to industry
-when discussing this, check if any overdraft is there. as it indicates liquidity probs, being an exp form of finance.

Question 7

Receivables collection period (in days)

Answer 7

Receivables x 365
Credit sales

-short period is preferred as it helps cash flow
-however for some long is strategy (competitiveness)

-short period indicates better credit control or potential settlement discounts
-long period tells poor credit control and potential bad debts

Question 8

Payables collection period (in days)

Answer 8

Payables x 365
Credit purchases* (or COS of not available)

-increase in days indicates cash flow difficulties
-means biz is delaying payments for free source of finance.
-imp to pay on agreed time to avoid conflict with suppliers

-decrese in days means more quick payments
-this cud mean settlements discounts being availed or credit terms being tightened

Question 9

Inventory days

Answer 9

Closing (or average) inventory x 365/ Cost of sales
-lower is better , good for cash flow, reduces risk of holding (theft,damage,obsolence)
-however always ensure suffiecient inventory for demand of customers

Question 10

Gearing

Answer 10

debt/ equity or debt /(debt+equity)

-imp as it indicates how risky a business is perceived to be based on its level of borrowing
-as borrowing inc, so does risk as now not only amount but interest also needs to be paid.
-further debt finance will be difficult and expensive to raise
-high level of gearing is not always bad, if biz has enough NCA to cover interest payments it shouldnt be a cause of concern to investors

Question 11

how is technology impacting finance sector?

Answer 11

-Digital Banking: easy transactions, payments system.
-blockchain and crypto
-robo advisors: automated investment platforms use AI to provide financial advice, lower costs than human financial advisors
-AI is used for data analysis, fraud detection, credit risk assessment
-Regtech helps comply with complex financial regulations automates reporting, compliance processes
-remote work and collaboration
-

Question 12

role of finance functions

Answer 12

Financial Planning and Analysis: Creating budgets and forecasts, analyzing financial data.
Financial Reporting and Compliance: Preparing financial statements, ensuring legal compliance.
Financial Control and Risk Management: Internal controls, risk mitigation.
Capital Budgeting and Investment Analysis: Evaluating projects and allocating resources.
Treasury and Cash Management: Managing cash flow and liquidity.
Cost Accounting and Cost Control: Analyzing and controlling costs.
Financial Strategy and Policy: Developing financial strategies and policies.
Tax Planning and Compliance: Minimizing tax liabilities and compliance.
Financial Systems and Technology: Overseeing financial systems and technology.
Investor Relations: Managing communication with investors.
Working Capital Management: Optimizing short-term assets and liabilities.
Mergers and Acquisitions (M&A): Evaluating potential M&A deals.
Financial Education and Communication: Educating employees and stakeholders.
Strategic Financial Leadership: Providing financial insights to support decision-making and strategic planning.
This condensed list highlights the core functions of the finance department.

Question 13

what is business partnering

Answer 13

In a business partnering model, finance professionals work closely with other departments and become strategic advisors. They collaborate with business units to provide financial insights and guidance, aligning financial strategies with the organization’s overall objectives.

evluation:Business Partnering is ideal for organizations seeking closer collaboration between finance and other departments. It’s effective for smaller to medium-sized organizations and those emphasizing agility and responsiveness.

Question 14

advantages of business partnering?

Answer 14

-Promotes alignment between finance and business units.
-Enhances financial decision-making with real-time insights.
-Fosters a customer-centric approach to financial support.
-Improves responsiveness to changing business needs.

Question 15

disadvantages of business partnering

Answer 15

-Requires a shift in the mindset of finance professionals.
-May demand additional training for finance teams to become effective business partners.
-Ongoing communication and collaboration are crucial, which can be challenging in large organizations.

Question 16

outsourcing

Answer 16

Outsourcing the finance function involves contracting external service providers to handle specific finance tasks or processes, such as accounting, payroll, or financial analysis.

evaluation: Outsourcing can be valuable for cost-conscious organizations looking to reduce overhead and gain access to specialized skills. However, it requires thorough vendor selection and management.

Question 17

advantages of outsourcing finance function

Answer 17

-Cost savings through reduced labor and infrastructure expenses.
-Access to specialized expertise and technology.
-Scalability and flexibility to adapt to changing business needs.
-Allows in-house finance teams to focus on strategic activities.

Question 18

disadvantages of outsourcing finance department

Answer 18

-Risk of loss of control over sensitive financial data.
-Quality and security concerns when outsourcing critical functions.
-Requires effective vendor management and oversight.
-May lead to job displacement and workforce concerns.

Question 19

Shared or Global Business Services

Answer 19

In this model, finance functions are centralized into shared service centers, often at regional or global levels. These centers provide a wide range of financial services to various business units across the organization.

evaluation:Shared or Global Business Services is suitable for large, multinational organizations aiming to standardize processes and reduce costs. It’s often used by organizations with a diverse set of business units.

Question 20

advantages of shared or global business services

Answer 20

Achieves economies of scale and cost reduction.
Standardizes processes, improving efficiency and quality.
Provides access to a global talent pool and specialized expertise.
Allows for consistent application of best practices.

Question 21

disadvantages of shared/global business services

Answer 21

Initial setup and transition can be complex and resource-intensive.
May require significant technology investments.
Some resistance from business units accustomed to local support.
Effective change management is critical to success.

Question 22

Short-Term Finance

Answer 22

-trade credit
-bank overdrafts
-short term loans

Question 23

trade credit

Answer 23

Description: Suppliers provide goods or services on credit, allowing the organization to delay payment for a specific period.
Advantages: Convenient, easily accessible, and often interest-free.
Challenges: Overreliance on trade credit can strain supplier relationships.

Question 24

bank OD

Answer 24

Description: Organizations can overdraw their bank accounts up to a predetermined limit, essentially borrowing from the bank for short periods.
Advantages: Flexibility and quick access to funds.
Challenges: High-interest rates, and it’s typically expensive for long-term use.

Question 25

short term loans

Answer 25

Description: Organizations can obtain short-term loans from banks or financial institutions, often secured by assets or receivables.
Advantages: Structured and predictable repayments.
Challenges: Interest costs and the need for collateral in many cases.

Question 26

long term finance

Answer 26

-equity financing
-debt financing
-venture capital and private equity
-IPO
-Retained earnings

Question 27

equity financing

Answer 27

Description: Raising capital by issuing shares or ownership stakes in the organization.
Advantages: No obligation to make regular interest or principal payments.
Challenges: Dilution of ownership and relinquishing some control.

Question 28

debt financing

Answer 28

Description: Borrowing funds from various sources, such as banks, bonds, or private lenders, with an agreement to repay over time.
Advantages: Predictable repayment schedules, interest tax deductions.
Challenges: Interest payments and the obligation to repay the principal.

Question 29

venture capital

Answer 29

Description: Investment from venture capitalists or private equity firms in exchange for equity ownership or a share of profits.
Advantages: Potential for expertise and business growth.
Challenges: Potential loss of control, high expectations from investors.

Question 30

IPO

Answer 30

Public Offerings (IPO):

Description: Going public by offering shares to the public through an initial public offering (IPO).
Advantages: Access to substantial capital and increased liquidity.
Challenges: Complex regulatory requirements and public scrutiny.

Question 31

retained earnings

Answer 31

Description: Utilizing profits earned in previous years, kept within the organization for reinvestment.
Advantages: No cost of borrowing, no dilution of ownership.
Challenges: Availability and adequacy of retained earnings.

Question 32

assessment of short and long term

Answer 32

Assessment:

Short-term finance is typically suitable for covering immediate working capital needs, such as paying bills or purchasing inventory. It’s useful for managing day-to-day operations.

Long-term finance is essential for major investments and long-term growth strategies. It can provide the substantial capital needed to support expansion, acquisitions, or the development of new products or markets.

The choice of finance sources should align with an organization’s strategic goals, financial health, risk tolerance, and repayment capacity. Often, a combination of sources is used to create a balanced capital structure that supports both short-term and long-term needs. Careful consideration of the cost, risk, and implications of each source is essential to make informed financing decisions.