Finance (Paper 2)

Question 1

List the reasons why a business needs finance (5)

Answer 1

• New firms need start-up capital
• New firms often have poor initial cash flow to cover costs
• To cover lack of liquidity from customers delaying payments
• To meet day-to-day running costs
• To expand

Question 2

List the short-term sources of finance

Answer 2

• Trade credit
• Over drafts

Question 3

What is trade credit

Answer 3

• The process of buying items from a supplier and paying for them at a later date

Question 4

Benefit of trade credit

Answer 4

• Provides smaller firms with the time to gather capital to repay the debt

Question 5

Drawbacks of trade credit

Answer 5

• Late repayments can lead to large fees

Question 6

What is an overdraft

Answer 6

• When the bank allows firms to take out more money out of their bank account than it has payed into it

Question 7

Main causes of negative cash flow

Answer 7

• Poor management
• Costs higher than revenue
• Offering customers to long to pay

Question 8

Define Poor management in context of negative cash flow

Answer 8

• Not having specialists in place to deal with finance, procurement or production so problems can’t be predicted or avoided

Question 9

Define the business a making a loss in terms of negative cash flow

Answer 9

• Costs are higher than revenue. could be production costs are high, selling price is too low or the company is making more products than there is demand for

Question 10

Define offering customers to long to pay in context of negative cash flow

Answer 10

• Trade credit agreements are not favourable for the business. Offering 60 day trade credit means waiting two months before any cash inflow comes in

Question 11

4 Main solutions to cash flow problems

Answer 11

• Reschedule payments
• Cut costs
• Use overdrafts
• Find new sources of cash inflow

Question 12

Define Break-Even

Answer 12

• When revenue and costs are the same
• The business is making neither a profit or a loss

Question 13

Define Break-Even point

Answer 13

• An amount of sales that if exceeded will cause profit
• If sales are less than this point, the business makes a loss

Question 14

What are the two parts of a financial statment

Answer 14

• Income statements
• Balance statements

Question 15

Internal sources of finance

Answer 15

• Personal or business savings
• Retained profits
• Selling fixed assets

Question 16

External sources of finance

Answer 16

• Bank loans, overdrafts and mortgages
• Loans from family and friends
• New share issues
• Trade credit
• Government grants
• Hire purchases

Question 17

Four factors that affect the choice of finance

Answer 17

• Size and type of the company
• Amount of money needed
• Length of time
• Cost of the finance