Financial Decisions

Question 1

What are financial objectives?

Answer 1

These are financial goals a business wants to achieve

Question 2

What is overtrading?

Answer 2

Is when a business produces too much and has to pay suppliers so much that they will become insolvent before they have chance to get paid by customers

Question 3

What is capital?

Answer 3

Capital wealth is wealth in form of money/other assets owned by a business

Question 4

What does Return on capital invested measure & how do you calculate it?

Answer 4

• Measures how efficiency an investment is and compares money invested to what you get back
  = Return on investment ÷ cost of investment x100

Question 5

What is a creditor?

Answer 5

People owed money by a business

Question 6

What is a payable?

Answer 6

Money the business owes

Question 7

What is a debtor?

Answer 7

Someone who owes money to the business

Question 8

What is a cash flow forecast?

Answer 8

Shows the amount of money managers expect to flow in and out of a business over a period in the future
-Used to show banks and venture capitalists when trying to get loans

Question 9

Why is cash flow forecasting not always accurate?

Answer 9

• Can be based on false assumptions about whats going on

- Circumstances can change after forecasts have been made

Question 10

What are the tricks of improving cash flow?

Answer 10

1) Overdrafts
2) Tried hold less stock so less cash is tied up
3) Debt factoring
4) sale and leaseback

Question 11

What are the three types of budgets?

Answer 11

1) Income
2) Expenditure
3) profit

Question 12

What is a variance?

Answer 12

A way of analysing budgets that shows id a business is performing worse or better than expected

Question 13

Whats a favourable variance?

Answer 13

• If revenue is higher than budget says meaning there will be an increased profit
• If costs are lower than predicted

Question 14

Whats an adverse variance ?

Answer 14

-when predicted revenue is higher than actual revenue

Question 15

What does Break Even Analysis mean?

Answer 15

-Breaking even means covering your costs

Question 16

What is BEO?

Answer 16

This is the level of sales a business needs to cover its costs

Question 17

What is meant by contribution in BE?

Answer 17

This is the difference between selling price and the variable costs it takes to produce it
= Selling price-variable costs

Question 18

What is the margin of safety?

Answer 18

The amount between actual output and BE output

Question 19

What are examples of Internal sources of finance?

Answer 19

1) Retained profit

2) Rationalisation

Question 20

What is rationalisation?

Answer 20

This is when managers re-organise the business to make it more efficient e.g selling assets and leasing them back

Question 21

What are examples of ST sources of finance?

Answer 21

Overdrafts
Debt factoring
Retained profits

Question 22

What is an overdraft?

Answer 22

When a bank lets a business have a negative amount in its bank account these are easy to arrange but mean that banks can charge high interest rates making them unstable in LT

Question 23

What is Debt factoring?

Answer 23

When banks and other financial institutions take unpaid invoices off hands of business and give them instant cash payment
- However the disadvantage is that debt factors get to keep some of the money

Question 24

Whats an example of a long term external source of finance?

Answer 24

Loan

Question 25

What is a loan?

Answer 25

When a business borrow a fixed amount of money and pay it back over a fixed period
-Banks need security in order to get one e.g property

Question 26

What are the advantages and disadvantages of a loan?

Answer 26

Adv - Guaranteed money for its duration and interest is lower than on an overdraft
Disadv- Hard to arrange as businesses need to be confident they will be paid back the money
-Keeping up with payments can be hard and if they decide to pay back early may face a fine

Question 27

What are more examples of External sources of finance?

Answer 27

Share capital
Venture capital
Crowdfunding

Question 28

What is share capital?

Answer 28

External source of finance where money raised through selling shares in the business
adv- Money doesn’t need to be repaid and shareholders bring in new ideas
disadv- original owner no longer owns all business and have to pay dividends

Question 29

What is venture capital?

Answer 29

Professional investors who invest in a business thought to be high risk but has the potential to be a success

Question 30

What is crowdfunding?

Answer 30

Method of finance for a business using contributions made by a large number of people, usually done via the internet
disadvantages- Crowdfunding organisations usually take some of the money

Question 31

What is a profit margin?

Answer 31

Measures how profitable a business’ product is by giving a % of the selling price thats actually profit

Question 32

What are the three profit margins?

Answer 32

1) Gross profit = Gross profit ÷ sales revenue x100
2) Operating profit
3) Profit for the year

Question 33

How do u calculate Profit for the year?

Answer 33

Operating profit+other profit-net finance costs -tax

Question 34

How do u calculate operating profit?

Answer 34

Sales revenue-cost of sales-operating expenses

Question 35

How do u calculate gross profit?

Answer 35

Sales revenue-cost of sales

Question 36

What are the methods of increasing profit?

Answer 36

• Reduce prices to increase demand
• increase prices
• Advertising campaigns