Financial function

Question 1

What are the financial concepts?

Answer 1

• Income
• Expenses
• Cash flow
• Owner’s equity
• Drawings
• Assets
• Liabilities
• Costs
• Breaking even
• Safety margin

Question 2

Discuss the concept of income.

Answer 2

• Business received income when services are rendered (e.g. delivery service or goods are sold e.g. sales… clothing)
• Income earned will show in the statement of comprehensive income
  Examples of income:
• Current income (from services rendered)
• Sales (when products are sold)
• Rent income (when property is rented)
• Interest income (from money saved in the bank/investments)

Question 3

Discuss the concept of expenses.

Answer 3

• Business incurs expenses when it has to pay for a service rendered to the business
• Shown in Statement of Comprehensive Income
• Examples: Water, electricity, advertising, repairs, insurance, salaries (paid monthly), wages (paid weekly)

Question 4

Discuss the concept of profit and cash flow.

Answer 4

Profit = income - expenses.
- Cash flow refers to the cash portion of various transactions
- Not all sales or trading stock will be in cash
- Business may sell goods on credit to debtors
- Cash may be obtained from other sources (shareholders, loans etc)

Question 5

Discuss the concept of owner’s equity.

Answer 5

Owner’s equity is the portion of a company’s assets that an owner can claim; it’s what’s left after subtracting a company’s liabilities from its assets. Owner’s equity is listed on a company’s balance sheet. Owner’s equity grows when an owner increases their investment or the company increases its profits.

Question 6

Discuss the concept of drawings.

Answer 6

• If the owner takes out money or assets out of the business for their own use, it is known as drawings.
• Drawings decrease owner’s equity
• Owner’s equity is shown in the Statement of Financial Position (balance sheet; assets = owner’s equity + liabilities)

Question 7

Discuss the concept of assets.

Answer 7

• The possessions owned by the business
• Assets are used by the business to make money
• Shown in the Statement of Financial Position (Balance sheet)
• Two types of assets: non-current (long term) assets and current (short term) assets.

Question 8

Give examples of non current assets.

Answer 8

(Longer than 12 months)
E.g.:
- land
- buildings
- vehicles
- equipment
- long term (> 1 year) investments in the bank

Question 9

Give examples of current assets.

Answer 9

(Within 12 months)
E.g.:
- Cash (positive bank balance)
- Debtors
- Trading inventory

Question 10

Discuss the concept of liabilities.

Answer 10

• The debt owed by the business
• What the business is liable to pay
• Shown in the Statement of Financial Position (balance sheet)
• Two types: Non current (>12months) and current (<12 months

Question 11

What types of costs are there?

Answer 11

Fixed and variable.

Question 12

Discuss the concept of fixed costs.

Answer 12

• Remain the same irrespective of output (units produced)
• Includes: insurance, rent expenses, fixed salaries (e.g. cleaners/managers/secretaries; not involved in production process) etc

Question 13

Discuss the concept of variable costs.

Answer 13

• Vary according to output (units produced)
• Will increase when production increases
• Includes: water & electricity, raw materials, wages of workers being paid according to output, etc

Question 14

What are total costs?

Answer 14

The sum of fixed and variable costs.

Question 15

What is cost per unit?

Answer 15

Calculated by dividing the total costs by the number of units produced.

Question 16

Describe a basic break even graph.
(Very NB) - please google it for reference!! I can’t paste images here

Answer 16

x axis: showing units sold over time
y axis: shows revenue over time
a line across the x axis shows the costs incurred. Below it are fixed and variable costs. If the number of units sold is below this line, the business is making a loss. If the number of units sold is above the line, the business makes a profit. The point at which the total units sold intersects the total cost line is called the break even point (BEP).

It is important for businesses to maintain a safety margin - the difference between actual profitability and the BEP.

Question 17

Discuss the concept of a safety margin.

Answer 17

• The safety margin shows how far above the BEP the business has to perform in order to ensure the business can safely continue to exist.
• Defined by the difference between gross revenue and BEP.

Question 18

What is the break even point?

Answer 18

The point at which the business’s revenue covers costs but nothing more. In other words, the business does not make a loss nor a profit.

Question 19

Discuss the concept of feasibility studies.

Answer 19

• The process of assessing the potential of a new business idea - will it be workable?
• Important to know ASAP whether a project has the potential to succeed or not, preferably before large amounts of time/money are invested.

Question 20

Why is a feasibility study important?

Answer 20

• Helps determine the posiibility of success if new ideas are implemented before the plan is developed
• Forces entrepreneur to remove emotion from the equation and focus solely on facts, thus forced to think critically
• Feasibility studies must be put in writing so that they can be referred to at a later stage and used as a guide to develop a business plan.

Question 21

What are the steps of a feasibility study?
Note: This is a potential exam application question.

Answer 21

1. Describe the project/idea.
2. Describe the market.
3. If it is a viable idea, what next?

Question 22

Discuss step one of a feasibility study.

Answer 22

1. Describe the business or project idea.
   Ask questions such as:
   - who will manufacture the product?
   - Is there a patent to protect intellectual property?
   - Who and where is the potential supplier, if the product is bought from one?
   - Is there an alternative supplier?
   - What distribution channels will be used? Direct/online, or indirect?
   - Write down a detailed description of what will be sold.
   - Clearly state how the project idea is different from businesses already selling something similar.
   - Why would the consumer want to buy this product and not anyone elses? (USP)

(Make sure you know 3 or 4 of these points)

Question 23

Discuss step two of a feasibility study.

Answer 23

2. Describe the market
   Ask questions such as:
   - is there a market for the proposed idea?
   - does the market have the potential to absorb other competitors? (P6F - current competitors; level of rivalry)
   - Is there potential for growth in the market?
   - Is the market price sensitive? (links to LSM and power of the buyer)
   - Should the product be sold for > or < existing products?
   - Who will be the competitors and what are their strengths/weaknesses? (SWOT/TOWS)

Question 24

Discuss step three of the feasibility study.

Answer 24

3. If it is a viable idea, what next?
   - How much capital is needed to start the business?
   - Where will the business be located?
   - (Dis)advantages of the location?
   - Municipal requirements for zoning?
   - Required special equipment?
   - Special skills needed?
   - There should be enough working capital for the first six to eight months of the business’s operations.

Question 25

What is overdraft?

Answer 25

An overdraft occurs when you don’t have enough money in your account to cover a transaction, but the bank pays the transaction anyway.