Learning Aim C - Financial Planning

Question 1

What is budgeting?

Answer 1

Setting targets for expenditure and expected revenue, usually over the period of a year

Question 2

What are the 2 budgeting types?

Answer 2

Revenue and expenditure

Question 3

What is revenue ( budgeting )?

Answer 3

Expected income from a range of possible streams but mainly sales

Question 4

What is expenditure ( budgeting )?

Answer 4

Expected spending in the enterprise, this is subdivided into different areas e.g., labour/marketing

Question 5

What is variances?

Answer 5

The difference between the budget and the actual

Question 6

What is a favourable budget?

Answer 6

If the figure is better than the budget (they have spent less or made more)

Question 7

What is an adverse budget?

Answer 7

If the actual is worse than the budget (they have spent more or made less)

Question 8

Variance calculation

Answer 8

Actual total - budget total

Question 9

Why are budgets used by a business? (4)

Answer 9

Set targets
Monitor performance
Prevent overspending
Help prevent fraud

Question 10

The process of budgeting

Answer 10

Forecasting and setting targets for expenditure and revenue

Question 11

What is budgeting control?

Answer 11

The process of comparing actual performance against the budgeted forecast

Question 12

What is a cash flow forecast?

Answer 12

The prediction of the money which will go into and out of a business, usually over 6-12 months

Question 13

What is net cash flow + calculation?

Answer 13

How much a business has made/cost in that month
NET cashflow = inflow OR receipts - outflow OR payments

Question 14

What is the closing balance + calculation?

Answer 14

How much money is in the business at the end of the month
closing balance = opening balance + NET cashflow

Question 15

Key fact about opening balance

Answer 15

Opening balance is always the same as the closing balance of the previous month

Question 16

How can a business improve the cash flow of a business?

Answer 16

• increase the amount of money that comes into the business (increasing sales/selling shares/obtaining loans)
• decrease the amount of money going out of the business (find a new,cheaper supplier for raw materials/decrease wages/find new suppliers of utilities)

Question 17

How can negatives be written on a cashflow forecast?

Answer 17

Either in brackets e.g., (x) or with a subtract sign infront e.g., -x

Question 18

What is break even + calculation?

Answer 18

The point at which is equal to the costs, neither a profit nor loss has been made
break even = fixed costs/(selling price - variable costs)

Question 19

Explain a break even graph

Answer 19

FC = Fixed costs - straight line
TC = Total costs - starts from fixed costs and goes up
TR = Total revenue - goes straight up from 0
BE = Break even point - where TR=TC
Anything above BE is a profit, anything below BE is a loss

Question 20

What is the margin of safety (MOS) + calculation?

Answer 20

The difference between the sales amount or maximum output capacity and the break even point
MOS = actual sales - breakeven sales

Question 21

Benefits of breakeven analysis (7)

Answer 21

• Estimate profits at different output levels
• Evaluate if a product is worth selling
• Calculate MOS
• Experiment with different pricing options
• Use ‘what-if’ scenarios to see the effect of changes in costs or prices
• Quick and easy to analyse
• See how best to lower the breakeven point

Question 22

What is an internal source of finance?

Answer 22

Money that is already inside a business

Question 23

List internal sources of finance

Answer 23

Savings, borrowing from friends/family, retained profit, sale of assets

Question 24

What are savings? + ADV/DISADV

Answer 24

Most people who start-up their business invest their own money
ADV: Quick, easy, don’t have to pay anyone back, no interest fee
DISADV: May not be enough, may strain personal life causing personal issues

Question 25

What is borrowing friends/family? + ADV/DISADV

Answer 25

Borrowing money from their friends/family - commonly used as a source of funds for start-up costs ADV: Easy to access, no interest rates DISADV: May cause arguments, most likely have to be repaid

Question 26

What is retained profit? + ADV/DISADV

Answer 26

Earnings the business accumulates over time ADV: No repayment, easy to access DISADV: For businesses under 1 year may only have a small amount, missed opportunities

Question 27

What is sale of assets? + ADV/DISADV

Answer 27

Selling unneeded things ADV: Proceeds don't need to be repaid DISADV: May need sold assets in the future, time-consuming

Question 28

What are external sources?

Answer 28

Money that is outside of a business

Question 29

List of external sources (12)

Answer 29

Government and charitable grants, mortgage, selling shares, taking on new partners, hire purchase, leasing, bank loan, peer to peer lending, business angel/venture capitalist, overdraft, crowdfunding, trade credit

Question 30

What are government and charitable grants? ADV+DISADV

Answer 30

Government/charities pay businesses that isn't wanted to pay back ADV: Don't have to pay back DISADV: Application process can be intricate, eligibility criteria can be strict, funds must be used solely for the purpose

Question 31

What is mortgage? ADV+DISADV

Answer 31

Loan which is used for property ADV: Repay over a long period of time DISADV: Significant interest accumulates, tedious process securing the mortgage as banks may think they will be unable to pay back ( based on earnings )

Question 32

What are selling shares? ADV+DISADV

Answer 32

A business may sell more of their ordinary shares to raise money ADV: Can gain lots of money quickly, no interest payable DISADV: Give away part of the business, leaves a business open to takeovers

Question 33

What is taking on new partners? ADV+DISADV

Answer 33

An additional person or people are brought into the business as a new business partner ADV: Easy way to gain money, potential to raise huge amount of money, may offer advice and help DISADV: Owners must give away part of the business, they may have a different vision for the business than the owner does

Question 34

What is hire purchase? ADV+DISADV

Answer 34

Used to purchase an asset by an instant deposit then pay remaining amount overtime ADV: expensive assets can be purchased and paid back over time DISADV: Interest is charged on hire purchase items, equipment is not owned until the final payment is made

Question 35

What is leasing? ADV+DISADV

Answer 35

A way of renting an asset that the business requires ADV: No large upfront payments, leasing company may be responsible for repairs/maintenance DISADV: More expensive to obtained assets overtime, assets aren't owned by business

Question 36

What is a bank loan? ADV+DISADV

Answer 36

Money borrowed from a bank by an individual or business ADV: Easy and quick to access, can get a significant amount of money at a time DISADV: Must pay interest, difficult for a new business to access

Question 37

What is peer to peer lending? ADV+DISADV

Answer 37

Individuals or businesses lend directly to other people or businesses bypassing traditional banks ADV: Quick access to money, retain full control of your business DISADV: Must repay, may have disagreements

Question 38

What is a business angel/venture capitalist? ADV+DISADV

Answer 38

An individual or group that is willing to invest money into a business in exchange for an agreed shared of the profits ADV: Gain money quickly, potential to raise huge amount of money, may offer advice and help DISADV: Owners must give away part of the business, they may have a different vision for the business than the owner does

Question 39

What is an overdraft? ADV+DISADV

Answer 39

Where a business uses more money than they have in a bank account ADV: Quick access, allows emergency purchases DISADV: High interest rates, only a short-term solution

Question 40

What is crowd funding? ADV+DISADV

Answer 40

Small amounts of finance from a large amount of people usually through social media or websites ADV: Does not need to be paid back, quick way to gain money DISADV: May not gain the required amount of money needed, if projects fail, then they risk reputation

Question 41

What is trade credit? ADV+DISADV

Answer 41

Allows a business to obtain raw materials and stock but pay for them later ADV: Access to supplies without immediate payment, no interest DISADV: Short term, must be paid off quickly, usually small amounts