Management Of Finance

Question 1

Describe what a bank overdraft is and discuss the advantages and disadvantages.

Answer 1

A bank overdraft is when a business takes out more money than it has in its bank account.This is usually a short-term source of finance.

Advantages

• allows a business to take out more than it has in its bank account;
• useful for addressing short-term cash flow issues.

Disadvantages

• daily interest or daily charges may apply;
• not useful for addressing long-term cash flow problems.

Question 2

Describe what a bank loan is and discuss the advantages and disadvantages.

Answer 2

A bank loan is when a business borrows money from a bank and repays it over a specified period of time in regular instalments with interest.

Bank loans can be short or long term.

Advantages
• easier to budget as a business is paying the loan back in regular instalments instead of a
one-off payment;
• can be taken out over a long period of time.

Disadvantages
• interest can be expensive, which means monthly repayments can be expensive;
• can affect credit ratings if a business does not keep up with monthly repayments.

Question 3

Describe what a government grant is and discuss the advantages and disadvantages.

Answer 3

A government grant is money that is given to a business by the government which is not repaid.

This is sometimes given to entrepreneurs when they first start up a business.

Advantages
• does not need to be repaid;
• can gain good publicity as grants can be given due to something positive that a business is
doing.

Disadvantages
• usually only a one-off payment;
• can come with strict conditions, e.g. a business must be located in a particular area or take on a set number of employees;
• can be time-consuming as there can be many forms to fill out etc.

Question 4

Describe what a hire purchase is and discuss the advantages and disadvantages.

Answer 4

Hire purchase is paying for an item with regular instalments over a specified period.

Advantages
• easier to budget as payment is made with regular instalments instead of a one-off payment;
• can be taken out over a medium/long-term;
• once a business has made its final payment then it will own the item.

Disadvantages
• interest has to be paid on top of regular repayments;
• the item is not owned until the final payment is made;
• if a business does not keep up with repayments then it can face repossession of the item.

Question 5

Describe what leasing is and discuss the advantages and disadvantages.

Answer 5

Leasing is when a business ‘rents’ an item. This can be used for IT equipment, vehicles and
equipment.

Advantages
• easier to budget as payment is made with regular instalments;
• once the leasing period is over, the item can be updated and a new leasing period can begin.

Disadvantages
• a business does not own the leased item;
• can be more expensive than hire purchase or using a bank loan to pay for the item.

Question 6

Describe what a mortgage is and discuss the advantages and disadvantages.

Answer 6

A mortgage is a type of loan which is used to pay for property/land. This is a long-term source of finance.

Advantages
• taken out over a long period of time;
• easier to budget as it will be paid back over a long period of time.

Disadvantages
• a business can face repossession if it does not keep up with monthly repayments;
• interest has to be paid on top of repaying the loan.

Question 7

Describe what a loan from family / friends is and discuss the advantages and disadvantages.

Answer 7

A loan from family/friends is when a business borrows money from a family member or friend, usually with no interest.

Advantages
• no interest or very little interest to be paid;
• family/friends may offer a loan if a business has been turned down from a bank.

Disadvantages
• can cause disagreements.

Question 8

Describe what share issue is and discuss the advantages and disadvantages.

Answer 8

Share issue is selling shares to existing or new shareholders. This is only available to LTDs.

Advantages
• can raise a large amount of capital.

Disadvantages
• can be expensive to issue more shares;
• a private company can only have a maximum of 50 shareholders.

Question 9

Outline what the fixed costs of a business are.

Answer 9

Costs which stay the same no matter how many units are produced

Question 10

Outline what variable costs are to a business.

Answer 10

Costs which change depending on the level of output.

Question 11

Describe what the break-even point is.

Answer 11

The break-even point is when a business is making no profit or loss.

Question 12

How can the break-even point be identified on a chart?

Answer 12

The point where the sales revenue and total costs meet.

Question 13

How do you calculate total profit?

Answer 13

Total Profit = sales revenue — total costs

Question 14

How do you calculate selling price?

Answer 14

Selling Price = sales revenue / output

Take your numbers from the break even point

Question 15

How do you calculate the break even point?

Answer 15

Break-even point = fixed costs / (sales — variable costs)

Question 16

Describe how spreadsheets can be used by finance departments.

Answer 16

• Calculate profit using formulae
• Create accounts such as income statements - templates may be used which make it less time consuming for the user.
• Create charts / graphs which allow the business to show profit levels over time.

Question 17

Describe how a finance dept can use word processing.

Answer 17

• Create financial reports for shareholders
• Create letters to send to customers reminding them to pay their bills on time

Question 18

Describe how a finance dept can use presentation software.

Answer 18

• Create *(presentations to show financial performance** to shareholders.

Question 19

Describe out a finance dept can use databases.

Answer 19

• Store contact details of customers to remind them of their payment dates.

Question 20

Describe how a finance dept can use email.

Answer 20

Remind customers of outstanding payments.

Question 21

Describe how a finance dept uses online banking.

Answer 21

• Pay bills online (eg: electricity)
• Transfer money to a customer or receive payment from a customer.

Question 22

Describe how a finance dept can use accounting software.

Answer 22

• Create final accounts such as income statements

Question 23

Describe how a finance dept can use electronic payment systems.

Answer 23

• Receive payment from customers

Question 24

What is a cash budget?

Answer 24

A cash budget is a plan of how a business expects to spend money (payment) and receive money (receipts)

Question 25

What is the opening balance?

Answer 25

The money that you have at the start of the week/month

Question 26

What is the closing balance?

Answer 26

The money you have at the end of the week/month (this is also the next week/month’s opening balance)

Question 27

What are receipts?

Answer 27

The money you get during the week/month

Question 28

What are payments?

Answer 28

The money you spend during the week/month

Question 29

What is a surplus?

Answer 29

A positive balance. This will happen when receipts are greater than payments

Question 30

What is a deficit?

Answer 30

A negative balance. This will happen when payments are greater than receipts

Question 31

Outline reasons why a business may experience cash flow problems.

Answer 31

• low sales - sometimes there simply aren’t enough sales coming in, e.g. people watching their outgoings after spending lots at Christmas

• an increase in expenses

• a one off payment of new assets, e.g. machinery;

• a deficit closing balance, i.e. more money is going out than coming in;

• money is tied up in inventory, e.g. inventory can’t be sold because it has gone out of date or
out of fashion;

Question 32

Describe reasons as to why a business may produce a cash budget.

Answer 32

• To see if it’s facing a surplus or deficit. If it is facing a deficit, it can take steps as to how it can be avoided
• To see whether another source of finance is needed
• To highlight periods where expenses are particularly high
• To help with decision-making
• To avoid cash flow problems. This is when more money is going out than coming in.
• To get a loan/mortgage from the bank
• To compare projected and actual figures. This can help see discrepancies between the figures that were planned and the actual figures.

Question 33

Describe ways in which a business can resolve cash flow problems.

Answer 33

• Introducing a new marketing campaign to increase sales eg: introducing new promotions

• Cutting down on staff overtime to reduce wage cost

• Find a cheaper supplier or negotiate better prices/credit terms

• Finding a cheaper energy supplier to cut down on electricity/gas costs

• Using a bank loan/hire purchase/leasing to fund buying new assets

• Encourage customers to pay earlier by offering discounts on earlier payments

• Selling any unnecessary assets that are no longer used eg: old machinery