Management of finance (Unit 5)

Question 1

What is the role of a finance department

Answer 1

Ensuring bills are paid on time, e.g. electricity.
Paying wages and salaries.
Managing the budgets for the other departments, e.g. marketing.
Chasing up customers who have not yet paid.
Creating final accounts, e.g. income statements.

Question 2

What factors influence the type of finance a business uses

Answer 2

the purpose of the finance
objectives of the organisation
amount of finance required
the type of business (not all sources of finance are available to all businesses)
length of time the finance is required for

Question 3

What are the main sources of finance

Answer 3

bank overdraft
bank loan
grant
mortgage
share issue
owner investment
loan from family or friends
hire purchase
crowd funding
leasing
retained profit
venture capital

Question 4

Which sources of finance are considered internal

Answer 4

Owner investment
Retained profit

Question 5

What is a bank overdraft

Answer 5

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.

Question 6

Which sources of finance are considered external

Answer 6

Bank overdraft
Bank loan
Mortgage
Hire purchase
Leasing
Loan from family or friends
Grant
Share issue
Crowd funding
Venture capital

Question 7

What are the advantages of using a bank overdraft

Answer 7

allows a business to take out more than it has in its bank account;

useful for addressing short-term cash flow issues.

Can be arranged quickly

Question 8

What are the disadvantages of using a bank overdraft

Answer 8

daily interest or daily charges may apply;

not useful for addressing long-term cash flow problems.

Usually only available for small sums of money

Question 9

Describe a bank loan

Answer 9

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 taken out over a short period of time, e.g. 2 years, or longer periods of time, e.g. 15 years.

Question 10

What are the advantages of a bank loan

Answer 10

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.

Can be arranged quickly

Question 11

What are the disadvantages of a bank loan

Answer 11

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 12

What is a government grant

Answer 12

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

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

Although this is usually exclusive to the third sector

Question 13

What are the advantages of a government grant

Answer 13

does not need to be repaid;

can gain good publicity as grants can be given due to something positive that a business is doing.

Question 14

What are the disadvantages of a government grant

Answer 14

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 15

Describe hire purchase

Answer 15

Hire purchase is paying for an item with regular instalments. A deposit is usually required as well. A hire purchase is usually paid back in monthly instalments and over a specified period of time.

Question 16

What are the advantages of hire purchase

Answer 16

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.

Expensive assets can be purchased and paid back over time

Question 17

What are the disadvantages of hire purchase

Answer 17

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 18

Describe leasing

Answer 18

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

Question 19

What are the advantages of leasing

Answer 19

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.

Large amounts of money are not required up front to lease machinery

The leasing company are responsible for repairs and maintenance

Question 20

What are the disadvantages of leasing

Answer 20

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 21

Describe a mortgage

Answer 21

A mortgage is a special type of loan which is used to pay for property/land. This is a long-term source of finance and is usually taken out over 20-25 years.

Question 22

What are the advantages of a mortgage

Answer 22

taken out over a long period of time;

easier to budget as it will be paid back over a long period of time.

Large amounts of finance can be raised quickly

Question 23

What are the disadvantages of a mortgage

Answer 23

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 24

Describe loan from family/friends

Answer 24

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

Question 25

What are the advantages of a loan from family/friends

Answer 25

no interest to be paid; family/friends may offer a loan if a business has been turned down from a bank. May not need to be paid back

Question 26

What are the disadvantages of a loan from family/friends

Answer 26

can cause disagreements. Money may be lost if business is not successful

Question 27

What is share issue

Answer 27

Share issue is selling shares to existing or new shareholders. This is only available to private limited companies (Ltd). Remember, in a private limited company, shareholders are invited to join the company.

Question 28

What are the advantages of share issue

Answer 28

can raise a large amount of capital. Finance raised does not need to be paid back

Question 29

What are the disadvantages of share issue

Answer 29

Shareholders need to be paid a dividend each year Shareholders become part owners of the business

Question 30

What is crowd funding

Answer 30

Crowd funding involves getting small amounts of finance from a large amount of people. This is usually done through social media or crowd funding websites. Crowd funding investors may: donate money get rewards for their investments receive a share of the profits

Question 31

What are the advantages of crowd funding

Answer 31

Access to large amount of investors Fast way to raise finance

Question 32

What are the disadvantages of crowd funding

Answer 32

A public request for investment risks your project being copied by competitors If the targeted amount isn’t reached the money is returned to investors and the business gets nothing

Question 33

What is venture capital

Answer 33

Venture capital is money that investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an element of risk with the business.

Question 34

What are the advantages of venture capital

Answer 34

Available for more risky investment

Question 35

What are the disadvantages of venture capital

Answer 35

Venture capitalists may want a share of the business meaning some control may be lost A larger return may be required due to the high risk nature of the investment

Question 36

What are the two types of costs

Answer 36

Fixed costs and variable costs

Question 37

What are fixed costs

Answer 37

Fixed costs - costs which stay the same no matter how many units are produced, e.g. rent will have to be paid whether a business has produced 0 or 10,000 units;

Question 38

What are variable costs

Answer 38

Variable costs - costs which change depending on the level of output, e.g. the more a business is producing, the higher the cost of the electricity used.

Question 39

What are total costs

Answer 39

Total costs are the fixed and variable costs added together.

Question 40

What is the break even point

Answer 40

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

Question 41

Why do businesses find the break even point

Answer 41

A business has to work out the break-even point to find out how many units will need to be produced before making a profit. A chart will usually be created to identify the break-even point.

Question 42

How do you identify the break even point

Answer 42

The break-even point can be identified as the point where the sales revenue and total costs meet.

Question 43

What is a cash budget

Answer 43

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

Question 44

Why might a business make a cash budget (Know atleast 4 reasons)

Answer 44

to see if it is facing a surplus (more money coming in than going out) or a deficit (more money going out than coming in): if a business is facing a deficit, then it will have to think about this can be avoided; note that profit and loss are not used in a cash budget as it is just a plan of expectations for spending and receiving money. to see whether another source of finance is needed, e.g. a bank overdraft to overcome a month where there may be a deficit; to highlight periods where expenses are particularly high; to help with decision-making, e.g. when to make a purchase; to avoid having cash flow problems: this is when more money is going out than coming in - this can lead to difficulty paying bills etc; note that these are also known as liquidity problems. to try to get a loan or mortgage from a bank: the cash budget can be taken to a bank to show that repayments are affordable. to compare projected and actual figures: a manager may look to see if there are any discrepancies between the figures that were planned and the actual figures, e.g. sales may have been lower than expected, and then investigate possible reasons for this.

Question 45

What are the reasons a business may face cash flow problems

Answer 45

low sales - sometimes there simply aren't enough sales coming in an increase in expenses a one off payment of new assets a deficit closing balance money is tied up in inventory, customers are not paying up on time, which can lead to bad debts; suppliers are not giving the business credit, which is buying goods from suppliers but paying for them at a later date.

Question 46

How can a business resolve cash flow issues

Answer 46

introducing a new marketing campaign to increase sales, e.g. introducing new promotions to entice customers into stores; cutting down on staff overtime to reduce wage cost (do not use 'get rid of staff' or 'cut down on employee wage' in your answers); finding a cheaper supplier of raw materials or negotiating prices or a credit agreement to cut down on cost of purchases; finding a cheaper energy supplier to cut down on electricity/gas costs; using a bank loan/hire purchase/leasing to fund buying new assets, e.g. machinery; encouraging customers to pay early by offering discounts on early payments; selling any unnecessary assets that are not longer used, e.g. old machinery.

Question 47

What is an income statement

Answer 47

An income statement shows the income and expenditure, and the profit/loss made by a business throughout the year.

Question 48

What is sales revenue

Answer 48

sales that a business has received throughout the year by selling to customers.

Question 49

What is cost of sales

Answer 49

the cost of producing a product or buying a product in to sell onto customers.

Question 50

What is gross profit

Answer 50

the profit made from buying and selling goods.

Question 51

Define expenses

Answer 51

items that a business must pay for to keep running, e.g. electricity, wages, loan repayments.

Question 52

Define profit/loss for the year

Answer 52

the profit made once expenses have been subtracted. Note that if a business has made a loss then the figure will be shown in brackets, e.g. (5,000).

Question 53

Why do businesses produce income statements

Answer 53

to calculate the total costs of expenses to calculate the profit/loss made for the year legal reasons (all limited companies are required to produce an income statement) tax reasons (profit needs to be calculated so businesses can accurately calculate their tax payments) to calculate cost of sales to compare with previous years or other companies

Question 54

What is a spreadsheet

Answer 54

A spreadsheet is a piece of software which is used for calculations using formulae. Examples of spreadsheet software include Microsoft Excel and Apple Numbers.

Question 55

Why would the finance department use spreadsheets

Answer 55

calculate profit using formulae; create accounts such as income statements - templates may be used which make this less time-consuming for the user; create charts/graphs which allow the business to show profit levels over time; copy and paste data into other software such as Microsoft Word; change figures easier when compared to paper-based documents, e.g. formulae will automatically update values; perform 'what if' scenarios by temporarily changing data to see the effects.

Question 56

How is word processing used by the finance department

Answer 56

Word processing, e.g. Microsoft Word: create financial reports for shareholders; create letters to send to customers reminding them to pay their bills on time.

Question 57

How is presentation software used by the finance department

Answer 57

Presentation software, e.g. Microsoft PowerPoint: create presentations to show financial performance to shareholders.

Question 58

How are datasbases used by the finance department

Answer 58

Databases, e.g. Microsoft Access: store contact details of customers to remind them of their payment dates.

Question 59

How is Email used by the finance department

Answer 59

E-mail, e.g. Microsoft Outlook: remind customers of their outstanding payments.

Question 60

How is online banking used by the finance department

Answer 60

Online banking: pay bills online, e.g. electricity; transfer money to a customer or receive payment from a customer.

Question 61

How is accounting software used by the finance department

Answer 61

Accounting software, e.g. Sage: create final accounts such as income statements.

Question 62

How are electronic payments systems used by the finance department

Answer 62

Electronic payment systems, e.g. Apple Pay: receive payment from customers.