Selecting Financial Strategies

Question 1

Raising sources of finance - internal

Answer 1

1. Trading profit - retained reserves - no interest to be charged
2. Sale of assets
3. Sale and leaseback

Question 2

Raising finance - external

Answer 2

1. Ordinary share capital - raise money cheaply but give up control of your business
2. Loan capital - debentures - bonds which are repayable by the company over a specific period of time

Question 3

Should a business use internal or external

Answer 3

Depends on;

1. Reserves
2. Control
3. Use of the finance
4. The amount required
5. Level of risk
6. Legal structure

Question 4

Reasons for profit centres

Answer 4

1. Focus
2. Benchmarking can occur
3. Motivate the individual
4. Can be more efficient

Question 5

Disadvantages of profit centres

Answer 5

1. Allocating costs
2. Demotivation
3. Setting targets
4. Diseconomies
5. External changes

Question 6

Cost minimisation

Answer 6

1. Direct costs - variable costs - got to control wages which is an issue if your manager reduces hours
2. Overheads - control rent, office supplies, machinery (external control so more difficult.

Question 7

Allocating capital expenditure

Answer 7

1. Decision to replace capital expenditure with labour
2. Investment decisions in whether it is financially viable to put money into a capital project - may depend on the level or interest and level of risk