Unit 3

Question 1

Debtor Days and Strategies to Improve

Answer 1

The lower the debtor days, the more likely customers are to look for another supplier
(Benchmark is 30-60 days)

Offer discounts for early payments or threaten late debtors with a lawsuit if they don’t pay

Question 2

Cost and Profit Center

Answer 2

Cost center is a unit of business where costs are allocated for accounting

Profit center is a unit of business where costs and profits are allocated for accounting

Question 3

Current Ratio and Strategies to Improve

Answer 3

The desirable ratio is 1.5:1 to 2:1. If it’s below 1.5 that means that the organization has liquidity problems and can’t pay back its liabilities properly, and if it’s above 2 then the organization has too much cash or debtors or stock

Increase current assets by selling non-current assets for cash but be wary to not have too much. Decrease current liabilities by using long-term SOFs instead of short-term SOFs

Question 4

Capital and Revenue Expenditure

Answer 4

Capital expenditure is finance spent on fixed assets that last over one fiscal year

Revenue expenditure is finance spent on the daily running of a business which lasts less than a fiscal year

Question 5

Pros and Cons of Payback Period

Answer 5

Easy way to check the viability of an investment project

Cash inflows are just a prediction and only takes time into account

Question 6

Acid Test Ratio and Strategies to Improve

Answer 6

The desirable ratio is above 1:1. If it’s below 1 that means that the organization has liquidity problems and can’t pay back its liabilities properly, and if it’s above 2 then the organization has too much cash or debtors

Same strategies as current ratio but additionally sell stock at a discounted price to get rid of it

Question 7

Direct and Indirect Costs

Answer 7

Direct costs are specifically related to the particular object or product (labor, raw materials)

Indirect costs don’t trace back to any product (rent, advertising)

Question 8

Overdrafts

Answer 8

Taking more money than you have. It’s usually short term and easy to acquire but has very high interest rates and needs to be paid back as soon as possible

Question 9

Business Angels

Answer 9

Wealthy people who are interested in a business and therefore invest into it in exchange for ownership. It’s has no interest but it can lead to loss of control.

Question 10

Stock Turnover and Strategies to Improve

Answer 10

The lower the ST ratio, the more efficient the organization is in generating profits

Sell stock at a discount to have more customers purchase

Question 11

Revenue Streams

Answer 11

Sources other than trading activity that is used to generate income for the organization

Question 12

Revenue and Equations

Answer 12

Money coming in from selling a product

TR = P * Q
AR = TR / Q

Question 13

Depreciation

Answer 13

When a non-current asset loses value and depreciates

Question 14

Variance

Answer 14

Comparison between budgeted and actual outcomes

Favourable and unfavourable (adverse)

Question 15

Budget

Answer 15

An estimated financial plan of the future revenues and expenditures

Set by budget holders

Question 16

Pros and Cons of Average Rate of Return

Answer 16

Goes further than payback period and takes into account product’s entire lifespan

Returns are a prediction and don’t include timings of returns

Question 17

Short Term VS Long Term Sources of Finance

Answer 17

Short term sources of finance are used to purchase assets used for daily operations (revenue expenditure)

Long term sources of finance are used to purchase fixed assets (capital expenditure)

Question 18

Profit Loss Formulas

Answer 18

Cost of Sales (COGS) = Opening Stock + Purchases - Closing Stock

Net Assets = Total Assets - Total Liabilities

Question 19

Creditor Days and Strategies to Improve

Answer 19

The higher, the more number of days it takes to pay back a creditor which will ruin relationship

Develop a better relationship with creditors or find a better creditor that fits your needs

Question 20

ROCE and Strategies to Improve

Answer 20

The higher the ROCE, the more profit the company generates from the invested capital

Minimize non-current liabilities and reduce retained profit by paying more dividends (can make you rely on long-term SOF)

Question 21

Personal Funds

Answer 21

Personal savings or money provided by family or friends. It’s easy to acquire but is too small of an amount so it might not do much

Question 22

Retained Profits

Answer 22

Profits that remain after costs and dividends are paid. It’s easy to acquire and free however not all companies have retained profits and it might be insufficient

Question 23

Gearing Ratios and Strategies to Improve

Answer 23

The higher, the more the organization depends on long-term borrowing and the lower the net profits
(Benchmark is 50%)

Look for free SOFs such as share capital or retained profits or don’t pay dividends

Question 24

GPM and PM and Strategies to Improve

Answer 24

The higher the GPM and PM, the easier it is to pay expenses

Increase revenue by increasing promotion or decrease costs by having cheaper suppliers or cutting labour costs

For PM you can negotiate longer credit periods as well

Question 25

Depreciation Formulas

Answer 25

Annual Depreciation (Straight Line)
If residual value = 0: Purchase cost / lifespan
If residual value > 0: Purchase cost - residual value / lifespan

Units of Production (UPR)
Annual Depreciation = UPR * Q actually produced
UPR = Purchase cost - residual value / total Q produced over lifespan
Overall Depreciation = Annual depreciation * lifespan

Question 26

Crowdfunding

Answer 26

Obtaining small amounts of money from a large group of people. It’s open for everyone to donate and can be in control, but due to high competition it usually doesn’t work

Question 27

Pros and Cons of Net Present Value

Answer 27

Includes both time and cash value and discount value can be changed depending on economy

Inaccurate as interest rate is unlikely to remain unchanged and is harder to calculate than ARR and PBP

Question 28

Insolvency VS Bankruptcy

Answer 28

Can’t pay on time
Can’t pay at all

A situation
A process

Flexible
Inflexible

Current Liabilities > Current Assets

Question 29

Efficiency Ratios

Answer 29

Stock turnover ratio shows how quickly the organisation sells and replenishes its stock.

Debtor days ratio (receivables) shows how long it takes to collect debts.

Creditor days ratio (payables) shows how long it takes to pay creditors.

Gearing ratio shows the extent of organisation’s reliance on loan capital.

Question 30

Share Capital

Answer 30

Money gained after selling shares. This is usually a large sum, but selling too much shares can lead to loss of control

Question 31

Pros and Cons of Profit and Cost Centers

Answer 31

Allows efficiency in monitoring and helps in decision making

Qualitative factors are ignored and decreases coordination and interdependence

Question 32

Loan Capital

Answer 32

Money gained from a bank. There’s no loss of control unlike share capital, but the money is going to be paid back to the bank eventually