Unit 3.1, 3.2, 3.3

Question 1

Capital Expenditure

Answer 1

purchase of assets (often called fixed assets) that are expected to last for a long time, more than one year, such as a building, machinery or furniture.
(Capital expenditure requires Long-term finance to GENERATE long-term PROFITS (Long term pain for long term gain… also, if successful, large generated profits)

Question 2

Revenue Expenditure

Answer 2

spending on all costs and assets, other than fixed assets such as salaries, and materials bought for stock/inventory. Basically, anything that will be used or needs to be paid for within one year.
(Revenue Expenditure requires Short-Term Finance to GENERATE short-term PROFITS. However, this expenditure also is used in daily/weekly/monthly production and if not properly controlled, can sink a business quickly as Short-term finance usually has high interest rates)

Question 3

Short Term Finance

Answer 3

typically has to be repaid within a year, although, more commonly, it is paid back within 90 days, and usually deals with immediate problems or requirements. Short Term finance often comes with a higher interest rate due to the increased risk connected with the shorter payment period.

Question 4

Long Term Finance

Answer 4

must be repaid within more than one year and going up to several decades. Often connected with lower interest rates and for larger sums of money to fund larger projects or needs.

Question 5

Personal Funds

Answer 5

the main source of finance as a start-up for sole traders and for partnerships. This happens when someone uses their own money to finance their business. This is also often used to ‘top up’ Revenue Expenditure needs during down periods (such as seasonal variations).

Question 6

Retained Profits

Answer 6

value of profits a business keeps, after all deductions taxes and dividends to shareholders have been paid, to reinvest into their business. This is the main and best source of finance for businesses (when available!).

Question 7

Sale of Assets

Answer 7

business sells its fixed assets (called divestment) or its dormant/unused assets. This is often a quick fix solution or done to downsize a business and maintain better cost(s) control (avoiding diseconomies of scale).

Question 8

Share Capital

Answer 8

the money raised from selling shares in the company.

Private Limited Companies cannot sell their shares to the public (1.2).

Public Limited Companies can issue their shares on a stock exchange (1.2).

When a company decides to go Public they issue an Initial Public Offering (IPO).

Question 9

Loan Capital

Answer 9

Long-term sources of finance obtained from lenders such as banks. Interest is charged which can be fixed or variable (changes over time) depending on the agreement. The amount borrowed is paid back over a predetermined period, plus interest. Collateral is often required as a form of security if a business should default (not able to pay) on its loan payments.

Question 10

Mortgages

Answer 10

are a common example, which are often used to buy buildings. Companies can remortgage their building as a way to raise capital in an emergency (although this should be avoided).

Question 11

Business Development Loans

Answer 11

are specifically designed to start or expand a newer business. They often have more flexible or variable interest rates (interest rates start low and increase over time) and should be pursued when possible as they are more favourable to new businesses when compared to standard loans. Banks issue these knowing they are a higher risk, but with a higher reward as they bring in new clients who likely need future capital.

Question 12

Overdrafts

Answer 12

Allows a business to take out more money than they have in savings, usually at very high interest rates. Usually, this has a maximum set amount for a business (example: you can Overdraft your account by $10,000). This is a short term source of finance used to cover immediate expenses.

Question 13

Debentures

Answer 13

Simple definition: Businesses issue a bond (money that is promised to be paid back), Lenders give a business money (capital), the business pays back the bond with interest until the original bond is repaid.

Question 14

Trade Credits

Answer 14

buy now and pay later’. A company receives an asset(s) but the provider (known as a creditor) receives no money at that time (eg Credit Cards). Usually if paid within 30-90 days with no interest and then highest interest rates after the agreed payment period has been exceeded. Controlling and having a Good Credit Rating is essential for Cash Flow and obtaining future finance at less risk!

Question 15

Crowdfunding:

Answer 15

a newer source of finance popularized by services such as Kickstarter. Crowdfunding allows new or established businesses to be creative with how they raise capital with many options available to ‘repay’ the investors (usually potential or existing customers) their money.

Question 16

Leasing

Answer 16

customer pays rental income to the legal owner of an asset (often buildings or large machinery) as they do not have enough capital to purchase these assets outright or those assets are not needed long-term. In the long-term, leasing is more expensive than simply buying the asset outright.

Question 17

Venture Capita

Answer 17

a form of high-risk capital, usually in loans and/or shares, invested by venture capital firms who see growth potential in a small to mid-sized business.
Investment is lost if the business fails, but if it succeeds, the investors can make huge sums of money through the growth of share value or buy-outs.

Question 18

The BUSINESS PLAN

Answer 18

Owner’s Background & Experience
Why an investor or lender should trust a new business entrepreneur or plan
Overview of the business idea and its product(s)/service(s)
What is being sold or served to consumers? What is the USP?
Analysis of Market Conditions, Positioning of the Business and its Products/Services in the Market
Who are the competitors? Who are you trying to sell to? Mass or Niche market? What are the current market trends?
Outline of your promotion plans
How will you gain the attention of your customers for the first time?
Financial Section
Cash-Flow Forecast (3.7), Profit Forecast and Profit & Loss Accounts (3.4 & 3.5), Balance Sheets (3.4) are all shown here, even when estimated.
Human Resources (HR) Requirements
How many employees will you need to start? What will be you Organizational Structure, Leadership style, Motivation focus, and Corporate Culture?

Question 19

Fixed Costs

Answer 19

Fixed costs are costs of production that do not change with the level of output, i.e. costs that have to be paid even if there is no output. Examples include:
Rent on land
Leasing costs of equipment
Standardized machinery repair
Salaries to managers

Question 20

Variable Costs

Answer 20

Variable costs are costs of production that do change according to the level of output, i.e. costs that increase when there is a greater level of output or production.
Examples include:
the costs of purchasing raw materials
wages for employees (if paid by units created).

Question 21

Total Costs

Answer 21

TC = TFC + TVC
This is important because it allows managers to make decisions about levels of output and prices to be charged for specific products. It is also essential information for monthly and yearly Financial Reports and Budgets.

Question 22

Direct Costs

Answer 22

The two most common direct costs in a manufacturing business (secondary sector) are labour and materials. The most important direct cost in a service business (tertiary sector), such as retailing, is the Cost of Sales (CoS). Examples are:

Question 23

Indirect Costs

Answer 23

Indirect costs are often referred to as overheads. Examples of indirect costs include:
* the fuel for a tractor on a farm
* promotional expenditure in a supermarket
* the rent towards an office location
* the cost of cleaning a school.

Question 24

Overheads

Answer 24

usually classified into four main groups

• Production overheads - these include factory rent and rates, depreciation (HL-Only content) of equipment and electrical power.
• Selling and distribution overheads - these include warehouse costs, packing and distribution costs, and salaries of sales staff.
• Administration overheads - these include office rent and rates, clerical and executive salaries.
• Finance overheads - these include the interest on loans or other similar fees.

Question 25

Total revenue (TR)

Answer 25

multiplying the Quantity (Q) sold by the unit Price (P).

Question 26

BM Tool #7 - Descriptive Statistics

Answer 26

Calculating the Median: The middle value of a set of data when organized in rank order. For example, a business might order Sale Figures for its Sales Teams.