Unit 5

Question 1

External influences of financial objectives

Answer 1

• Competitor actions
• Market forces- An ever changing market can affect objectives and the data
• Economic factors
• Political factors such a legislations
• Technology beneficial in the long term but not short term

Question 2

Internal influences on financial objectives

Answer 2

• Corporate objectives
• The resources available
• Operational factors

Question 3

Cash flow objectives

Answer 3

• Reduction of bank borrowings
• targets to achieve payments from customers
• Extension of credit to pay the suppliers

Question 4

Variance analysis

Answer 4

Is the difference between the planned budget with the actual budget outcome ( adverse or favourable)

Question 5

The pros of budgeting

Answer 5

• Reduce inefficiency
• Budgets and improves aims and motivation
• Improves manager decision making

Question 6

Cons of budgeting

Answer 6

• Operation budgets may become inflexible
• A very adverse budget may demotivate staff and waste resources

Question 7

The value of break-even analysis

Answer 7

• Starting a business- They can dictate whether the sales needed makes profit
• Supporting loan applications
• Measuring profit and losses
• Provides ‘what if ?’ scenarios, allows a business to prepare

Question 8

The drawbacks of a break-even analysis

Answer 8

• No costs are truly fixed even fixed costs so if a cost rises more output is needed to occur to breakeven
• The cost line never is straight due to discount costs for bulk buying
• Sales revenue thinks all output is sold at a standard price
• The analysis is only good as the information provided.

Question 9

How to analyse the timings of cash inflows and outflows

Answer 9

• Forecast time periods of when cash outflows might exceed inflows to allow prepration.
• Plan how to finance major items of expenditure
• Asses whether an idea can generate enough cash that is worthwhile

Question 10

Retained profit

Answer 10

Pros: No interest to pay, does not have to be paid back and no damage of shares.
Cons: Shareholders may be unhappy with reduced dividends

Question 11

Sales of assets

Answer 11

Pros: No interrest to pay, no damaged shares and nothing to payback
Cons: once its gone its GONE

Question 12

Loans

Answer 12

Pros: No damage of shares
Cons: Interest payments, effects on gearing

Question 13

Overdraft

Answer 13

Pros: Quick easy and flexible, interest is only paid on the amount withdrawn.
Cons: Interest rates are higher than the bank loan.

Question 14

Debt factoring

Answer 14

Pros: improves cash flow, immediate cash and protection from bad debts.
Cons:
- Expensive as a fee will go to the third party company
- Customer relations may be affected

Question 15

Trade credit

Answer 15

Pros: eases cash flow

Cons: If late payments occur it may damage credit history

Question 16

Payables

Answer 16

• Is money which is owed to the business from good or services via a credit payment. Formula is payable days/cost of sales x 365

Question 17

Receivables

Answer 17

• Is money owed by a businesses customers for goods bought on credit

Question 18

Methods of improving cash-flow

Answer 18

• Debt factoring- This is when debts are collected by a third party company called factors. They collect the debt which the business receives 80% of. However lose out a 5% which damages profit margins.
• Sale and leaseback- Business sells for short term finance but leases back for the assest to gain revenue. However, this will be a payment that will need commitment.
• Improved working capital control:
  Selling stocks of finished goods quicker
• Making customers pay on time and offering less trade credit.
• Selling excess material stocks.

Question 19

Methods of improving profitablity

Answer 19

• Increasing prices- allows revenue to increase but may risk a fall of sales the scale of this will be determined upon the price elasticity.
  -Cutting costs- Lower cost of production can increase profit margins but quality decrease may damage reputation and lose customers
• Maximising capital utilisation
• Increase efficiency- can be achieved by fringe benefits or piece rate pay. Or introduced methods such as kaizen