Unit 5

Question 1

What are financial objectives?

Answer 1

Financial objectives are financial goals that a business wants to achieve. Businesses usually have specific targets in mind and a specific period of time to achieve them.

The financial objectives will be set by financial managers and will help the business achieve its corporate objectives and they must be consistent with the financial objectives of other departments.

Question 2

What is revenue objectives?

Answer 2

Revenue objectives are objectives that want to increase the value or volume of sales.

Question 3

What are cost objectives?

Answer 3

Cost objectives are objectives that are set to reduce costs.

Question 4

What are profit objectives?

Answer 4

Profit objectives might set a target figure for profit or for a percentage increase from the previous year.

Question 5

What are cash flow objectives?

Answer 5

Cash flow is all the money flowing into and out of the business over a period of time.

Cash flow objectives are put in place to help prevent cash flow problems.

Question 6

What is capital?

Answer 6

Capital is simply wealth in the form or other assets owned by a business.

Question 7

What is capital expenditure?

Answer 7

This is the money spent to buy fixed assets, which are things that can be used over and over again like factories and vehicles.

Question 8

What is capital structure?

Answer 8

This refers to the way a business raises capital to purchase assets. A businesses capital structure refers is a combination of its debt capital and its equity capital.

Question 9

What are the internal factors influencing financial objectives?

Answer 9

The overall objectives of the business - Financial objectives need to be consistent with the corporate objectives of the business.

The status of the business - New businesses might set ambitious targets for revenue because they are trying to grow quickly and establish themselves in the marketplace.

Other areas of the business - Financial objectives might be limited by what is happening in other departments of the business.

Question 10

What are the external factors influencing financial objectives?

Answer 10

The availability of finance - Cash flow targets might depend on how easy it is for the business to get credit.

Competitors - If new competitors enter the market you might have to do something that makes you more competitive.

The economy - in a period of economic boom, businesses can set ambitious targets.

Shareholders - Shareholders usually want the best possible return on investment .

Environmental/ethical influences - like fair trade.

Question 11

What is cash inflow and outflow?

Answer 11

Cash inflow are sums of money received by a business.

Cash outflows are sums of money paid out by a business.

Question 12

How can businesses improve cash flow?

Answer 12

Overdrafts can be arranged with banks to allow a business to borrow money according to its needs up to a present amount.

Businesses can try to hold less stock, so less cash is tied up in stock. But this could cause problems if there is a sudden increase in demand for a product, as they may run out.

Credit controllers keep debtors in control.

Question 13

What is cash flow forecast?

Answer 13

Cash flow forecasts (also called cash budgets) show the amount that managers expect to flow into the business and flow out of the business over a period of time over a period of time.

Question 14

Why isn’t cash flow forecasting accurate?

Answer 14

Cash flow forecasts can be based on false assumptions about what is going to happen.

Circumstances can change suddenly after the forecast’s been made. Costs can go up or machinery can break.

A good cash flow needs a lot of experience and lots of research into the market.

Question 15

What is a budget?

Answer 15

A budget forecasts future earnings and future spending.

Question 16

What is the difference between income and expenditure budgets?

Answer 16

Income budgets forecast the amount of money that will come into the company as revenue. To do this a company needs to predict how much it will sell, and what the price is.

Expenditure budgets predict what the business’s total costs will be for the year, taking into account both fixed and variable costs.

Question 17

How can budgets affect all areas of a business?

Answer 17

The expenditure budget forecasts total expenditure. This is broken down into department expenditure budgets.

Budget holders are people responsible for spending or generating the money for each budget.

Question 18

What are the benefits of budgeting?

Answer 18

Budgets help to achieve targets like keeping costs low and revenue high.

Budgets help control income and expenditure.

Budgeting helps managers to review their activities and make decisions.

Budgeting helps focus on priorities.

Budget let heads of department delegate authority to budget holders.

Question 19

What are the disadvantages of budgeting?

Answer 19

Budgeting can cause resentment and rivalry if departments have to compete for money.

Budgets can be restrictive. Fixed budgets stop firms responding to changing market conditions.

Budgeting is time consuming.

Inflation is difficult to predict.

Question 20

How do budgets affect how flexible a business can be?

Answer 20

Fixed budgets provide discipline and certainty. This is important for a business with liquidity problems.

Fixed budgeting means budget holders have to stick to their budget throughout the year.

Flexible budgeting allows budgets to be altered in response to significant changes in the market or economy.

Question 21

What is the difference between favourable and adverse variance?

Answer 21

A variance means the business is performing either worse or better than expected.

A favourable variance leads to increased profit. If revenue’s more than the budget say it’s going to be favourable and also if costs are below the cost predictions.

An adverse variance is a difference that reduces profits. Selling fewer items than the income budget predicts or spending more on an advert than the expenditure budget.

Question 22

How can variances be bad?

Answer 22

When variances occur, it means that what has happened is not what the business was expecting. Businesses need to know about variances so that they can find out why they have occurred.

It is extremely important to spot adverse variances as soon as possible. It is important to find out which budget holder is responsible.

Question 23

What external factors and internal factors affect variances?

Answer 23

External factors -
Competitor behaviour and changing fashions may increase or reduce demand for products.

Changes in the economy can change how much wages workers are.

Internal factors -
Improving effeciency

A business might overestimate the amount of money it can save.

Question 24

What is variance analysis?

Answer 24

Variance analysis means spotting variances and figuring out why they have happened so that action can be taken to fix them.

Small variances arent a big problem. They can actually help to motivate employees.

Large variances can demotivate. Staff dont work hard if there are large favourable variances.

Question 25

What are some decisions based on adverse variance?

Answer 25

They can change the marketing mix, but only is the demand is price elastic.

Streamlining production makes the business more efficient, so this reduces costs.

They can try to motivate employees to work harder.

Businesses can try yo cut costs by asking for suppliers for a better deal.

Question 26

What are the decisions based on favourable variances?

Answer 26

If the favorable variance is caused by a pessimistic budget, they can set more ambitious targets next time.

If the variance is because of increased productivity in one part of the business, they can try to get everyone else whatever they can try to get everyone else doing whatever was responsible for the improvement.

Question 27

What is break even?

Answer 27

The break even output is the level of sales a business needs to cover its costs. costs = revenue.

When sales are below the break even output, costs are more than revenue and vice versa.

Question 28

What are the advantages of break even analysis?

Answer 28

It is easy to do. If you can plot figures on a graph accurately, you can do break even analysis.

It is quick.

Break even charts let businesses forecast how variance in sales will affect costs, revenue and profits.

Businesses can use break even analysis to help persuade the bank to give them a loan.

Question 29

What are the disadvantages of break even analysis?

Answer 29

Break even analysis assumes that variable costs always rise steadily.

Break-even analysis is simple for a single product but most businesses sell more than one product at a time.

If the data is wrong, then the results will be wrong.

Break even analysis only tells you how many units you need to sell to break even. It doesn’t tell you how many actually going to sell.

Question 30

What are examples of internal finance within a business?

Answer 30

Retained profit -
Profit can be retained and built up over the years for later investment. This can work in the short and long term.

Shareholders may object to this method as they may to wish to receive the profits as dividends.

Rationalisation -
This is when managers organise the business to make it more efficient. They can do this by selling some of their assets.

Businesses dont need to pay interest on fiance they raise by selling their assets.

Question 31

What are examples of external finance within a business?

Answer 31

Overdrafts -
Overdrafts are where a bank lets a business have a negative amount of money in its bank account.

Overdrafts are easy to arrange and flexible.

The main disadvantage of overdrafts is that banks charge high interest rates on them.

Debt factoring -
Debt factoring is when banks and other financial institutions take unpaid invoices off the hands of the business, and give them an instant cash payment.

The advantage of this for businesses is that they can instantly get money they are owed.

The disadvantage of this is that the debt factoring company keeps some of the money owed as a fee.

Question 32

Bank loans is an example of external finance in the long term, what are the advantages?

Answer 32

You are guaranteed the money for the duration of the loan (the bank can’t suddenly demand it back)

You only have to pay back the loan and interest.

The interest charges for a loan are usually lower than for an overdraft.

Question 33

Bank loans is an example of external finance in the long term, what are the disadvantages?

Answer 33

They can be difficult to arrange because a bank will only lend a business money if they are going to get it back.

Keeping up with the repayments can be difficult if cash isn’t coming into the business quickly enough.

The business might have to pay a charge if they decide to pay the loan back early.

Question 34

What is share capital?

Answer 34

Share capital is an external source of finance for limited companies.

Private and public limited companies can be financed in the long term using ordinary share capital money raised by selling shares in the business.

Using share capital to finance a business has its advantages.

the drawback of selling shares is that the original owner no longer owns all of the business and may have to pay the shareholders a dividend.

Question 35

What is venture capital and crowdfunding?

Answer 35

Venture capital is funding in the form of shares or loan capital that is invested in a business that is thought to be high risk.

Crowdfunding is a method of financing a business or project using contributions made by a large number of people.