Unit 5 - Decision making to improve financial performance

Question 1

Short-term finance?

Answer 1

Borrowing that is normally repaid within 12 months.

Question 2

Long-term finance?

Answer 2

Borrowing which is normally repaid after 12 months or more.

Question 3

Internal source of finance (short-term)?

Answer 3

• Retained profits

Question 4

Internal source of finance (long-term)?

Answer 4

• Sale of assets

Question 5

External source of finance (short-term)?

Answer 5

• Overdrafts
• Debt factoring

Question 6

External source of finance (long-term)?

Answer 6

• Share capital
• Venture capital
• Crowdfunding
• Bank loans
• Grants

Question 7

What are retained profits?

Answer 7

Profit from the previous years, not distributed to shareholders.

Question 8

ADV of retained profits?

Answer 8

• cheapest source of finance, as there is no interest.
• doesn’t need to be repaid
• no loss of control (no shares sold)

Question 9

DVNTG of retained profits?

Answer 9

• shareholders may want to receive dividends and instead refuse to leave the profits in the business for expenditure.

Question 10

What is a bank overdraft?

Answer 10

An agreement with a bank to take out more money from an account than a business has, but only up to an agreed limit.

Question 11

ADV of a bank overdraft?

Answer 11

• Flexible way of borrowing money whenever necessary (take as much out as needed and pay as much back in when available).

-Useful for businesses with yo-yoing cash inflows (unpredictable or varying cash inflows).

Question 12

DVNTG of bank overdraft?

Answer 12

• high-interest rates.
• no set interest rates– rates can alter throughout periods.
• hard to measure the real cost of service as interest rates may not remain the same.
• Bank can cancel this facility at any time ( be prepared to pay everything back).

Question 13

What is a bank loan?

Answer 13

A set amount of money borrowed from a bank with a fixed interest rate, and set repayment dates.

Question 14

ADV of a bank loan?

Answer 14

• The cost of borrowing is fixed and thus clear and measurable.
• No loss of business control.

Question 15

DVNTG of a bank loan?

Answer 15

• Repayment must be done on time, whether the business has cash or not.
• If the business fails to repay within time then you may be faced with a court case, where the business may have to be liquidated to recuperate the funds needed for repayment.
• Collateral, which equates to the funds in question, may have to be provided to secure the loan.

Question 16

What is venture capital?

Answer 16

Finance is obtained from the sale of shares to wealthy individuals also called venture capitalists, business angels, or private investors.

Question 17

ADV of venture capital?

Answer 17

• No interest charged
• Venture capitalists can offer advice, guidance and contacts that can be helpful in teaching how to use the funds more effectively.
• Venture capitalists are more inclined to invest in risky businesses with potential negative or positive outcomes ( because they feel more entitled to, co-owning the business)

Question 18

DVNTG of venture capital?

Answer 18

• Loss of control/leadership/business ethos
• Fewer profits for you and the business exclusively.
• Venture capitalists may sell their shares however they like to however they like.

Question 19

What is share capital or share issue?

Answer 19

Finance obtained from the sale of shares either privately for an LTD or via the stock exchange for a PLC.

Question 20

ADV of share capital?

Answer 20

• Large amounts of capital can be raised.
• No interest charged.
• No set repayments.

Question 21

DVNTG of share capital?

Answer 21

• Loss of control.
• Shareholders have voting rights for key decisions (AGM).
• Shareholders who have ventured into the business via the stock exchange may be anonymous to you and may have opposing ideologies, which clash with the way you want to run the business.
• Getting listed on the stock exchange can be time-consuming and costly for some businesses.

Question 22

What is debt factoring?

Answer 22

Debt factoring is a financial practice in which a company sells its customer’s invoices to a third-party company, known as a factor, at a discount in exchange for immediate cash.

And then this company will take it upon itself to chase customers for what they now owe them.

Question 23

ADV of debt factoring?

Answer 23

• cash is received upfront
• a possible solution to the cash flow problem due to late payers.
• Relieves the business from having to chase customers.

-can provide credit checks on customers.

Question 24

DVNTG of debt factoring?

Answer 24

• debt factoring businesses will charge a fee.
• customers may not want to deal with factoring businesses, which may damage the customer <> business relationship.

Question 25

Meaning of variance?

Answer 25

Difference between budgeted figure and an actual figure.

Question 26

Meaning of Favourable variance?

Answer 26

Positive impact caused by the difference between budgeted and actual figure.

In relation to:
- sales
- costs

Question 27

Meaning of Adverse variance?

Answer 27

Negative impact caused by the difference between budgeted and actual figure.

In relation to:
- sales
- costs

Question 28

How to respond to adverse sales variance?

Answer 28

• Increase promotion
• Improve the product (product life extension)
  reduce the price (if -1 < PED)
• Look for new markets or segments
  change distribution
• Train staff (customer service)

Question 29

How to respond to adverse cost variance?

Answer 29

• Find cheaper suppliers
• Change production method
  Invest in better machinery
• Become more capital-intensive & reduce
  number of staff employed
• Increase size of orders (bulk buying)

Question 30

Solution to adverse variance in labour costs?

Answer 30

• Become more capital-intensive ( lowering wage costs in the long run).
• Workforce management system, where staff are only working during periods of time when demand is high.
• Increased training to boost productivity <> efficiency.

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