Unit 5- Finance

Question 1

What is the advantages of setting financial objectives?

Answer 1

Gives a focus for the business
Measure of success or failure
Provide transparency for shareholders about their investment

Question 2

What is the equation for the return on investment percentage?

Answer 2

Financial gains- cost of investment/ cost of investment x 100

Question 3

What does the return on investment percentage show businesses?

Answer 3

Relative financial returns on different investments taken
Trends in finance performances
Changing levels of return for certain activities so the business can put money into increased profitability activities
Total investment level to undertake

Question 4

What are the key benefits of cost minimisation?

Answer 4

Lower unit cost 
Higher gross profit margin 
Higher operating profits
Improved cashflow
Higher return on investment

Question 5

What are the factors affecting sources of finance?

Answer 5

Size of the business 
Ownership type
Shareholders
Competition
Previous debt/ profit level
Cashflow forecast/ budgets/ business plans
Use of money
Level of risk

Question 6

What are the principles of good budgeting?

Answer 6

Managerial responsibilities clearly defined
Responsibility to adhere to their budget
Performance monitored against budget
Unaccounted for variances are investigated

Question 7

What is historical budgeting?

Answer 7

Use the last years figures as the basis for the budget
Realistic
However, circumstances may have changed
Does not encourage efficiency

Question 8

What is zero budgeting?

Answer 8

Budgeted costs and revenues set to zero
Based on new proposals for sales and costs
Makes budgeting more complicated and time consuming but potentially more realistic

Question 9

What are the three main types of budget?

Answer 9

Revenue budget- expected revenues and sales
Cost budget- expected costs based on sales
Profit budget- Based in combined sales and costs budget

Question 10

What are the benefits of decision trees?

Answer 10

Balanced picture of risks and rewards associated with each option
Takes into account uncertainty
Encourages careful consideration of all alternatives
Useful when making tactical or routine decisions rather than strategic decisions
Useful when similar scenarios have occurred before

Question 11

What are the factors affecting cashflow?

Answer 11

Amount of cash invested into the firm and held at the start of trading
Length of time taken to produce the product/ service to converting inputs
The amount of stock held by a firm
Goods sold on credit
Amount of credit given by suppliers
Seasonality

Question 12

What is liquidity?

Answer 12

The ability for the firm to pay its short term debts

Question 13

What affects the accuracy of forecasts?

Answer 13

Externalities 
Historical data
How new the business is 
New competitors
Staff force and productivity 
Experience in market
How quickly the market changes 
Inaccurate market research

Question 14

What are the reasons for using cashflow forecasts?

Answer 14

Identify potential cashflow problems in advance
Make sure there is sufficient cash available to pay suppliers and customers
Avoid the possibility of the company being forced into liquidation

Question 15

What are the solutions to cash flow problems?

Answer 15

Sell unwanted assets
Redundancy 
Lower staff shifts/ hours 
Offer less customer credit 
Decrease costs
Overdraft
Government schemes 
Bank loan 
Delayering 
Venture capital

Question 16

What are common cashflow problems?

Answer 16

Sales prove lower than expected
Customers do not pay up on time
Costs prove higher than expected
Imprudent cost assumptions

Question 17

What is ratio analysis?

Answer 17

Analysing relationships between financial data to assess the performance of a business

Question 18

What does the profitability ratio provide insights to?

Answer 18

Is the business making a profit? Is profit growing?
How efficient is the business at turning revenues into profit?
Is the profit enough to justify investment in the business?
Hoes does the profit achieved compare with the rest of the industry?

Question 19

What are the ways to improve profits?

Answer 19

Reduce product range- operations are too complex and inefficient, some products have a very low profit margin or may even make a loss
Outsource non-essential functions- a way of reducing fixed costs, main areas to outsource: IT, call handling and finance

Question 20

What is management accounting and examples?

Answer 20

Creation of financial information for use by internal issues in the business
In order to predict, plan, review and control financial performance of the business
Examples- revenue, cost and profit objectives, decision trees, investment data and break even charts

Question 21

What is financial accounting and examples?

Answer 21

Provision of financial information information to show external users the financial position of the business
Concentrates on historical data
Examples- cashflow statements, capital structure data, income statements and balance sheets

Question 22

What are the benefits of break-even?

Answer 22

Motivation for managers- same common goal

Visual information

Question 23

What are the externalities affecting break even?

Answer 23

Change in supplier
Location/ infrastructure
Business' reputation
Unexpected costs
Competition

Question 24

What are the limitations of break-even analysis?

Answer 24

Change of costs- updated a lot

Should be bare minimum- might not push managers and staff enough

Question 25

What is contribtion?

Answer 25

The difference between total revenue and total variable costs
Total revenue- total variable costs
Contribution per unit x units sold

Question 26

What is the usefulness of break-even analysis?

Answer 26

Helps plan
What-if? analysis- shows different break-even outputs and the changes in profit levels that might arise from changes unpriced
Decisions made about changes in fixed costs