Unit 5. Finance

Question 1

Pros on setting financial obj

Answer 1

1.Enables managers and owners to judge the performance of the enterprise

2. valuable to managers as a measure of performance - because most biz are judged on their financial attainments by other stakeholders
   - could identify aspects of the performance of the biz that are causing problems
3. Could motivate workers - clear guideline

Question 2

Difference between cash flow and profit

Answer 2

Just because biz is profitable, does not mean there will hold large sum of cash, or even have enough cash.

EX) biz such as jeweller might hold large amount of expensive stocks for customers to view before making a choice. This will entail large amounts of cash being tied up in the form of stocks and not available to the biz for other purposes

Question 3

What are the diff measurements of profit

Answer 3

1: gross profit
When direct cost is deducted from the revenue.
- gives broad indication of the financial performance of the biz without taking into account other costs such as indirect cost or overheads.

2: operating profit
Gross profit - operating expenses ( like rent and wages Indirect cost to the trading )

3: profit of the year
Operating profit - ( interest paid and received by item and corporation taxes)

Question 4

Some financial obj managers may make

Answer 4

1: Revenue obj normally short term
-may be used to mainly by biz that aim to grow.
-based on biz reducing its prices in the expectation of making a large number of additional sales and therefore increasing its revenue. Effective when elastic.

Cons: do not necessary increase a biz profit.
Increase revenue by ad could cause increase cost which could lower profits.

2.Cost Objectives
2 type of way: cost minimization and reduction of cost

3. Profit objectives
   Can be expressed in:
4. As a simple figure
5. As a percentage increase in profits
   May motivate workers but could collect concerns if low performance since it will be shown.
6. Cash flow Obj
   - increase liquidity
7. Investment returns ( Capital expenditure ) objectives
   - happens when biz buy large quantities of non current assets
   -obj for ROI

6, capital structure obj
Refers to the way in which a biz has raised the capital it requires to purchase it assets.

Question 5

What is non current assets

Answer 5

Items that biz owns and which it expects to retain for one year or longer ( property, vehicles)

Question 6

What are budgets

Answer 6

Financial plans for a future period of time
Biz forecast their revenue and expenditure using budgets

Question 7

Formula of ROI

Answer 7

Profit from the investment ➗capital invested in the project x 100

Question 8

Influencing on capital structure objectives

Answer 8

Capital structure: refers to the way in which the business has raised the capital it requires to purchase its assets.

1: cost of borrowing
( is it high IR or low )
2: economy condition
(When good share price is high)

Question 9

What are the internal influenced on financial objectives and decisions

Answer 9

1: overall obj of the biz- if operated with profit maximization, the finance department set for cost minimization.
2:nature of the product that is sold-are they long cash cycle(like boating) or high elastic of demand
3: obj of the biz senior management-if managers of biz hold large shareholders-may be to increase profit

Question 10

External influence

Answer 10

1: tech-as technology, may be easier to operate finance- may set managers to set more challenging objectives

2: Economy
If economy is not performing well and business has difficultly on raising capital, then objectives may be more likely to set on profit.

3: Political and legal environment
Immigration from other Eu countries to the Uk has created a supply of cheap labour enabling biz to control and cash flow more effectively.

5: competitiveness
If competitive market, might consider establishing an objective of increased level of investment to provide new and improved location

Question 11

What are three type of budgets

Answer 11

1: Revenue or earning budgets
Sets outs business expected revenue from selling its products, including the expected level of sales and the likely selling price of the product.
It may be straightforward for an established biz, vice versa.

2: Expenditure budgets
Also called cost or production budgets. Sets out expected expenditure on a monthly basis.

3: Profit BUdgets
By combining expenditure and revenue budgets, it is possible to calculate expected profits

Question 12

What biz may research before constructing a budgets

Answer 12

1: analyzing the market to predict likely trends in sales and prices to help forecast revenue

2: researching cost for labour, fuel and raw materials by contacting suppliers and seeing if they can negotiate price reductions for prompt payment or ordering in bulk

3: compare the financial performance in previous years

Question 13

What are the Difficulties in constructing a budget

Answer 13

Sets outs business expected revenue from selling its products, including the expected level of sales and the likely selling price of the product.
It may be straightforward for an established biz, vice versa.

Also called cost or production budgets. Sets out expected expenditure on a monthly basis.

By combining expenditure and revenue budgets, it is possible to calculate expected profits

DIFFICULTIES
Highly dependent on market research to forecast sales and revenue.
Changes in fashion and tastes could make it difficult to forecast sales
Or changes in technology
Or state of an economy
Ex) significant increase in oil price in Russia, orCovid 19
Or in legislation.
Ex) increase IR effect

Question 14

What is Variance Analysis

Answer 14

Process of investigating any doff between forecast data and actual figures

Question 15

Adverse favorable what are they

Answer 15

favorable good adverse bad

Question 16

Factors leading to adverse and favorable variances

Answer 16

1: poor forecasting tech insufficient use of market research - likely advertise

Question 17

Responses to adverse sales/revenue variance

Answer 17

1: cut prices
2: Seek new market
3: improve company brand image
4: Increase Advertising or promotion

Question 18

Responses to adverse production

Answer 18

1: Reduce waste
2: Seek cheaper raw materials
3: Cut wages or increase labour productivity

Question 19

Pros of budgeting

Answer 19

1. Allows managers to ensure biz not to overspend
2. Allow senior managers to direct extra funds into important areas of the biz
3. Helps biz to set up the target which could motivate staff

Question 20

Cons of budgeting

Answer 20

1. If a biz intends some of its worker to manage budgets, (delayering budgets) - training required
   Increase cost of training depending on the skill of workforce.
2. Workers may be demotivated if the target senior manager made an over ambitious target.

Question 21

Factors to have an effective budgeting

Answer 21

1. Manager should review budgets as frequently as possible to asses their effectiveness
2. Managers should set not too ambitious target

Question 22

Two main reason why manager might forecast cash flow for a biz

Answer 22

1. To support applications for loans
2. To help avoid unexpected cash flow crisis

Question 23

What is payable and receivable

Answer 23

Payables: term that relates to the amount of time taken by a biz to pay its suppliers ad other creditors. It is normally expressed in terms of days

Receivables: term that relates to the amount of time taken by a biz customers to pay a biz for the products that is has supplied

Question 24

Explain the term trade credit

Answer 24

The notion of allowing customers time for payment

Question 25

Reasons why managers use break even analysis

Answer 25

1. To help decide whether the biz idea will be profitable and whether it is viable
2. Help decide the level of output and sales necessary to generate a profit
3. To asses the impact of changed in the level of production on the profitability of the biz

Question 26

Break even formula

Answer 26

Fixed cost ➗ contribution per uint

Question 27

Formula of contribution

Answer 27

Revenue - VC

Question 28

Formula of contribution per unit

Answer 28

Selling price of one unit of output - VC of producing that unit

Question 29

Showing the break even point at break even chart

Answer 29

When TC = revenue

Question 30

What is margin of safety

Answer 30

Measures the amount by which a biz current level of output exceeds breakeven out put

shown by difference between breakeven point and profit point quanitity

Question 31

Pros of Breakeven analysis

Answer 31

1. Biz can forecast the effect of varying numbers of customers on its costs, revenue and profit.
   Can also analyze the implication of changing prices and cost.
2. Quick and cheap, provide evidence to bank for a loan to financial planning as well as evidence or whether the biz is likely to make a profit

Question 32

Cons of breakeven analysis

Answer 32

1. Difficult to use when a biz sells more than one product. Only shows for one product
2. It is not a real life number. Just an assumption, therefore the number may fluctuate

Question 33

What the breakeven analysis depends on(EVALUATION)

Answer 33

If the guideline and its value are over stated.
: managers must bear in mind the value of break even analysis depends on the use of reliable data or cost pries and expected sales.

Question 34

Profit margin formula

Answer 34

Profit x 100 ➗revenue

Question 35

Types of profit margin and their formula(what are they)

Answer 35

1. Gross profit Margin
   Gross profit ➗revenue x 100
   :margin of revenue- COGS
2. Operational profit margin
   Operational profit ➗ sales revenue x 100
   : margin of profit deducting indirect cost
   3, Profit for the year margin
   profit for the year ➗ revenue x 100

Question 36

Financial factors managers want to consider before launching new products

Answer 36

-Does the biz have sufficient capital to fund this new product?
-what will b the effect of launching this new products on the biz cash flow
-will the new product generate a profit and if so over what time scale?

Question 37

Is the data reliable? What are the data that could be used

Answer 37

primary market research may be high quality data
Historical data is not always a good indicator of the dat a

Question 38

What are the Internal and external source of finance Or categorise in SR or LR

Answer 38

Internal:
Retained profits, Share capital, working capital,selling asset capitals.
External:
Bank loan, overdraft, Venture capital, debt factoring
SR: overdraft, retained profits, debt factoring, selling capitals.
LR: Retained profits , bank, loans mortgages and debentures, VC, share capital.

Question 39

Pros and cons retained profit

Answer 39

Pros:
1. Biz do not have to pay interest on loan
2. May avoid need for a company to sell further shares.- control

Cons:
1.opportunity cost- shareholders may feel shit
2.finite amount retained - slow growth to expand

Question 40

Source of finance(EVALUATION)

Answer 40

1. The biz legal structure: are they plc? Or ltd?
2. the cost of source of finance
   -rate of interest
   -cost of selling shares
   -opportunity cost
   3.Flexibility: do you need it now? Or not?
   4.Control
   5.The purpose of which the finance is needed: do you need it a lot??

Question 41

Pros and Cons of Overdrafts

Answer 41

Pros:
1. flexible way of funding day to day financial requirements.
2. Interest is only payable on the actual amount borrowed

Cons
1. Interest rates are high
2. Bank may ask for repayment at any time

Question 42

Pros and cons of debt factoring

Answer 42

Pros:
1. Allows biz to receive cash almost immediately a sale is made.
2. May reduce biz overdraft and Interest charges

Cons:
1. Can reduce or even eliminate biz profit margin if its small
2. Customers may be aware if debts are factored and could lose faith in the supplier

Question 43

Bank loan pros and cons

Answer 43

Pros:
1.can be negotiated to meet a biz precise requirements
2. Managers can plan for repayments within budgets

Cons
1. inflexible
2. Biz may be required to offer collateral

Question 44

Mortgages and Debentures pros and cons

Answer 44

Pros:
1. Ideal sources for very long term projects
2. Avoid owners losing any controls

Cons:
1. Managers have to offer collateral
2. biz could lose valuable alternative investment

Question 45

Pros and cons: VC

Answer 45

Pros:1. Can bring expertise into the biz as part of the deal
2. Avoids to pay interest on the entire amount of finance

Cons:
Usually only able to raise small amounts of finance

Question 46

Possible sources for new start up biz

Answer 46

Internal:
1.Owners personal assets
2.Retained profit
3.Friends family

External:
VC

Question 47

Possible sources for established biz

Answer 47

Internal
1.retained profits
2.Working capital
3.Asset disposals

External
1.Issue shares
2. Bankloan /overdraft
3. VC
4. Suppliers

Question 48

Sole trader source of finance and key issues

Answer 48

Owners savings,
Loans
Banks

Key issues
Evidence that biz have potential to develop
Bank may give you high IR

Question 49

Ltd source of finance and key issues

Answer 49

Dependent upon the size of the ltd
Banks, shares , working capital

Disagreement among existing shareholders
Loss of control

Question 50

PLC source of finance and key issues

Answer 50

Suppliers, banks gov grants and loans VC public share

Issues
State of the colony and stock market
Recent financial performance
Reputation of company

Question 51

Causes of cash flow problems

Answer 51

1.overtraining
2. Allowing too much trade credit
3. poor credit control
4. Inaccurate cash flow forecasting

cash+ stock+ debtors-creditors= working capital

Question 52

What is trade credit

Answer 52

When biz allow customers pay between 30 - 90 days

Question 53

What is working capital

Answer 53

diff between current assets and current liabilities
Used to pay its employees and suppliers, taxes etc,
Fund to meet short term obligation.

Question 54

What is working capital

Answer 54

Is the finance available to the biz for its day-to-day training activities. Working capital is available when its customers pay for the goods or services they have received. Working capital is used to pay wages, and for fuels and raw materials.

Question 55

What are the method of improving cash flow and the associated difficulties-

Answer 55

1. Improve control of working capital
   ・the employment of additional staff to oversee the con tool will increase costs
   ・customers may object to being pressured to pay and buy elsewhere.

2.Nagotiate improved terms for trade credit
-increase the date of payables and decrease the date of receivables.
-relationship with payables may ruin relationship
- may be loss of customers-competitors who provides favourable credit terms

3. Debt factoring
   ・could reduce profit margin depending on its significance of it.
   ・customers may be unsettled by the realisation that a supplier is having cash flow difficulties

4.arrange ST borrowing

Basically……….. turn into cash quicker
.
Stocks:
Sell them don’t overstock debtors:reduce debt days
creditors :delay credit days.

Question 56

What is debt factoring

Answer 56

Selling the sale invoice to third party with discount

Question 57

Pros of careful cashflow

Answer 57

1: reduced borrowing cost
Managers can predict of cash flow
2: good relations with supplies
3:public relations-customers don’t feel doubtful

Question 58

Method of improving profits
(and difficulties)
Answer in:
Marketing view
Finance view
Human Resources
Operation view

Answer 58

Marketing:
1. Launch new products
2. Advertise more
3. Increase prices
could reduce sales if price elastic
could face criticism if product is essential

Finance:
1.Cut costs(VC,FC)

Human Resources:
1.Cut wage cost-redundancy
2. Motivate workers/increase their skill by improving workforce performance

Operations
1. Increase efficiency
2.Less waste

3.reduce substandard goods
-may require additional expenditure on employees or technology to identify faulty products.
-may require more expensive inputs increasing cost

4.Increase capacity utilization

Question 59

Pros and cons of share capital (equity)

Answer 59

-pros:doesn’t need to be repaid(no interest, nor collateral)-low risk
-can be used to rise very large amount of capital.
Cons:
-risk of control
-shareholders expectations-more shareholders- affecting the company like sr objectives.

Question 61

What did Archie Carrol stated about CSR?

Answer 61

He stated that CSR involves the conduct abiding, ethical and socially supportive.
By creating a layers in the pyramid as a hierarchy this can assist managers in understanding the different types of obligations that a biz has towards society.

Question 62

Tell me about the Carrols Pyramids

Answer 62

He secreted in to four types of responsibility that a biz should meet to be socially responsible.

1: Economic(financial) responsibilities- the responsibility to be profitable. Without this, the org wouldn’t likely to survive in the LT- will not be able to fulfill its other responsibilities to society.

2: legal responsibilities-business should obey the laws of the countries in which they are operating. Meeting these responsibilities will help to ensure the biz acts in the best interest of society by, such as paying minimum wages or avoiding activities that cause pollution.

3: Ethical responsibilities-a step beyond legal responsibilities and entails behaving in a morally correct way to meet ethical responsibilities. As an example would be when business pays for a living wage than legally-enforceable minimum wage.

4:Philanthropic responsibilities- relate to discretionary behavior by biz to improves the lives of other in society.
Example would be providing recreational facilities for communities or sponsoring sport events.

It goes by BOTTOM-to-TOP

Question 63

What is Stakeholder Concept and Shareholder Concept? What are the difference?

Answer 63

Stakeholder concept is when business considers the needs of its stakeholders, not just shareholders. This can be an important component of corporate social reporting.

Whereas with shareholder concept is when business to see as a primary importance and argues that this could be accomplished by maximizing the profit and resulting to an increase in share prices and higher dividend payment. However there is an issue which encourage short-term is in SM and also the increased taking the risk of generating maximum profits.

Question 64

What are the impact of being socially responsible?

Answer 64

It can help or to attract the best employees and to build a strong employer brand as they are socially responsible.
It can also help biz to access new markets and this can be very attractive at a time when globalization is increasing competitive pressures by incorporating socially responsible behavior into strategy making it able to gain access to the markets to the poor who needs financial support and benefit over time from their growth.