Unit 5 (Finance)

Question 1

What is return on investment (ROI)?

Answer 1

A return on investment is how much profit is made as a result of your investment.

Question 2

What are some advantages of ROI?

Answer 2

• Good for comparative analysis
• Good way to profitability
• Can engage/lure investors
• Identify areas for improvement

Question 3

What are some disadvantages of ROI?

Answer 3

• Does not consider time
• An investment may take 10 years to start being profitable

Question 4

What is the value of setting financial objectives?

Answer 4

Provides a focus for the whole business
Reduces risk of failure
Motivates employees
Measures financial performance of the business
Identifies strengths and weaknesses
Make business look attractive to investors

Question 5

What are the 6 elements to economies of scale?

Answer 5

Purchasing
Financial
Marketing
Tech
Managerial
Risk bearing

Question 6

What’s the benefit of revenue objectives?

Answer 6

Seek to maximise sales in an attempt to secure economies of scale.

Question 7

What is a cash flow forecast?

Answer 7

A short term planning tool designed to help the business understand its liquidity and its ability to pay bills in time.

Question 8

What is meant by liquidity?

Answer 8

Your ability to cover any short-term liabilities such as loans, staff wages, bills and taxes.

Question 9

What is meant by equity?

Answer 9

The money the owners have put into the business (eg by issuing shares or retained profit)

Question 10

What is meant by external finance?

Answer 10

Investment for the business obtained from outside of the business.

Question 11

What is meany by internal finance?

Answer 11

Money gained from inside the business.

Question 12

What is debt factoring?

Answer 12

Selling debts to other companies who will collect in on behalf of the business, which eliminates receivables and replaces it with cash/

Question 13

What are benefits of debt factoring?

Answer 13

Improves cash flow
Frees up finance department time cashing bad debts
Useful for small businesses who don’t have enough resources

Question 14

What are disadvantages of debt factoring?

Answer 14

Results in a lower profit figure as the full amount isn’t acquired
Can damage reputation of business (desperate measures)
Can make company accounts look unattractive

Question 15

What is debt factoring short term use and long term use?

Answer 15

Short term - Used to swap debt for cash to improve working capital.
Long term - If business has a cost objective they’ll look to reduce the cost of chasing debts.

Question 16

What is an overdraft?

Answer 16

An overdraft is when your bank allows you to withdraw money when the account has no funds of insufficient funds to cover the withdrawal.

Question 17

What are some benefits of an overdraft?

Answer 17

Quick fix method to tide a business over a difficult month
Can be arranged on phone or online
Business will only pay interest on the amount overdrawn

Question 18

What are some disadvantages of an overdraft?

Answer 18

Very expensive - interest rates
Not suitable for large amounts of money over long periods
If business goes over amount they may get charged heavily

Question 19

What is retained profit?

Answer 19

Profits from previous years used to reinvest into the business

Question 20

What does gearing mean?

Answer 20

How much debt you have

Question 21

What are benefits of using retained profit?

Answer 21

No interest
No loss of control or shares
Quick access for quick advantage of business opportunities

Question 22

What are some drawbacks of using retained profit?

Answer 22

Start ups wont have any capital
Business may not have made enough profit to be useful
Opportunity cost
Not all business are profitable

Question 23

What is share capital?

Answer 23

Finance raised from issuing shares int he business (only for PLC AND LTDS)

Question 24

What are benefits of using share capital?

Answer 24

Investors are often prepared to provide extra funding
More cost effective way to raise finance, no interest

Question 25

What are drawbacks of using share capital?

Answer 25

Can be expensive and slow process to organise
More shares sold, the more profits have to be divided up and paid out to investors and dividends

Question 26

What is a budget?

Answer 26

A financial plan for the future concerning revenues and costs of a business

Question 27

Why do companies set budgets?

Answer 27

Budgets for revenues and costs are prepared in advance and then compared with actual performance to establish any variances

Question 28

Uses of budgets in management?

Answer 28

Establish priorities
Assign responsibilities
Provide direction
Improve efficiency
Allocate resources
Forecast outcomes
Delegate without loss of control

Question 29

What is good budgeting and its feature?

Answer 29

Managerial responsibilities are clearly defined
Corrective action taken if results differ from budget
Performance is monitored against the budget
Unaccounted for variances are investigated

Question 30

What is historical budgeting and its features?

Answer 30

Uses last years figures as a basis
Realistic as it’s based on actual results
However circumstances may have changed

Question 31

What is zero budgeting?

Answer 31

Budgeted costs and revenues set to zero
Budget based on new proposals for sales and costs
Makes budgeting more complicated but potentially more realistic

Question 32

What are the main types of budget?

Answer 32

Revenue, profit and costs.

Question 33

What are some sources of information for budgets?

Answer 33

Financial performance in previous periods
Market research
Competitors activity
Customer feedback

Question 34

What are some difficulties with budgeting accurately?

Answer 34

Sales forecasting
- harder when market experiences rapid change
- startup firms find it hard to estimate
Costs
- always likely to be unexpected costs
- will vary depending on the sales budget
- changes in PESTLEC will impact costs

Question 35

What is a variance analysis?

Answer 35

Calculating and investigating the differences between actual results and the budget

Question 36

What is meant by a favorable variance?

Answer 36

Actual figures better than the budgeted figure

Question 37

What is meant by an adverse variance?

Answer 37

Actual figure worse than budgeted figure

Question 38

What are some causes of favourable variances?

Answer 38

Stronger market demand
Selling price increased
Cautious sales and costs assumptions
Competitors weakness leading to higher sales
Better than expected productivity or efficiency

Question 39

What some problems with budgets?

Answer 39

Only as good as data being used
Can lead to inflexibility indecision making
Need to be changed as circumstances change
Take time to complete and manage
Can result in short term decision to keep within the budget

Question 40

What is a debenture?

Answer 40

A loan agreement in writing between a borrower and a lender that is registered at Companies House. Secured with collateral.

Question 41

What is venture capital?

Answer 41

A venture capitalist (VC) is an investor who provides young companies with potential with capital in exchange for shares.

Question 42

Benefits and drawbacks of using a debenture?

Answer 42

Debentures provide a fixed rate of interest for the lender which has to be paid before any dividends are issued to shareholders

Question 43

What are payables?

Answer 43

Money that is owed BY the business to its suppliers (debts of the business)
-> also knows as a current liability
-> will appear on a statement of financial position

Question 44

What are receivables?

Answer 44

Money owed TO the business by its customers.
-> will appear on a statement of financial position