Unit 5 - finance

Question 1

Name 4 areas for financial objectives

Answer 1

Return on investment
Cash flow targets
Profit and shareholder returns
Cost minimisation

Question 2

What is cash flow?

Answer 2

The amount of money that flows into and out of a business over a period of time

Question 3

What is overtrading?

Answer 3

When a firm tries to grow to quickly

Question 4

What can be the consequences of overtrading?

Answer 4

A firm can run out of money as money is going out far faster than it is co I got in, especially if trade credit periods are offered to customers

Question 5

What is gross profit?

Answer 5

The difference between revenue and the direct costs of producing a good or service

Question 6

What is operating profit?

Answer 6

When the direct costs and overheads have been deducted from the revenue

Question 7

What is profit for the year?

Answer 7

Revenue minus direct costs of production, overheads and taxes and interests

Question 8

How do you calculate a profit margin?

Answer 8

(Specific type of) profit / sales revenue X100

Question 9

Name 3 cash flow targets

Answer 9

Reducing receivables days
Increasing payables days (credit period)
Reduce borrowings
Reduce seasonal swings in cash flow

Question 10

What is capital expenditure?

Answer 10

Money spent on long-term investment into a business

Question 11

What is revenue expenditure?

Answer 11

Money spent on the day to day running of the firm, e.g. Buying raw materials

Question 12

How do you calculate return on Investment?

Answer 12

Net profit/amount invested X100

Question 13

Define a business’ capital structure

Answer 13

The way in which it has raised its long term finance

Question 14

What are the two sources of long term funding for a business?

Answer 14

Borrowing and share capital

Question 15

Name 3 external influences on financial objectives

Answer 15

Whether the market is growing or not
What other businesses are doing, e.g. To keep up?
Changes in legislation may mean firm needs to adapt

Question 16

Name 3 internal influences on financial decisions and objectives

Answer 16

Overall corporate objectives
Operational capacity
Resources, from finance to workers

Question 17

When may cash flow be more important to a business than profit

Answer 17

When it is first set up

During a recession

Question 18

What is a budget?

Answer 18

A financial plan that estimates the revenues, profits and costs over a specified future time period

Question 19

What are the 3 things that are budgeted?

Answer 19

Expenditure, revenue and profit

Question 20

What is variance analysis?

Answer 20

The process of explaining the differences between budgeted figures and actual figures

Question 21

What is an adverse variance?

Answer 21

If the actual profit is lower than expected

Question 22

What is a favourable variance?

Answer 22

If the actual profit is higher than the expected

Question 23

What is a cash flow forecast?

Answer 23

A prediction of money coming into and out of the business

Question 24

What is net cash flow?

Answer 24

The difference all cash in and all cash out

Question 25

What is the opening balance on a cash flow forecast?

Answer 25

The closing balance carried forward from the previous month

Question 26

What is the closing balance on a cash flow forecast?

Answer 26

The sum of the net cash flow and opening balance

Question 27

Why is it important to do a cash flow forecast?

Answer 27

To stop the business running out of cash
To plan
To help apply for loans

Question 28

What is break even?

Answer 28

When a businesses sales revenue is equal to its total costs

Question 29

What is on each of the axis on a break even graph?

Answer 29

X axis- output

Y axis-costs and revenues

Question 30

What is contribution?

Answer 30

The difference between sales revenue and variable costs

Question 31

HOw do you calculate contribution per unit?

Answer 31

Sales revenue - variable costs/output

Sales price per unit - variable cost per unit

Question 32

How do you calculate break even output?

Answer 32

Fixed costs/contribution per unit

Question 33

How can you use contribution to calculate profit?

Answer 33

Total contribution - fixed costs

Question 34

WHat effect will a rise in price have on the break even output?

Answer 34

It will go down

Question 35

WHat does ‘service a debt’ mean?

Answer 35

Refers to being able to make repayments on any loans

Question 36

Why is selling more than one product a problem when calculating break even?

Answer 36

The selling price per unit will be different

Question 37

WHat is the difference between profit and profit margin?

Answer 37

Profit is just a figure, the profit margin compares the profit to something, usually sales revenue

Question 38

What is retained profit?

Answer 38

The profit that is reinvested in the business rather than being laid out to shareholders in dividends

Question 39

Name some external sources of finance

Answer 39

Long term loan
Debt factoring
Overdrafts
(Trade credit - not actual finance but helps finances)

Question 40

Name some internal sources of finance?

Answer 40

Retained profit
Sale of assets
Share capital

Question 41

Name an advantage and disadvantages of an overdraft

Answer 41

• the facility is always there
• it’s quick
• often high interest
• usually only small amounts

Question 42

Name an adv and disadvantage of debt factoring

Answer 42

• saves the firm the effort of getting the money themselves
• can get the money more quickly
• lose some of the money they would have received if they’d have collected it themselves
• may lose contact with customers