Unit 5 - financial operations

Question 1

What is ROI and it’s formulae ?

Answer 1

ROI is the money a business gets back after an initial investment. Calculated by:

( Operating profit / Capital Invested ) x 100

Question 2

What are the 3 different types of budgeting?

Answer 2

Income budgets
Expenditure budgets
Profit budgets

Question 3

Variance analysis

Answer 3

The difference between actual figure and the budget.

The two types of variances are favourable, and adverse.

Question 4

Pros and cons of setting budgets

Answer 4

Pros:
*Quantifiable target allows outcomes to be measured, motivating budget holder due to more responsibility.
*Informs decision making
*Acts as a guardrail to unnecessary spending

Cons:
*Time consuming to set & monitor
*May be restrictive

Question 5

Factors affecting net cash flow forecast.

Answer 5

*Transaction types eg. cash vs credit
*Timing of cash flow eg. timing of payments in & out
*Nature of business.

Question 6

Difference between cash and profit

Answer 6

Profit is recorded when a sale is made, and is affected by running costs, not assets.
Cash is recorded when the business gets the money.

Question 7

Causes of cash flow problems (COS)

Answer 7

Credit sales
Overtrading eg. additional overheads
Seasonality

Question 8

Financial methods to improve cash flow

Answer 8

*Overdrafts & Short term bank loans

*Factoring - selling business debts to a factor house to chase customer repayments for a % of the profit.

*Sale of assets

*Cash payments from customers and controlling credit

Question 9

Working capital cycle and its formula

Answer 9

Indicates a businesses ability to pay off short term debts eg. by selling liquid assets.

Length of working capital cycle =
(time goods held as stock + time for receivables paid)
- (period of credit business takes to pay suppliers)

Question 10

Breakeven point formula & Margin of Safety

Answer 10

FC / (SP-VC per unit) = BEP
Actual sales - BEP = MOS

Question 11

Difference between contribution per unit and total contribution?

Answer 11

Contribution per unit = SP - VC per unit
Total contribution = TR - TVC

Question 12

Methods of improving profitability

Answer 12

*Sell the same quantity at a higher price due to customer loyalty.
*Sell more at the current price eg. promotion
*Sell the same units at the same price but reduce costs eg. changing suppliers