Unit 6 - Finance

Question 1

Types of finance

Answer 1

•Internal finance (inside the business) e.g: retained profits

•External finance (outside the business) e.g: bank loans

Question 2

Types of sources of finance?

Answer 2

•Family and friends

•Retained profits-
+ve: No interest, not giving any ownership
-ve: Shareholders unhappy, as they may want profits as dividends

•New share issues- long term
+ve: Cheaper if interest are high
-ve: Lose ownership/ control

•Bank loan- long term
+ve: Cheaper if interest rates low
-ve: More future cash outflows, increase cost, lower net profit

•Mortgage- type of bank loan

•Selling unwanted assets-
-ve: limited by nature

•Overdrafts

•Trade credit
+ve: Make sales and get money in before paying supplier
-ve: If you abuse the no. of days it takes to give money back

•Hire purchase:
+ve: Hire at first then purchase it to become ur long term asset (non current asset)

•Gov grants:
+ve:No need to be repaid
-ve: Not flexible, specific requirements

Question 3

Consequences of cash flow issues?

Answer 3

Cant pay stakeholders:
• Employees- wages
•Suppliers
•Banks- overdrafts, loans you owe

Question 4

Formula for net cash flow

Answer 4

Net cash flow= Cash inflow-Cash outflow

Question 5

Solutions to cash flow issues?

Answer 5

•Re-schedule payments to suppliers, however could damage relationships

•Get overdraft, short term issues only, due to high interest rates

•Reduce outflows, reduce wages, = lower productivity

•Increase inflows, lower prices, need demand to increase

•New sources of finance

Question 6

Types of costs?

Answer 6

•Fixed costs (FC)
•Variable costs (VC)
•Total costs (TC)
•Profit

Question 7

Formula for total costs?

Answer 7

TC = FC + VC

Question 8

Formula for profit?

Answer 8

Profit = TR - TC

Question 9

Types of investment?

Answer 9

•New machinery
•New buildings
•New vehicles

Question 10

Formula for Average rate of return?

Answer 10

ARR= AAP / Cost of investment x 100

Question 11

Formula for Average annual profit?

Answer 11

AAP= Total profit / How many years

Question 12

What happens at the break even point?

Answer 12

TR = TC

Question 13

+ve of breakeven?

Answer 13

•Easy to use
• Know how many you need to sell to not make a loss
•Can use model to change price/costs etc and find a comfortable point for break even output level to match market research

Question 14

-ve of break even?

Answer 14

•Doesn’t account for economies of scale
•Doesn’t account for when cash flows repaid, TR not same as cash inflows
•Assumes incorrectly all products made are sold

Question 15

What is cash a flow forecast?

Answer 15

•How much cash in bank account

Question 16

What is an income statement?

Answer 16

How much profit is made

Question 17

What is a statement of financial position?

Answer 17

Net worth of the business

Question 18

How are income statement layed out?

Answer 18

1. Revenue
2. Cost of sales
3. Gross profit
4. Expenses
5. Net profit

Question 19

Formula for Gross profit margin?

Answer 19

Gross profit margin= (Gross profit/ Revenue) x100

Question 20

Formula for net profit margin?

Answer 20

Net profit margin= (Net profit/ Revenue) x100

Question 21

Def of assets?

Answer 21

Things you own

Question 22

Def of liabilities?

Answer 22

Things you owe

Question 23

Def of current and non- current?

Answer 23

Current: Short term

Non-current: long term

Question 24

Formula for total net assets

Answer 24

TNA= Current assets + Non-current assets - Current liabilities - Non- Current liabilities

Question 25

Formula for total equity

Answer 25

TE = Retained profits + Share capital

Question 26

How to consider financial performance?

Answer 26

•Compare against previous years
•Compare against rivals
•Consider perspective of other stakeholders