Chapter 10 - Financial analysis

Question 1

What are the affects of technology on finance functions?

Answer 1

• Big data - analyse large amounts
• Cloud computing - reduce costs
• Predictive analytics - assess future trends
• Fintech - blockchain, secure payment

Question 2

Define ‘business partner’ in context of the finance function

Answer 2

Finance professionals being fully embedded in the operations of the business

Question 3

Define shared or global business services

Answer 3

An in house function which provides finance support to all functions within the business

Question 4

Define leading and lagging

Answer 4

Raising cash by delaying payments to suppliers (lagging) and accelerating receipts from customers (leading)

Question 5

How can sources of finance be evaluated?

Answer 5

SAF

• Suitability - appropriate for use? e.g. long term asset long term finance
• Accessibility - acceptable to shareholders? Risk attitude
• Feasibility - can additional finance be raised

Question 6

What are the advantages of using retained profits as a source of finance?

Answer 6

• Simple

- No change in ownership

Question 7

What are the disadvantages of using retained profits as a source of finance?

Answer 7

• Restrict dividend payouts

- May not be sufficient for growth

Question 8

What are the advantages of issuing shares as a source of finance?

Answer 8

Long-term capital

Question 9

What are the disadvantages of issuing shares as a source of finance?

Answer 9

Dilute existing control

Question 10

What are the advantages of using a bank loan as a source of finance?

Answer 10

• Repayments are known so can be budgeted
• Flexible
• Quick
• No dilution of control

Question 11

What are the disadvantages of using a bank loan as a source of finance?

Answer 11

• Increased gearing and risk
• Interest to be paid
• Covenants

Question 12

What are the advantages of using an overdraft as a source of finance?

Answer 12

• Flexible
• Only pay interest on amount owing
• Doesn’t count towards gearing

Question 13

What are the disadvantages of using an overdraft as a source of finance?

Answer 13

• Repayable on demand so less reliable

- More expensive

Question 14

What are the advantages of using an initial coin offering as a source of finance?

Answer 14

• Simple
• No change in ownership
• Enable start up to attract international investors

Question 15

What are the disadvantages of using an initial coin offering as a source of finance?

Answer 15

• Failure to raise amount required results in funds returned to investors
• Unregulated and associated with fraud

Question 16

Define initial coin offering

Answer 16

The creation of virtual ‘tokens’ which are sold to raise funds for business projects

Question 17

Define risk

Answer 17

Situations which may occur whose probability of occurrence can be calculated based on past experiences

Question 18

Define uncertainty

Answer 18

Situations whose outcome cannot be predicted with statistical confidence

Question 19

What are the disadvantages of EV?

Answer 19

• Probabilities are estimates
• Long-term averages - not useful for one off decisions
• EV outcome may not be actual outcome
• Do not consider attitudes of risk

Question 20

Define strategic cost management

Answer 20

Focusing on what is driving costs and whether they can be reduced

Question 21

What are the qualitative techniques for forecasting?

Answer 21

• Delphi technique
• Sales force opinions
• Executive opinions
• Market research

Question 22

Define the Delphi technique

Answer 22

Selecting a panel of experts who produce an independent forecast. The forecast is shared, and then each produces a revised forecast. Process continues until they are in agreement with one definitive forecast

Question 23

What are the quantitative techniques for forecasting?

Answer 23

• Linear regression

- Time series analysis

Question 24

What does linear regression do?

Answer 24

• Measures the relationship between two variables
• Strength is measured by correlation coefficient
• Coefficient of determination (r squared) explains proportion of variation in one variable explained by variation in other

Question 25

What does time series analysis do?

Answer 25

Separates seasonal and cyclical fluctuations from long-term underlying trends

Question 26

Define budgeting

Answer 26

A business plan for the short term

Question 27

What are the advantages of budgeting?

Answer 27

- Promotes forward thinking - identifies problem early - Motivates performance - Yardstick for measuring performance - System of authorisation - managers spend up to limit

Question 28

What are the disadvantages of budgeting?

Answer 28

- May be demotivated if budget unattainable - Slack may be built in to make it attainable - Short-term results rather than underlying causes

Question 29

Define standard costing

Answer 29

Predetermined estimates of costs, the collection of actual costs and the comparison of the two to identify variances

Question 30

What are the disadvantages of standard costing?

Answer 30

- Standards become out of date - Variances for which manager is held accountable can be out of their control - Once standard met, no incentive to improve