Finance

Question 1

What 3 pieces of financial information does the finance function give?

Answer 1

Tax
Break-even
Loans

Question 2

What are 8 ways of raising finance?

Answer 2

Loan
Overdraft
Trade credit
Retained profit
Sale of assets
Owners’ capital
New partner
Crowdfunding

Question 3

What is one benefit and drawback of a loan?

Answer 3

Benefit - The longer the term of lean, the lower the monthly interest payments as the business is spreading the cost over a long period of time.

Drawback - Each month the business will have to pay some of the loan and interest back.

Question 4

What is one benefit and drawback of an overdraft?

Answer 4

Benefit - Extremely flexible

Drawback - The interest rate charges is usually higher than a loan.

Question 5

What is one benefit and drawback of a trade credit?

Answer 5

Benefits - The business will never run out of products to sell.

Drawback - The supplier may charge a higher cost for the products because of the credit arrangement.

Question 6

What is one benefit and drawback of retained profit?

Answer 6

Benefit - No interest to pay, cheapest method of finance.

Drawback - Not applicable in the first year of trading as the business has not made any profits to ‘retain’.

Question 7

What is one benefit and drawback of sale of assets?

Answer 7

Benefit - Good way to raise cash quickly.

Drawback - This will have an impact on their statement of financial position so the business appears to own less.

Question 8

What is one benefit and drawback of using the owner’s capital?

Answer 8

Benefit - Easy to access money through owner’s bank account.

Drawback - Owner will not be able to spend it on something else.

Question 9

What is one benefit and drawback of a new partner?

Answer 9

Benefit - Bring new ideas and finance.

Drawback - They will have share in the profit equal to their investment.

Question 10

What is one benefit and drawback of crowdfunding?

Answer 10

Benefit - Attract advice and help as well as funds. Acts as an advert.

Drawback - Alerts your competitors of your need for funds.

Question 11

What is the calculation for sales revenue?

Answer 11

Price x Quantity sold

Question 12

What is the calculation for gross profit?

Answer 12

Sales revenue - Variable costs

Question 13

What is the calculation for net profit?

Answer 13

Sales revenue - Total costs

Question 14

What is the calculation for gross profit margin %?

Answer 14

Gross profit
x100
Sales revenue

Question 15

What is the calculation for net profit margin %?

Answer 15

Net profit
x100
Sales revenue

Question 16

What is average rate of return?

Answer 16

A business may have to decide between two products as they can’t do both so they will calculate the ARR of both and the project with the best results go ahead.

Question 17

How do you calculate the average rate of return?

Answer 17

1. Add up all profits for the year
2. Minus the initial investment
3. Divide the new figure by the number of years the project ran for
4. Divide this figure by the cost of the initial investment
5. Multiply by 100 to get a %

Question 18

What is the calculation for break-even?

Answer 18

Fixed costs
Selling price - Variable costs

Question 19

What are 2 reasons for the usefulness of break-even?

Answer 19

Write a business plan
Help the business to obtain finance to grow or expand

Question 20

What are 4 reasons for the usefulness of cash flow forecasting?

Answer 20

Use as a planning tool
To anticipate periods of cash shortage
To enable remedies to be put in place for shortages
To provide targets

Question 21

What are 4 limitation of cash flow forecasting?

Answer 21

It’s a best guess
Could be out-of-date
May be inaccurate
Competitor activity may affect sales