Theme 2 key terms (Done)

Question 1

Define finance.

Answer 1

Finance is the management of the investment needed to; open, run and grow a business.

Question 2

Reasons to raise finance.

Answer 2

• To pay debts.
• To help a business over a slow trading period.
• To expand (growth).
• To start up a business.
• To buy stock- ask a supplier for trade credit.

Question 3

What is owner capital (aka owners equity)?

Answer 3

The amount of money owed to the owner once all the debts of the business are paid off.

Question 4

Who is most likely to use owners capital?

Answer 4

Sole traders and partnerships are most likely to use owners capital to expand and grow their business.

Question 5

What are retained profits?

Answer 5

Profits that are re-invested into the business to help it grow.

Question 6

What is an advantage of retained profits.

Answer 6

No interest to pay as it belongs to the business.

Question 7

What is a disadvantage of using retained profits?

Answer 7

Once retained profits are used, they’re gone.

Question 8

Why would a business sell assets?

Answer 8

To raise finance for growth and expansion.

Question 9

What are examples of assets that may be sold?

Answer 9

• Machinery.
• Land.
• Premises.
• Vehicles.

Question 10

What are the advantages of selling assets?

Answer 10

• Improves efficiency.
• Increase capacity utilisation.
• Raise finance to invest in another brand.

Question 11

What are the disadvantages of selling assets?

Answer 11

• May not raise enough money for growth/expansion.
• Less items on balance sheet which is less attractive to investors.
• Possible sign of financial trouble.

Question 12

What are three advantages of internal finance?

Answer 12

• The capital is available immediately (assets can be sold quickly and retained profits will be in a bank account ready).
• Internal finance is cheap (no interest payments).
• No need to involve third parties.

Question 13

What are two disadvantages of internal finance?

Answer 13

• Internal finance can be limited (e.g. a business may not be sufficiently profitable to use retained profit).
• There are no inflationary benefits with internal finance. Inflation can reduce the value of debt if external sources are used.

Question 14

What is limited liability?

Answer 14

Where shareholders can only lose the original amount they invested in a business

Question 15

Unlimited liability

Answer 15

Where business owners are liable for all business debts

Question 16

What are cash inflows?

Answer 16

The flow of money into a business

Question 17

What are cash outflows?

Answer 17

The flow of money out of a business

Question 18

What is consumer income?

Answer 18

The amount of income remaining after taxes and expenses have been deducted from wages

Question 19

What are consumer trends?

Answer 19

Habits or behaviours of consumers that determine the goods and services they buy

Question 20

What is unit cost?

Answer 20

The cost of producing one unit, calculated by dividing the total cost by the output

Question 21

What is contribution?

Answer 21

The amount of money left over after variable costs have been subtracted from revenue

Question 22

What is margin of safety?

Answer 22

The range of output between the break even level and current level of output, over which a profit is made

Question 23

What is variance?

Answer 23

The difference between actual financial outcomes and those budgeted

Question 24

What is gross profit?

Answer 24

The difference between revenue/ turnover and cost of sales

Question 25

What is operating profit?

Answer 25

The difference between gross profit and business overheads, such as selling and administrative expenses

Question 26

What are current liabilities?

Answer 26

Money owed by the business that must be re-payed within one year

Question 27

What are working capital?

Answer 27

The funds left over to meet day-to-day expenses after current debts have been payed out

Question 28

What is overtrading?

Answer 28

The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast

Question 29

What is batch production?

Answer 29

A method that involves completing one operation at a time on all units before performing the next

Question 30

Define capital intensive?

Answer 30

Production methods that make more use of machinery relative to labour

Question 31

Define capital productivity?

Answer 31

The amount of output each unit of capital (eg one machine) produces

Question 32

What is cell production?

Answer 32

It involves producing a family of products in a small self-contained unit within a factory

Question 33

What is division of labour?

Answer 33

Specialisation in specific tasks or skills by an individual

Question 34

What is flow production?

Answer 34

Large-scale production of a standard product, where each operation on a unit is performed continuously one after the other, usually on a production line

Question 35

What is Kaizen?

Answer 35

A method involving continuous improvement

Question 36

Define labour intensive?

Answer 36

Production methods that make more use of labour relative to machinery

Question 37

What is labour productivity?

Answer 37

The amount of output each unit of labour (eg one worker) produces

Question 38

What is lean production?

Answer 38

An approach to operations that focuses on the reduction of resources

Question 39

What is outsourcing?

Answer 39

Giving work to sub-contractors to reduce costs

Question 40

What is capacity utilisation?

Answer 40

The use that a business makes of its resources

Question 41

What is over-utilisation?

Answer 41

The position where a business is running at full capacity and ‘straining’ resources

Question 42

What is under-utilisation?

Answer 42

The position where a business is producing at less than full capacity