Unit 3 questions – Finance
With reference to PU; distinguish between capital and revenue expenditure [4]
Capital expenditure is spending on long term fixed assets for the business. In the case of PU, this
could be spending on a new building for their new campus in country B. This could help PU to
differentiate themselves from other universities as this could be a state-of-the-art building with high
quality facilities that can attract students.
Revenue expenditure is money used for day-to-day operations of the business such as the salaries of
the lecturers. Without good salaries, the lecturers may not be motivated to provide high quality
lectures, which is essential for PU to maintain and increase student numbers.
With reference to PU, explain the difference between internal and external sources of finance [4]
An internal source of finance is obtained using the businesses/owners’ own resources in the form of
“retained profit”. Although PU are non-profit, any money left over after paying costs can be
reinvesting into the university again to help fund expansions. PU may need to consider changing
their fees or promotion strategies to increase this.
External sources of finance are obtained from outside of the business, for example businesses
providing funding for research projects would be considered external for example the faculty of IT
receiving funding from a software company. This would have supported their work on AI and could
help prevent contamination issues in the future. Government grants received would be another
example.
With reference to PU, explain the difference between fixed and variable costs [4]
A fixed cost is a cost that doesn’t change based on output, for PU an example of a fixed cost would
be the salaries of the lecturers. This must be paid each month regardless of the revenue that PU
receive. Without good salaries, the lecturers may not be motivated to provide high quality lectures,
which is essential for PU to maintain and increase student numbers.
A variable cost is a cost that can change based on output, for PU an example could be the costs of
energy in running the buildings e.g. costs of electricity could rise due to the higher usage of internet
and computers for online lessons. This may be a cost that PU aim to reduce to be more ecologically
sustainable.
With reference to PU, explain an advantage and disadvantage of accessing government grants [4]
An advantage of accessing government grants is that they are free and do not need to be repaid.
Some students and employees received these grants for computer equipment. This would have
meant that they could now access/teach online lessons and improve the experience of the students.
A disadvantage is that government grants were only suitable for some people, it may have been the
case that other students could not afford computers but did not qualify for the grants. This may
mean they struggle to access the lessons and fell behind in their education.
Explain an advantage and disadvantage of PU using cashflow forecasts [4]
An advantage of a cashflow forecast for PU is that it allows them to predict inflows and outflows and
aid decision making by being able to predict student numbers and costs and allow them to identify,
for example, if the move to open a new campus would be viable. This helps them to plan more
effectively.
A disadvantage of a cashflow forecast is that it is only a prediction, other external factors could occur
that affect the accuracy of the forecasts. For example, they would not have anticipated the chemical
plant explosion and so planned actions could not occur as the predicted inflows and outflows were
now wrong. Therefore, this should always be treated with caution.
Explain how PU could further reduce their cash outflows [4]
One way PU could reduce cash outflows could be to decrease spend on marketing. The case study
refers to “aggressive marketing strategies”, these could be quite expensive for PU. They may seek to
find cheaper methods of marketing such as on social media pages to increase awareness. However,
this could be risky as less marketing may impact student numbers negatively.
Another way could be to make further staff redundancies, this would reduce the salaries cost for PU
and free up more money for expansion. As PU lecturers and students are more skilled and
accustomed to the use of online technology, this could mean that PU could run lessons with large
number of students and thus the need for less lecturers. However, this would have an impact on the
morale and motivation of current lecturers who may fear for their job.
Possible Section B
Discuss how PU could resolve their cashflow problems [10]
-Decrease cash outflows eg marketing, salaries
-Increase cash inflows eg promotion/fees to increase revenue
- Additional Source of Finance eg investment/donations, sale of assets
With reference to PU, explain the importance of budgeting for organisations [4]
A budget is a financial plan that estimates revenue and expenditure over a period of time.
Budgeting is important as it can help PU to plan effectively to meet objectives such as knowing how
much they can spend on the expansion into country B. This will require careful budgeting to ensure
costs can be anticipated and planned for such as recruitment costs. This therefore helps aid decision
making as the decision to move will be based on solid financial reasoning.
Budgeting also helps PU to allocate resources effectively to where they are needed most. PU can
identify budget variances and correct these for the next year, for example reducing costs/increasing
revenue. PU could identify costs that need to be reduced such as marketing or salaries. Without
budgeting, PU would likely overspend and put their financial position in jeopardy.
Cashflow calculation?
Investment Appraisal?
Balance Sheet – fixed assets?
Variance Analysis?
Make sure you can construct and calculate these.