Chapter 29: Business finance

Question 1

Start-up capital

Answer 1

Capital needed by the entrepreneur to set up a business

Question 2

Working capital

Answer 2

Capital needed to pay for raw materials, day-to-day running costs and credit offered to customers

Question 3

Why do businesses need finance?

Answer 3

Cash injections to purchase capital equipment
Day-to-day finance to pay bills and expenses
Buying assets
Paying for takeovers to achieve growth

Question 4

Short-term finance

Answer 4

Money required for short periods of up to one year

Question 5

Long-term finance

Answer 5

Money required for more than one year

Question 6

Profit

Answer 6

Value of goods (revenue) less costs

Question 7

Liquidity

Answer 7

The ability of a business to pay off its short-term debts

Question 8

Administration

Answer 8

When administrators manage a business that is unable to pay its debts with the intention of selling it as a going concern

Question 9

Bankruptcy

Answer 9

The legal procedure for liquidating a business which cannot fully pay its debts out of its current assets

Question 10

Liquidation

Answer 10

When a business ceases trading and its assets are sold for cash to pay suppliers and other creditors

Question 11

Working capital (formula)

Answer 11

current assets - current liabilities

Question 12

Current assets

Answer 12

Assets that are either cash or likely to be turned into cash within 12 months

Question 13

Current liabilities

Answer 13

Debts that usually have to be paid within one year

Question 14

Trade receivables

Answer 14

Money that customers owe the business

Question 15

Trade payables

Answer 15

Money owed to creditors

Question 16

Methods of managing inventory

Answer 16

Keeping smaller inventory levels
Using IT systems to record sales and inventory levels
Efficient inventory control, use and handling
Just-in-time inventory ordering
Delivering goods quickly to speed up payments

Question 17

Methods of managing trade payables

Answer 17

Delaying payments to suppliers to increase credit period
Buying goods from suppliers who offer credit

Question 18

Methods of managing trade receivables

Answer 18

Selling for cash only, no credit
Reducing the credit period offered to customers

Question 19

Capital expenditure

Answer 19

Purchase of non-current assets that are expected to last for more than one year

e.g. machinery and buildings

Question 20

Revenue expenditure

Answer 20

Spending on all costs and assets other than non-current assets including wages, salaries, and inventory

Question 21

Internal sources of finance

Answer 21

Raising finance from a business’s assets or profits left in the business.

Question 22

External sources of finance

Answer 22

Raising finance from sources outside the business
e.g. banks

Question 23

Retained profit

Answer 23

Profit after tax retained in a company rather than paid out to shareholders as dividends

Question 24

non-current assets

Answer 24

assets kept and used by the business for more than one year

Question 25

Short-term external sources of finance

Answer 25

Bank overdrafts
Trade credit
Debt factoring

Question 26

Overdraft

Answer 26

A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required

Question 27

Factoring

Answer 27

Selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in exchange for immediate liquidity

Question 28

Long-term external sources of finance

Answer 28

Hire purchase and leasing
Bank loans (long-term)
Debentures
Share/equity capital
Business mortgages
Government grants
Venture capital

Question 29

Hire purchase

Answer 29

An arrangement for buying goods, where the buyer makes an initial down payment and pays the balance plus interest in instalments.

Question 30

Leasing

Answer 30

Obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to purchase the asset

Question 31

Long-term loans

Answer 31

Loans that do not have to be paid for at least a year

Question 32

Debentures

Answer 32

Long-term bonds issued by companies to raise debt finance, often with a fixed rate of interest

Question 33

Share/equity capital

Answer 33

Permanent finance raised through the sale of shares

Question 34

Business mortgages

Answer 34

long-term loans to companies purchasing a property for the business, with the property acting as collateral

Question 35

Venture capital

Answer 35

A type of financing that investors provide to startup companies that are believed to have long-term growth potential.

Question 36

Collateral security

Answer 36

An asset which a business pledges to a lender and which must be sold off to pay a debt if the loan is not repaid

Question 37

Rights issue

Answer 37

Existing shareholders are given the right to purchase additional stock at a discounted price

Question 38

Microfinance

Answer 38

Providing financial services for poor and low-income customers who do not have access to banking services such as loans and overdrafts

Question 39

Crowdfunding

Answer 39

Use of small amounts of capital from a large number of individuals to finance a new business venture

Question 40

Factors affecting the source of finance

Answer 40

Why finance is needed and the period
Cost of financial source
Amount required
Form of business ownership and desire to keep control
Level of existing borrowing
Flexibility of finance required