3.1 Sources of finance Flashcards
(39 cards)
Define Capital expenditure
money spent to acquire fixed assets in a business. Capital expenditures are long-term investments intended to assist businesses to succeed and grow. Fx buying a van(business car)
Define Revenue expenditure
Money used in the day-to-day running of a business. Fx rent, wages, raw material, insurance and fuel. Do not involve the purchase of longer-term, fixed assets. Revenue expenditure needs to be covered immediately.
Define Internal sources of finance
money obtained from within the business and is usually from already established businesses.
Define Personal funds
a source of finance for sole traders that comes mostly from their own personal savings. This maximize their control over the business. This shows commitment to the business.
Define Retained profit(ploughed-back profit)
profit that remains after a business has paid corporation tax to the government and dividends to shareholder.
Used in Profit & loss account and balance sheet.
Outline the advantages of Retained profit(ploughed-back profit)
Cheap as it doesn’t incur interest charges
Permanent source of finance as it does not have to be repaid
Flexible as it can be used in a way the business deems fit
The owner have control over their retained profits without interference from other financial institutions such as banks.
Outline the disadvantages of Retained profit(ploughed-back profit)
Start-up businesses will not have any retained profits as they are new ventures
If too low, it may not be sufficient for expansion
Some owners may overuse the retained profit and leave no buffer for emergencies or for future growth opportunities
A high retained profit may mean that either very little or nothing was paid out to shareholders as dividends.
Define Sale of assets
when a business sells off its unwanted or unused assets to raise funds. In some cases businesses may adopt a sale and lease back option.
Define Working capital
is money that is brought in through sales of a good or services. Many business use this to pay for revenue expenditures. Current assets(Stocks, cash, debtors) - current liabilities(Creditors, overdraft, short-term loans).
Define External sources of finance
money obtained from sources outside the business.
Define Share capital(equity capital)
money raised from the sale of shares of a limited company. Buyers of these shares are known as shareholders. Authorized share capital suggest the maximum amount the shareholder of a company intend to raise.
Define Loan capital
money sourced from financial institutions such as banks, with interest charged on the loan to be repaid.
Define overdrafts
when a lending institution allows a firm to withdraw more money than it currently has in its account
Define Trade credit
an agreement between businesses that allows the buyer of goods or services to pay the seller at a later date
Define grants
funds usually provided by a government, foundation, trust, or other agency to businesses that do not need to be repaid
Define subsidies
financial assistance granted by a government, a non-government organization (NGO), or an individual to support business enterprises that are in the public interest
Define debt factoring
a financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business with a percentage of the owed debt in cash
Define leasing
a source of finance that allows a firm to use an assets without having to purchase it by cash
Define venture capital
financial provided by investors to high-risk, high-potential start-up firms or small businesses.
Define Business angels(angel investors)
highly affluent individuals who provide financial capital to small start-up or entrepreneurs in return for ownership equity in their businesses
Define Short-, medium- and long-term finance
In determining wheter to classify a source of finance as short, medium or long term, it is important to consider the investor’s personal preference or the type of assets under consideration.
Define Short-term finance
This is money needed for the day-to-day running of a business and therefore provides its needed working capital. (expected to be paid with 12 months of trading or financial year)
Define medium-term finance
This is money mostly used to purchase assets such as equipment or vehicles that have useful lifespans for a specific period of time. (duration period between 1 and 5 years)
Define long-term finance
This is funding obtained for the purpose of purchasing long-term fixed assets or other expansion requirements of a business.
