Chapter 26 (business finance)

Question 1

Why does business activity requires finance?

Answer 1

1. start-up.
   Setting up a business will require cash injections from the
   owners to purchase essential capital equipment and premises.
2. working capital.
   Working capital is the capital needed to pay for raw
   materials, day-to-day running costs and credit
   offered to customers.
3. expansion.
   When businesses expand, further finance will be needed to
   increase the capital assets held by the firm – and, often,
   expansion will involve higher working capital needs

Question 2

How to calculate working capital?

Answer 2

current assets – current liabilities

Question 3

revenue expenditure is?

Answer 3

Revenue expenditure is the spending on all costs and assets other than fixed assets.
Includes: 
wages
salaries
materials bought for stock

Question 4

Capital expenditure is?

Answer 4

involves the purchase of assets that are expected to last for more than one year.
such as:
building and machinery

Question 5

how important is Working capital?

Answer 5

very.
Working capital is often described as the ‘lifeblood’
of a business.
Without sufficient working capital a business will be illiquid (unable to pay its immediate or short-term debts)

Question 6

what is Liquidity?

Answer 6

it is the ability of a firm to be able to pay its short-term debts

Question 7

what is Liquidation?

Answer 7

it is when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

Question 8

what is internal source of finance?

Answer 8

Internal money raised from the business’s own
assets or from profits left in the business.
e.g Profits retained in the business, Sale of assets, Reductions in working capital

Question 9

what is external source of finance?

Answer 9

External money raised from sources outside the
business.
e.g Bank overdrafts, Trade credit, Debt factoring

Question 10

Medium-term sources of External finance.

Answer 10

1. Hire purchase

2. Leasing

Question 11

what is Hire purchase?

Answer 11

Hire purchase means an asset is sold to a company that agrees to pay fixed repayments over an agreed time period – the asset belongs to the company

Question 12

what is Leasing?

Answer 12

Leasing means obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. Ownership remains with the leasing company

Question 13

Long-term sources of External finance?

Answer 13

1. Long-term loans from banks
2. Long-term bonds or debentures
3. Sale of shares – equity finance
4. Grants
5. Venture capital

Question 14

what are Long-term loans?

Answer 14

Long-term loans are loans that do not have to be repaid for at least one year

Question 15

what are Long-term bonds or debentures?

Answer 15

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

Question 16

Sale of shares – equity finance is?

Answer 16

Equity finance is permanent finance raised by companies through the sale of shares

Question 17

what are Grants?

Answer 17

-Government grants are usually given to small
businesses or those expanding businesses.

-Grants often come with conditions attached, such as location and the number of jobs to be created.

-but if conditions are met, grants do not have to be
repaid

Question 18

what is Venture capital?

Answer 18

Venture capital is risk capital invested in start-ups or expanding small businesses that have good profit potential but do not gain finance easily from other sources.