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Business > 5.1 - business finance: needs and sources > Flashcards

5.1 - business finance: needs and sources Flashcards

1
Q

why do businesses need finance?

A
  • for start up capital (for premises, recruiting and training staff, buying equipment, machinery) ​
  • for capital for expansion- buying more premises, buying more machinery, developing new products, taking over another business ​
  • for additional working capital- working capital is money needed for paying for day to day activities e.g. paying wages, paying for raw materials, paying electricity bulls. ​
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2
Q

what is capital expenditure?

A

the money used for for long term finance needs (buying assets that last longer than a year e.g. premises and machinery) ​

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3
Q

what is revenue expenditure?

A

money needed for day-to-day expenses e.g. wages ​

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4
Q

what is internal finance?

A

money raised from within the business

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5
Q

examples of internal finance

A
  • retained profit ​
  • sale of exisiting assets ​
  • sale of inventory to reduce inventory levels ​
  • owners saving
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6
Q

what is retained profit?

A

the profit reinvested back into the business, after the owners/shareholders have taken their share of profit

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7
Q

what are the benefits and drawbacks of retained profit?

A
  • no interest has to be paid on it, unlike a loan, leading to lower costs ​
  • it does not have to be repaid (unlike a loan), leading to lower cash outflow​

​- not suitable for a new business, as they have no profit from a previous year ​
- shareholders may not be happy if more profit has been used as retained profit instead of giving it to them in the form of dividends. (may sell their shares a a result of this)​

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8
Q

what is sale of existing assets?

A

when the business sells items of value that they own but are no longer needed. E.g. vehicles, equipment

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9
Q

what are the benefits and drawbacks of sale of existing assets?

A
  • makes better use of unused assets by gaining money from them​
  • the money does not have to be repaid to anyone, unlike a loan​
  • may not get a significant of money for the asset if it has depreciated in value over time e.g. a vehicle​
  • not suitable for new businesses as they have no unused assets yet​
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10
Q

what is sale of inventory to reduce inventory levels?

A

Inventory are the stock/raw materials used by a business to make a finished product

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11
Q

what are the benefits and drawbacks of sale of inventory to reduce inventory levels

A
  • can reduce the costs of storing raw materials e.g. factory space​
  • reduces the amount of money tied up in inventory and so can be used for other things e.g. wages​
  • if they sell too much of their inventory, they may not have enough to produce enough products, reducing customer satisfaction​
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12
Q

what are the benefits and drawbacks of owners savings?

A
  • no interest needs to be paid, unlike a loan, so lower costs​
  • it does not have to be repaid (unlike a loan), leading to lower cash outflow​

​- it may not be enough (especially for sole traders)​
- owners may not want to risk investing their savings into the business incase it fails​

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13
Q

what is external finance?

A

money raised from sources outside the business

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14
Q

what are some examples of external finance?

A
  • bank loans​
  • sale of shares
  • grants from government ​
  • crowdfunding
  • selling debts to a debt factoring company
  • micro finance ​
  • debentures
  • overdraft
  • trade credit
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15
Q

what are bank loans?

A

money borrowed from the bank, which must be repaid (Usually monthly instalments) along with interest

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16
Q

what are the benefits and drawbacks of bank loans?

A
  • can pay them back in instalments, improving cashflow​
  • larger companies can negotiate lower interest rates​
  • interest needs to be paid, leading to higher costs ​
  • security/collateral often needs to be provided e.g., a house. So if the loan is not repaid the house can be repossessed by bank. risky for owners.​
17
Q

what are the benefits and drawbacks of selling shares?

A
  • no interest has to be paid leading to lower costs ​
  • can obtain large amount of finance for expansion ​
  • shareholders will be expected to be paid dividends. Reducing the amount of profit left over for retained profit​
  • if many shares are sold, the original owners may lose control of the company ​
18
Q

what are the benefits and drawbacks of grants from the government?

A
  • does not have to be repaid and no interest needs to be paid
  • may have to meet a certain criteria to obtain the loan e.g. firm must locate in a particular area and so are difficult to obtain
19
Q

what is crowd funding?

A

raising money for a project/venture via the internet from a large number of people

20
Q

what are the benefits and drawbacks of crowd funding?

A
  • no initial fees are needed. only if you receive money from investments will the platform charge a percentage ​
  • allows them to see the public reaction of the product initially. If people are not willing to invest it is probably not a good business idea. ​
  • publicising the business idea could allow competitors to copy the idea and produce it and get it onto the market before them.​
  • if the total amount requested has not been raised, they will have to return all donate money, wasting a lot of time. ​
21
Q

what is debt factoring?

A

a debtor is a customer who owes a business money. Debt Factoring is a business selling off their debts to a debt factoring company. The debtor will then now pay the debt factoring company

22
Q

what are the benefits and drawbacks of debt factoring?

A
  • cash is now immediately available for the business as they have received in from the debtor company ​
  • the business no longer has to waste time following up the debtors for the money- can spend this time elsewhere ​
  • the business does not receive the full 100% of the value of its debts from the debtor company. Therefore. less revenue for the business ​
23
Q

what is micro finance?

A

providing financial services, including small loans to poor people, not served by traditional banks. These are usually in developing countries

24
Q

what are the benefits and drawbacks of micro finance?

A
  • suitable for entrepreneurs who do not have any assets to offer for collateral to a bank for a regular loan ​
  • may not get enough finance from micro finance
25
Q

what are debentures?

A

long term loans, issued by limited companies

26
Q

what are the benefits and drawbacks of debentures?

A
  • allows the business access to large amounts of finance that can be paid over a long period of time. E.g., 25 Years. This will help slow down cash outflow as it does not need to be repaid immediately
  • interest must be paid on these loans, increasing costs
27
Q

what is leasing?

A

an asset allows the business to use an asset without having to purchase it

28
Q

what are the benefits and drawbacks of leasing?

A
  • the business does not have to find a large cash sum to purchase the asset to to start with so they down need to take out a bank loan.​
  • the maintenance of the asset will be carried out by the leasing company, reducing costs for a business ​
  • the costs of leasing an asset will be higher in the long run than purchasing the asset. E.g., if you lease a vehicle for 10 years, that will be more expensive by buying it outright. ​
29
Q

what is an overdraft

A

arranged by a bank. The bank gives the business the right to ‘overdraw’ from their account. (Take out more money than they have in their bank account.)

29
Q

what is trade credit?

A

an agreement between a supplier and a business. The business can receive the raw materials they ordered straight away and pay for them at a later date.

29
Q

what are the benefits and drawbacks of an overdraft?

A
  • allows the business to be able to pay day to day bills e.g. wages and suppliers even if they don’t have enough cash in their bank ​
  • interest will be charged on the overdraft ​
  • the bank can ask for the overdraft to be repaid on very short notice. ​
29
Q

what are the benefits and drawbacks of trade credit?

A
  • cash flow improves as cash out flows are delayed in the short run, improving net cash flow in the short run. ​
  • suppliers often offer businesses discounts to pay straight away, meaning the business will miss out on this, increasing costs. ​

Business (23 decks)

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