Business - 5.1 Flashcards
(57 cards)
1
Q
finance - definition
A
refers to the money available to spend on business needs
2
Q
why do businesses need finance ? (3)
A
- start a business
- expanding an existing business
- additional working capital
- capital expenditure
- revenue expenditure
3
Q
starting up a business - business finance
A
- money needed to purchase non-current assets
- finance needed is often called “start-up capital
4
Q
expanding an existing business - business finance
A
- business expand to increase profit
- additional non-current asset can be purchsed (eg. larger buildings, more machinery)
- finance needed for research and development
5
Q
additional working capital - business finance
A
- having enough working capital to meet all requirements
6
Q
capital expenditure - definition
A
money spent on non-current assets (lasts more than 1 year)
7
Q
revenue expenditure - definition
A
money spent on day-to-day expenses (wages / rent)
8
Q
2 types of sources of finance
A
- internal finance
- external finance
- short-term finance
- long-term finance
9
Q
internal finance - definition
A
obtained from within the business
10
Q
external finance - definition
A
obtained from sources outside of and separate from the business
11
Q
internal finance - list (4)
A
- retained profits
- sale of existing assests
- sale of inventories
- owners savings
12
Q
retained profits - definitions
A
profit kept in the business after the owners have taken their share of their profits
13
Q
retained profit - advantages
A
- doesn’t need to be paid back
- no interest to pay
14
Q
retained profit - disadvantages
A
- a new business will not have any retained profits
- small firms dont have enough finance for expansions
- keeping profits reduces payments to owners
15
Q
sale of existing assets - definition
A
- assets that are no longer required can be sold
16
Q
sales of existing assets - advantages
A
- better use of capital tied up in the business
- doesn’t increase debts of business
17
Q
sale of existing assets - disadvantages
A
- takes time to sell assets
- amount is never certain unless sold
- not available for new business
18
Q
sale of inventories - advantages
A
- reduces opportunity cost
- reduces storage costs of high inventory levels
19
Q
sale of inventories - disadvantages
A
- must be done carefully to avoid disappointing customers if not enough to sell
20
Q
owners saving - advantages
A
- should be available to the firm quickly
- no interest is paid
21
Q
owners saving - disadvantages
A
- saving may be too low
- increases the risk taken by the owners as they have unlimited liability
22
Q
external finance - list (7)
A
- issues of shares
- bank loans
- selling debentures
- factoring debts
- grants & subsidies
- micro-finance
- crowdfunding
23
Q
issue of shares - definition
A
selling ownership (shares) in the company to raise money
24
Q
issue of share - advantages
A
- permanent source of capital which would not have to be repaid to shareholders
- no interest has to be paid
25
issue of shares - disadvantages
- shareholders expect dividends
- dilutes ownership / control of original owners
26
bank loans - definitions
- borrowing money that needs to be repaid with interest over time
27
bank loan - advantages
- quick access to large amounts
- fixed repayment schedule
- suitable for long-term needs
28
bank loan - disadvantages
- interest must be paid
- may require collateral
- increases financial risk
29
selling debentures - definition
- long-term loan certificate issues by limited companies with fixed interest rate
30
selling debentures - advantages
- raises long-term finance
- non loss of ownerships
31
selling debentures - disadvantages
- must be repaid with interest
32
factoring debt - definition
- selling unpaid customer invoices (trade receivables) to a factoring company for immediate cash, usually at a discount
33
factoring debts - advantages
- improves cash flow quickly
- immediate cash is a available for business
- risk of collecting debt becomes the factors not the business
34
factoring debts - disadvantages
- does not receive 100% of the value of its debts
- may upset customers
35
grant and subsides - advantages
- dont need to be repaid
- helps with start-ups or expansion
36
grant and subsides - disadvantages
- often given with condition
37
micro-finance - definition
- providing financial services (small loans) to poor people not served by traditional banks
38
micro-finance - advantages
- can reduce poverty and create job
39
micro-finance - disadvantages
- may have high interest rates
- loan sizes are very small
40
crowd funding - definition
funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, usually via online
41
crowd funding - advantages
- no initial fees needed
- can change business based on public reaction
- can be quick
42
crowd funding - disadvantages
- crowds may reject funding
- total amount required is not raised
- competitors can steal ideas
43
short term - list (2)
1. overdraft
2. trade credit
44
overdraft - definition
when a business is allowed to withdraw more money than it has in its bank account
45
overdraft - advantages
- can pay wages, suppliers
- vary each month
- interest will only be paid on the amount overdrawn
46
overdraft - disadvantages
- interest rates are variable
- bank may ask to repay on short notice
47
trade credit
when a business delays paying its suppliers, leaving the business in a better cash position
48
trade credit - advantages
- creates a interest-free loan to the business for a length of time that payment is delayed
49
trade credit - disadvantages
- suppliers may refuse to give discounts or even refuse to supply anymore goods if payment is not made quickly
50
long-term finance - list (5)
1. bank loans
2. hire purchase
3. leasing
4. issues of shares
5. debentures
51
hire purchase - definition
allows a business to buy a non-current asset over a long period of time with monthly payments which include an interest charge
52
hire purchase - advantages
- business doesnt have to find a large cash sum to purchase the asset
53
hire purchases - disadvantages
- cash deposit is paid at the start of the period
- interest payments can be quite high
54
leasing - definition
allows business to use the asset without having to buy / purchase it
55
leasing - advantages
- business doenst need a large cash sum to purchase the asset to start with
- care and maintenance of the asset is carried out by leasing company
56
leasing - disadvantages
- total cost of leasing chargers will be higher than purchasing the asset
57
factors managers consider before deciding where to obtain finance from
1. purpose & time period (what and how long)
2. amount needed (how much)
3. legal form & size (eg. sole trader/partnership)
4. control (owner losing control)
5. risk and gearing (how risky finance is, if it will increase the companys debt level)
