Business - 5.1 Flashcards

(57 cards)

1
Q

finance - definition

A

refers to the money available to spend on business needs

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2
Q

why do businesses need finance ? (3)

A
  1. start a business
  2. expanding an existing business
  3. additional working capital
  4. capital expenditure
  5. revenue expenditure
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3
Q

starting up a business - business finance

A
  • money needed to purchase non-current assets
  • finance needed is often called “start-up capital
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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
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5
Q

additional working capital - business finance

A
  • having enough working capital to meet all requirements
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6
Q

capital expenditure - definition

A

money spent on non-current assets (lasts more than 1 year)

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7
Q

revenue expenditure - definition

A

money spent on day-to-day expenses (wages / rent)

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8
Q

2 types of sources of finance

A
  1. internal finance
  2. external finance
  3. short-term finance
  4. long-term finance
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9
Q

internal finance - definition

A

obtained from within the business

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10
Q

external finance - definition

A

obtained from sources outside of and separate from the business

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11
Q

internal finance - list (4)

A
  1. retained profits
  2. sale of existing assests
  3. sale of inventories
  4. owners savings
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12
Q

retained profits - definitions

A

profit kept in the business after the owners have taken their share of their profits

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13
Q

retained profit - advantages

A
  • doesn’t need to be paid back
  • no interest to pay
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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
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15
Q

sale of existing assets - definition

A
  • assets that are no longer required can be sold
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16
Q

sales of existing assets - advantages

A
  • better use of capital tied up in the business
  • doesn’t increase debts of business
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17
Q

sale of existing assets - disadvantages

A
  • takes time to sell assets
  • amount is never certain unless sold
  • not available for new business
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18
Q

sale of inventories - advantages

A
  • reduces opportunity cost
  • reduces storage costs of high inventory levels
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19
Q

sale of inventories - disadvantages

A
  • must be done carefully to avoid disappointing customers if not enough to sell
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20
Q

owners saving - advantages

A
  • should be available to the firm quickly
  • no interest is paid
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21
Q

owners saving - disadvantages

A
  • saving may be too low
  • increases the risk taken by the owners as they have unlimited liability
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22
Q

external finance - list (7)

A
  1. issues of shares
  2. bank loans
  3. selling debentures
  4. factoring debts
  5. grants & subsidies
  6. micro-finance
  7. crowdfunding
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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)