Business - 5.1 Flashcards
(57 cards)
finance - definition
refers to the money available to spend on business needs
why do businesses need finance ? (3)
- start a business
- expanding an existing business
- additional working capital
- capital expenditure
- revenue expenditure
starting up a business - business finance
- money needed to purchase non-current assets
- finance needed is often called “start-up capital
expanding an existing business - business finance
- business expand to increase profit
- additional non-current asset can be purchsed (eg. larger buildings, more machinery)
- finance needed for research and development
additional working capital - business finance
- having enough working capital to meet all requirements
capital expenditure - definition
money spent on non-current assets (lasts more than 1 year)
revenue expenditure - definition
money spent on day-to-day expenses (wages / rent)
2 types of sources of finance
- internal finance
- external finance
- short-term finance
- long-term finance
internal finance - definition
obtained from within the business
external finance - definition
obtained from sources outside of and separate from the business
internal finance - list (4)
- retained profits
- sale of existing assests
- sale of inventories
- owners savings
retained profits - definitions
profit kept in the business after the owners have taken their share of their profits
retained profit - advantages
- doesn’t need to be paid back
- no interest to pay
retained profit - disadvantages
- a new business will not have any retained profits
- small firms dont have enough finance for expansions
- keeping profits reduces payments to owners
sale of existing assets - definition
- assets that are no longer required can be sold
sales of existing assets - advantages
- better use of capital tied up in the business
- doesn’t increase debts of business
sale of existing assets - disadvantages
- takes time to sell assets
- amount is never certain unless sold
- not available for new business
sale of inventories - advantages
- reduces opportunity cost
- reduces storage costs of high inventory levels
sale of inventories - disadvantages
- must be done carefully to avoid disappointing customers if not enough to sell
owners saving - advantages
- should be available to the firm quickly
- no interest is paid
owners saving - disadvantages
- saving may be too low
- increases the risk taken by the owners as they have unlimited liability
external finance - list (7)
- issues of shares
- bank loans
- selling debentures
- factoring debts
- grants & subsidies
- micro-finance
- crowdfunding
issue of shares - definition
selling ownership (shares) in the company to raise money
issue of share - advantages
- permanent source of capital which would not have to be repaid to shareholders
- no interest has to be paid