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Business > Ch 22 - Financial information > Flashcards

Ch 22 - Financial information Flashcards

(60 cards)

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1
Q

3 main needs businesses need finance

A

-start up capital
-capital for expansion
-additional working capital

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2
Q

start up capital

A

-long term
-finance required to start a new business / to expand existing business
-finance needed to pay fixed and current assets
-low frequency of need
-huge amounts required

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3
Q

investment capital (capital for expansion - capital expenditure)

A

-medium term
-investing in something that lasts (assets)
-ex. machines
-medium frequency of need
-less amounts required than start up capital

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4
Q

working capital (revenue expenditure)

A

-short term
-finances needed on day to day running of business (runs out)
-spent on raw materials, facilities, wages
-high frequency of need
-low amounts needed

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5
Q

internal sources of finance? examples?

A

-finance sourced from within the business
–> revenue
–> selling objects
–> raising prices

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6
Q

advantages of internal sources of finance? [2]

A

-no need to pay back charges
-no borrowing or being in debt or interest

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7
Q

disadvantages of internal sources of finance? [1]

A

not a lot of money is raised

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8
Q

external sources of finance? examples?

A

finance raised from outside business
–> borrowing bank loans

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9
Q

advantages of external sources of finance? [1]

A

unlimited resources (no limit of money you can earn)

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10
Q

disadvantages of external sources of finance? [3]

A

-need to pay back (with charge / interest)
-theres a time limit to pay it back
-giving up control (giver controls you)

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11
Q

short term external source of finance?

A

need to pay back borrowed money in a year

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12
Q

medium term external source of finance?

A

need to pay back borrowed money between 1 and 5 years (few years)

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13
Q

long term external source of finance?

A

need to pay back borrowed money over a long time (10+ years)
–> lots of interest
–> for expensive things

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14
Q

4 examples of internal finance?

A

-retained profits
–>saving money instead of spending it, after owner’s take their share

-sale of unwanted assets
–> existing assets that are no longer use to the business

-sale of inventories
–> no stocks (just in time stock management)

-owner’s savings
–> owner puts in their savings for business

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15
Q

3 short term finance?

A

-trade credit
–> buying goods on credit

-bank overdraft
–> bank allowing more withdrawal than money in bank account

-debt factoring

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16
Q

3 medium term finance?

A

-hire purchase
–> installments (machines) (paying little bit up front and rest on monthly basis)

-leasing
–> renting out things (usually expensive things)

-bank loan
–> borrowing money from bank for a purpose

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17
Q

3 long term finance?

A

-shares
–> for limited companies, anyone can buy shares and become shareholder

-debentures
–> for limited companies, take money from investors

-mortgage
–> land is taken if loans can’t be paid back

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18
Q

disadvantages of trade credit [3]

A

-need to pay back before receiving next batch of goods
-if its not paid back, supplier might to go competitors
-may not get paid back (issue for sellers)

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19
Q

advantages of trade credit [2]

A

-can buy the goods needed immediately
-no interest unless theres a delay in repaying (sue / additional charges)

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20
Q

disadvantages of bank overdraft [4]

A

-in debt
-have to pay back on demand (short term)
–> lose control
-high rate of interest
-risky for bank –> no security

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21
Q

disadvantages of hire purchase [2]

A

-not the owner until payment is finished (can’t resell)
-company can repossess the asset

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21
Q

advantages of hire purchase [2]

A

-can immediately start to make output and earn money
-can use machine immediately to get income

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21
Q

advantages of leasing [4]

A

-flexibility
–> can easily change product
–> no hassle of ownership
-good for short term needs

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21
Q

disadvantages of leasing [2]

A

-never become the owner
-can’t own property

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21
advantages of bank loans [2]
-cheap -flexible --> can use money for many purposes
22
disadvantages of bank loans [3]
-lots of paperwork -need to pay back with interest -lose control
23
advantages of shares [3]
-don't need to return money earned -no interest / charge -raises huge sums of money
24
disadvantages of shares [2]
-have to share profits sometimes -lose control
25
advantages of debentures [3]
-lending money, not ownership so still have control / no ownership loss -lots of government formalities (no frauds) -raises huge sums of money
26
disadvantages of debentures [2]
-have to return the money -pay interest every year
27
who are business angels?
-people investing in new businesses for profit, not for making it flashy -usually people with lots of money
28
what is mortgage?
-if you own lots of land, property is mortgaged to land -you take a loan and if you can't pay it back, property is taken away
29
4 alternative sources?
-grants -subsidy -microfinance -crowd funding
30
what are grants?
money given to businesses from the government to help --> no need to return / no charges --> usually for businesses doing something that benefits society (located in remote area, product preserves culture / country)
31
what is subsidy?
products that are given by the government --> necessary goods (petrol) --> no need to pay back and the government takes loss --> selling price is lowered to compete with international brands
32
what is microfinance?
borrowing small amounts / low cost items from specialist agents (specialised institutions / specific banks) --> agriculture for farmers --> need to pay back with interest -made because banks don't loan small amounts
33
what is crowd funding?
borrowing money from people, not banks (online sometimes) --> small amounts sometimes --> no paying back, donations / buying products
34
how do businesses make the choice of finance?
-purpose of money -time period needed for -amount needed -form of business -->sole trader? limited company? -size of business -control --> losing / dividing control? -risk --> interests need to be repaid --> could lead to bankruptcy -gearing --> relying too much on borrowings? --> lots of borrowed money = high gear = bad reputation)
35
short term financial needs?
36
retained profits advantages [1]
no need to be repaid, no interest
37
retained profits disadvantages [3]
-for well developed businesses only -profit too low -reduced payments to owners
38
sale of unwanted assets advantages [2]
-makes better use of capital -doesn't increase business's debts
39
sale of unwanted assets disadvantages [3]
-takes time to sell -amount raised isn't certain until it's sold -not for new businesses as they don't have assets
40
sale of inventories advantages [2]
-saves storage costs -reduces raw materials bought
41
sale of inventories disadvantages [1]
customers may be disappointed if there's not enough goods in stock
42
owner's saving advantages [2]
-no interest -available quickly
43
owner's saving disadvantages [2]
-savings may be low -increases owner's risk as they have unlimited liability
44
5 external finance examples?
-issue of shares -bank loans -selling debentures -factoring of debts -grants and subsidies from outside agencies
45
adv of issue of shares [2]
-permanent source (no repaying) -no interest
46
adv of bank loans [3]
-varying for length of time -quick to arrange -large companies = low interest for large sums
47
adv of selling debentures [1]
to raise very long term finance (25 years)
48
adv of factoring of debts [2]
-immediate cash available -risk of collecting debt is factor's, not business's
49
adv of grants / subsidies from outside agencies [1]
-no need to be repaid
50
disadv of grants and subsidies from outside agencies [1]
-given with strings attached (certain criteria) --> particular area is the location
51
disadv of factoring of debts [1]
doesn't receive 100% of the value of the debts
52
disadv of selling debentures [1]
need to be repaid with interest
53
disadv of bank loans [2]
-need to be repaid with interest -security is required --> bank can sell some of business's or owner's property if loan isn't repaid
54
how to convince banks to give loans to business?
-cash flow forecast --> why money is needed --> where it will be used -income statement, forecast for next --> shows chances of business making profit -details of existing loans and sources of finance being used -evidence that security is available for bank -business plan the clearly states business's purpose
54
disadv of issue of shares [3]
-dividends are paid after tax -dividends are expected by shareholders -ownership of the business may change (lose control)
55
how to convince shareholders to buy shares?
-if company's share price is increasing -dividends are high -profits are rising (dividends increase in future) -if other companies are bad investments -company has good reputation -company has plans for future growth

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