Chapter 26 (business finance) Flashcards Preview

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Flashcards in Chapter 26 (business finance) Deck (18):

Why does business activity requires finance?

1. start-up.
Setting up a business will require cash injections from the
owners to purchase essential capital equipment and premises.

2. working capital.
Working capital is the capital needed to pay for raw
materials, day-to-day running costs and credit
offered to customers.

3. expansion.
When businesses expand, further finance will be needed to
increase the capital assets held by the firm – and, often,
expansion will involve higher working capital needs


How to calculate working capital?

current assets – current liabilities


revenue expenditure is?

Revenue expenditure is the spending on all costs and assets other than fixed assets.
materials bought for stock


Capital expenditure is?

involves the purchase of assets that are expected to last for more than one year.
such as:
building and machinery


how important is Working capital?

Working capital is often described as the ‘lifeblood’
of a business.
Without sufficient working capital a business will be illiquid (unable to pay its immediate or short-term debts)


what is Liquidity?

it is the ability of a firm to be able to pay its short-term debts


what is Liquidation?

it is when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors


what is internal source of finance?

Internal money raised from the business’s own
assets or from profits left in the business.
e.g Profits retained in the business, Sale of assets, Reductions in working capital


what is external source of finance?

External money raised from sources outside the
e.g Bank overdrafts, Trade credit, Debt factoring


Medium-term sources of External finance.

1.Hire purchase


what is Hire purchase?

Hire purchase means an asset is sold to a company that agrees to pay fixed repayments over an agreed time period – the asset belongs to the company


what is Leasing?

Leasing means obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. Ownership remains with the leasing company


Long-term sources of External finance?

1.Long-term loans from banks
2.Long-term bonds or debentures
3.Sale of shares – equity finance
5.Venture capital


what are Long-term loans?

Long-term loans are loans that do not have to be repaid for at least one year


what are Long-term bonds or debentures?

Long-term bonds or debentures are bonds issued by companies to raise debt finance, often with a fixed rate of interest


Sale of shares – equity finance is?

Equity finance is permanent finance raised by companies through the sale of shares


what are Grants?

-Government grants are usually given to small
businesses or those expanding businesses.

-Grants often come with conditions attached, such as location and the number of jobs to be created.

-but if conditions are met, grants do not have to be


what is Venture capital?

Venture capital is risk capital invested in start-ups or expanding small businesses that have good profit potential but do not gain finance easily from other sources.