Finance Flashcards
(36 cards)
Name 3 internal sources of finance
- Owners personal finance
- Retained profits
- Sale of Assets
Name 9 external sources of finance
- Share issue
- Debentures
- Bank overdraft
- Trade credit
- Debt factoring
- Grants
- Bank loan
- Leasing
- Hire purchase
- Mortgage
- Venture capitalists
Advantages and Disadvantages of owners personal finance
- allows owner to retain control
- reduce amount borrowed from other sources
- can be difficult to withdraw savings once they’re invested
- Risky for the owner
Advantages and Disadvantages of retained profit
-Can be used to make larger purchase such as assets or for bulk buying
- Makes if hard for the business to grow
- Not always generated
Advantages and Disadvantages of Sale of Assets
- Money can be raised to boost cash flow
- Money doesn’t need to be repaid
-If money is required urgently, the asset may have to be sold for less than it is worth
Advantages and Disadvantages of Share Issue
- Large amounts of capital can be obtained
- Share holders have limited liability
- Finance raised does not have to be repaid
- Selling price of shares varies daily
- Can be expensive
- Only a certain amount can be issued
- Dividends have to be repaid
Advantages and Disadvantages of debentures
- Control of business is retained
- Paid back over a long time
-Interest must be paid back even if losses are made
Advantages and Disadvantages of a bank overdraft
- Easy to arrange
- Allows the business to continue to pay expenses
- High interest rates are usually applied by the bank
- Can be withdrawn by the bank at any time
Advantages and Disadvantages of trade credit
- Allows business to sell stock at a higher price and earn a profit
- keeps business going if cash flow is poor
- Discount for prompt credit is lost
- Supplies may be reluctant to offer credit
Advantages and Disadvantages of debt factoring
- Responsibility is passed on saving time and effort
- Cash flow is improved
- Has to be sold for reduced amount
- only can be done for large amounts
Advantages and Disadvantages of grants
- Usually given as an incentive to get started or expand
- Doesn’t need to be repaid
- Can be complicated to apply for
- One off payments that aren’t repaid
Advantages and disadvantages of bank loans
- Can budget for repayment
- Purchases for essential equipment can be paid back over many years
- Interest
- Hard to secure for small businesses
Advantages and disadvantages of leasing
- Saves on cost of purchase of paying outright
- Equipment can be easily kept up to date
- Can be more expensive over a long period of time
- Leased item is not owned by the business
Advantages and disadvantages of hire purchase
- Expensive equipment can be bought with only one deposit
- Owned by the business at the end of the repayment period
- Does not own the asset until last repayment
- Can be more expensive
Advantages and disadvantages of a mortgage
- Repaid over a long period of time
- Interest rate is often lower than that of a bank loan
- Interest is added
- The mortgage provider officially owns the property
Advantages and disadvantages of venture capitalists (business angels)
- Source of finance for companies with poor credit rating
- Large amounts retained
- Not suitable for small sums of money
- Part ownership may have to be provided in return
Factors for selecting source of finance
- Interest Rates
- Payback term
- Short term finance required
- Long term finance required
- Size and type of organisation
Why are cash budgets important to management?
POCCCDM Plan Organising Command Coordination Control Delegation Motivation
Benefits of preparing a cash budget
- Shows whether the business will have a surplus or a deficit
- Shows whether additional finance is required
- Helps control expenses
- Helps to make decisions
- Measures the performance
Uses for cash budgets
- A target for the organisation to work towards
- Each department can have its own budget
- Management can compare actual spending to budgeted spending
Sources of cash flow problems
-Tying up to much cash in inventory
-Allowing customers too much credit
Customers not paying within agreed payment terms
-Low Saes
-Purchase of capital items
Resolving cash flow problems
- Do not buy too much inventory
- Cut credit limit
- Reduce the price or hold promotion to encourage sales
- Rent out equipment
Users of financial statements
Owners Employees Inland revenue (HMRC) Trade unions Competitors Investors Lenders
what does the statement of financial position show
Assets, Liabilities and Equity
