Influences on financial management

Question 1

What are the internal sources of finance?

Answer 1

comes either from the business’s owners (equity or capital) or from the outcomes of business activities.

Question 2

What are retained profits?

Answer 2

Money that has been earned by the business and has not been distributed to shareholders in dividends.
NET PROFITS – DIVIDENDS = RETAINED

Question 3

What are the external sources of finance?

Answer 3

Short term, and long term borrowing

Question 4

What are the types of short term borrowing?

Answer 4

• Overdraft: bank allows a business to overdraw its account to a predetermined limit
• Commercial bills: type of loan issued by non-bank institutions
• Factoring: selling of accounts receivables for a discounted price to a finance or factoring company

Question 5

What are the types of long term borrowing?

Answer 5

• Mortgage: Loan secured by the property of the business
• Debentures: issued by a company for a fixed rate of interest and for a fixed period of time
• Unsecured notes: loan for a set period of time but is not backed by any collateral or assets
• Leasing: involves for the payment of money for the use of equipment that is owned by another party

Question 6

What are the types of equity?

Answer 6

• Private equity: Raised by a private company through selling partial ownership of the business.
• Public equity: Raised by a public company by selling partial ownership of the business through the sale of shares to the general public.
• Ordinary and Preference shares:
  o Ordinary shares – their owners do not have voting rights at AGMs.
  o Preference shares provide more security.
• New share issues: Company sells its shares for the first time and all the money raised goes to the company itself.
• Rights issues: Company wishes to sell additional shares and organises a rights issue for existing shareholders.
• Share placements: Company offers additional shares to institutions and other major investors to raise urgent funds.