Planning For The Future Organisation

Question 1

What is meant by a short term loan?

Answer 1

Short-term needs must be paid within the current financial year, e.g. raw materials, wages, light and heat, telephone, advertising, insurance and transport costs. [Current Expenditure)

Question 2

What is meant by medium term loan?

Answer 2

Medium-term needs: spending on items that are likely to last beyond the current financial year that typically have a working life of up to five years. e.g. vehicles and ICT equipment.
[Capital Expenditure]

Question 3

What’s a is meant by a long term loan?

Answer 3

Long-term needs: the purchase of items that will provide benefits to the business over a more extended period of time, more than five years, e.g. premises and machinery. [Capital Expenditure]

Question 4

What are some factors that affect sources of finance?

Answer 4

Purpose of the Finance: day-to-day purchases or fixed assets?
> Amount of Finance Required: long-term sources are more suitable for large amounts, short-term sources for small amounts, etc.
> Cost of Finance: compare APR of each source and lender. (Annual Percentage Rate)
> Control: will the source change the control of the business, e.g. issuing new shares
> Security Required: will the lender require collateral?

Question 5

What are the 3 sources of finance and when should they repaid?

Answer 5

Short-term Finance: repaid within one year
Medium-term Finance: repaid between one and five years
Long-term Finance: repaid over a period longer than five years.

Question 6

What working capital?

Answer 6

Working capital is the money a business has available to fund its day-to-day expenditure
Working Capital = Current Assets - Current Liabilities
Businesses need working capital for liquidity (the ability of a business to pay its day-to-day expenses and debts).