Unit 3 - Business Finance

Question 1

Why do business need finance?

Answer 1

Businesses require finance to cover daily operations, invest in growth, and manage cash flow. Finance is needed for short-term needs, long-term needs, and for starting up or expanding the business.

Question 2

What are short-term finance needs, what might they include and why are they important?

Answer 2

Definition: Funds needed for immediate or near-future expenses.

Examples:
Payment of suppliers
Day-to-day operational costs (wages, rent)
Inventory purchases

Importance: Helps maintain smooth operations and avoid cash shortages

Question 3

What are long-term finance needs, what might they include and why are they important?

Answer 3

Definition: Funds required for investments over a long period of time (more than 1 year)

Examples:
- Purchasing new equipment
- Expanding production facilities
- Research and development

Importance: Supports sustainable growth and business expansion

Question 3

How does finance support a start-up business?

Answer 3

It provides the initial capital required to establish the business. Ensures that the business can launch and operate until it starts generating revenue

Example:
- covering initial expenses (e.g equipment,
premises, marketing)
- Developing products or services
- Setting up operations

Question 3

How is finance used when expanding an existing business

Answer 3

Funds the growth of an already established business.

Must be planned to scale operations without disrupting current business functions

Examples:
- Increasing production capacity
- Entering new markets or launching new
product lines
- Upgrading equipment or facilities

Question 3

What are 4 important consideration when securing finance for either a start-up or expansion?

Answer 3

Capital Availability - Ensure adequate funds are available at the right time

Financial Planning: Align financing with the business’s strategic goals and cash flow needs

Risk Assessment - Evaluate the potential financial risk and long-term impact on ownership/control.

Source Selection - Decide between internal (personal savings, retained profits) or external (loans, investors) sources based on the business’s situation.

Question 4

What are internal sources of finance

Answer 4

Finance that is generated within the business itself without relying on external creditors or investors.

e.g personal savings, retained profit and selling assets

Question 5

2 advantages and disadvantages of using personal savings

Answer 5

+ No need to repay interest
+ Full control remains with the owner

• Often limited in amount
• Risk of personal financial loss if the business
  fails

Question 6

2 advantages and 1 disadvantage of using retained profit

Answer 6

+ inexpensive as it involves no external
borrowing
+ shows financial stability and reinvestment
commitment

• may not be sufficient for large investments

Question 7

How can selling assets provide finance for a business?

Answer 7

Liquidating non-essential or underused assets to generate cash

e.g selling old equipment, property or vehicles

Question 8

2 advantages and disadvantages of selling assets to gain finance

Answer 8

+ immediate cash injection
+ Can reduce ongoing maintenance costs

• Loss of asset utility
• Potential long-term value loss if assets appreciate over time

Question 9

What are eternal sources of finance

Answer 9

Finance obtained from outside the business, often in the form of loans, investments or credit arrangements.
e.g overdrafts, trade payables, loan capital, share capital (including public share offerings), venture capital and crowdfunding.

Question 10

What is an overdraft and how does it function as an external source of finance?