Unit 5.1 Business Finance Flashcards
(15 cards)
Finance Definition
Money available to spend on the business needs
Why do businesses need finance?
- expansion
- for start up capital
- R&D –> new products
- Day to day expenses
- Enter new markets
Working Capital
The finance needed to pay for raw materials, day to day running costs and credit offered to customers.
Working Capital
Current assets (inventory) - Current liabilities (amount that customers owe you)
Why do businesses need SUFFICIENT Working Capital?
To be able to pay for its immediate or short term debts. Inadequate working capital may force a business into “LIQUIDATION” by its creditor.
2 Ways a business spend their finances
- Capital Expenditure
- Revenue Expenditure
Capital Expenditure (Long term)
Money spent on fixed assets (machinery, buildings etc) which lasts for more than 1 year
Revenue Expenditure (Short term)
Money spent on day to day expenses which do not involve the purchase of long term assets e.g wages & debts. Lasts for less than 2 years or as little as a few months
Difference between Short term and Long term
Is how long you have to pay back the loan
Internal finance
Obtained from within the business itself
Retained Profit (Internal Finance)
Profit kept in the business after owners have given their share of the profit. Firms can reinvest the profit into the business.
Retained Profit Advantages
- does not have to be repaid unlike a loan
- no interest has to be paid
Retained Profit Disadvantages
- new business will not have retained profit
- profits may be too low to finance
Sale of existing assets
Assets that the business don’t need anymore e.g. unused buildings or spare equipment can be sold to raise finance
Sale of existing assets Advantages
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