2.1 Managing Business Activities Flashcards
Definition of Sources of Finance
A place where a business can find money that they may need to pay off debts or for investment
Definition of Expenditure
Spending
Definition of Capital Expenditure
Spending on items that naught be used over and over again
Definition of revenue Expenditure
Payments for goods and services that have already been consumed or will be very soon
Definition of Internal Sources of Finance
Money funds found within the business
Definition of External sources of finance
Money funds found outside the business
Examples of internal sources of finance
Owner’s capital - money provided by the owner
Retained profit - money made by the business but has not yet been spent
Sale of assets - items that the business owns that have value that they can sell
Pros and cons of internal sources of finances
Pros :
Capital is available immediately
It is cheaper - no interest
No third parties involved
Cons :
May not have enough money - funds limited
Is inflexible - not many sources to choose from
Can’t use the money else where if it is spent
Examples of external sources of finances
Crowd funding - local community is asked to give the business money as they may like the product or it provides jobs
Family and friends
Banks - apply for money through an overdraft or a loan
Peer to peer lending - someone directly influenced or no relation to the business lends the business money
Business angels - someone invest into the business and provides both money and expertise
Other businesses - Someone lends to the business influenced or no relation
Leasing/hire purchase
Trade credit
Venture capital
Share capital
Mortgage
Government grant
Pros of external sources of finance
Crowd funding - no interest , increase reputation , way to test the market
Family and friends - no/low interest , probably won’t want to intervene in the running of the business , may be a gift
Banks - gain large amounts , pre-arranged
Peer to peer lending - lower interest rates then bank , more convenient
Business angels - they want it to be successful
Other business - lower interest rates then banks , more convenient
Cons of external sources of finances
Crowd funding - not reliable , may only be used once , time consuming , small amounts of money raised
Family and friends - don’t have the right amount
Banks - interest rates , higher risk of debt
Peer to Peer lending - not secure , hard to organise
Business angels - lose share of business , inter free with decision making
Other businesses - not secure , hard to organise
Types of sources of finance
Short term - used to rains finance quickly - designed to support a business in maintains a positive cash flow , used to cover costs of meeting customer needs
Long term - funds that raise finance over a longer period of time , used to cover the costs of large one off expenses
Examples of short term sources of finances
Selling assets , retained profits , owner profits , leasing/hire purchase , trade credit , overdraft
Examples of long term finances
Retained profit
Venture capital
Share capital
Loans
Crowd funding
Mortgage
Government grant
Definition of Liability
The ability to ensure that debts are paid
