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Business Studies > 2.1 (Not On Exam) > Flashcards

2.1 (Not On Exam) Flashcards

1
Q

What is capital expenditure? Give three examples.

A

Spending on items that may be used over and over again. E.g. company vehicle, a new factory, machinery, etc.

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2
Q

What is revenue expenditure? Give three examples.

A

Revenue expenditure refers to the payments for goods and services that have either already been consumed or will be very soon. E.g. wages, raw materials, repair of machines.

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3
Q

What is internal finance?

A

Internal finance is money generated by the business or the current owners.

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4
Q

What is retained profit?

A

Retained profit is profit after tax that is put back into business and not returned to the owners.

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5
Q

What are two advantages of retained profits?

A
  • It is the cheapest source of finance, with no financial charges such as interest.
  • Retained profit is a flexible source of finance as it does not need to be used immediately and can be retained in a bank account.
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6
Q

What are three disadvantages of retained profit?

A
  • There is an opportunity cost. If retained profit is used by the business it cannot be returned to the owners.
  • For limited companies it means that shareholders receive lower dividends.
  • Retained profit is not a possible source of finance if a business doesn’t make a profit.
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7
Q

What is the sale of assets?

A

When a business sells some unwanted assets to raise finance.

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8
Q

What are some examples of assets that may be sold? (4)

A

Machinery, obsolete stock, land and buildings that are no longer required.

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9
Q

What is a sale and leaseback agreement?

A

The practice of selling assets, such as property or machinery, and leasing them back to the buyer.

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10
Q

What is an advantage of a sale and leaseback agreement?

A

Instant cash is generated for the seller and the responsibility for the maintenance of the asset passes to the new owner.

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11
Q

What are three advantages of internal finance?

A
  • The capital is available immediately-no time delay. E.g. retained profit will be in a bank account ready and waiting. Assets can be quickly if price is competitive.
  • Internal finance is cheap- there are no interest payments, which means that costs will be lower and profits will be higher.
  • There is no need to involve third parties.
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12
Q

What are three disadvantages of internal finance?

A
  • Internal finance can be limited- may not have sufficient profits to use retained profits, or may not have unwanted assets to sell, or the current owners may not have any personal resources to contribute.
  • There are no inflationary benefits with internal finance. Inflation can reduce the value of debt if external sources are used.
  • Opportunity cost can be high. E.g. a plc considering the use of retained profits for funding will have to consider the reactions of shareholders if dividends are frozen or cut.
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13
Q

What are two advantages of selling assets (internal finance source)?

A
  • Improve efficiency.

- Increase capacity utilisation.

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14
Q

What are two disadvantages of selling assets (internal finance source)?

A
  • May not raise enough money for growth/expansion.

- Less on balance sheet- unattractive to investors.

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15
Q

What is external finance? Give three examples.

A

Money raised from outside the business. E.g. banks, investors, lenders.

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16
Q

What are the six sources of finance?

A
  • Family and Friends.
  • Banks.
  • Peer-to-peer lending.
  • Business angels.
  • Crowd funding.
  • Other businesses.
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17
Q

What are the 7 methods of finance?

A
  • Loans.
  • Share capital.
  • Overdrafts.
  • Venture capital.
  • Trade credit.
  • Grants.
  • Leasing.
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18
Q

What are two advantages of family and friends as a source of finance?

A
  • Cheap source because if it is a loan, interest charges may be low, or zero.
  • Friends and family may not want a stake in the business, which helps maintain control of business.
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19
Q

What is a disadvantage of friends and family as a source of finance?

A

If a loan cannot be repaid, or there is some confusion about the loan, it could result in a loss of friendship or a breakdown in family relations.

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20
Q

What is an advantage of using banks as a source of finance?

A

Banks might offer free advisory services to businesses.

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21
Q

What is a disadvantage of using banks as a source of finance?

A

A formal application is required to get finance from banks and it will probably be necessary to provide a business plan.

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22
Q

What is peer-to-peer lending?

A

Where individuals lend to other individuals without prior knowledge of them, on the internet.

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23
Q

What is a debenture?

A

A long term loan to a business.

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24
Q

What is a bank overdraft?

A

An agreement between a business and a bank that means a business can spend more money than it has in its account.

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25
Q

What are three advantages of peer-to-peer lending?

A
  • Anyone can apply for a peer-to-peer loan.
  • Interest rates are better for both borrowers and lenders than those offered by a bank.
  • Very convenient because it can be completed online fairly quickly.
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26
Q

What are three key features of peer-to-peer lending?

A
  • All transactions take place online.
  • No previous knowledge or relationship between lenders and borrowers needed.
  • Peer-to-peer sites make a charge.
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27
Q

What is a disadvantage of peer-to-peer lending?

A

If you are a lender, access to cash may not be instant (could be months).

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28
Q

What are business angels?

A

Individuals who typically invest between £10,000 and £100,000+, often in exchange for a stake in a business.

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29
Q

What are three disadvantages of using business angels?

A
  • It is difficult to find a suitable business angel with similar interests and a common view about the future direction of the firm.
  • Business angels may be demanding with not much time for the business.
  • Have to share profits with business angels.
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30
Q

What is crowd funding?

A

Where a large number of individuals invest in a business or project on the internet.

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31
Q

What are two advantages of crowd funding?

A
  • No upfront fees.

- Businesses can generate funds and promote the business at the same time.

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32
Q

What is a disadvantage of crowd funding?

A

May need to create a promotional video which could be costly or time consuming.

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33
Q

What is a disadvantage of using other businesses as a source of finance?

A

Other businesses might only buy shares with a view of taking over the company in the future.

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34
Q

What is a loan?

A

An arrangement where the amount borrowed must be repaid over a clearly stated period of time, in regular instalments.

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35
Q

What are the three different sorts of loan capital?

A
  • Bank loans.
  • Mortgages.
  • Debentures.
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36
Q

What is an unsecured loan?

A

A loan where the lender has no protection if the borrower fails to repay the money owed.

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37
Q

What is an advantage of a bank loan?

A

They can be used for long term or short term purposes depending on the needs of the business.

38
Q

Are mortgages secured or unsecured loans?

A

Secured loans.

39
Q

What are secured loans?

A

A loan where the lender requires security, such as property, to provide protection in case the borrower defaults.

40
Q

What is an advantage of a mortgage to the lender?

A

Mortgages are usually cheaper than unsecured loans because there is less risk for the lender.

41
Q

Why might a mortgage be used by a business?

A

They might be used by a business to fund the purchase of premises or a large item of capital equipment.

42
Q

What is a creditor?

A

The holder of a debenture (someone to whom the business owes money).

43
Q

Who uses debentures as a long-term source of finance?

A

Public limited companies

44
Q

What two things are debenture holders entitled to?

A
  • A fixed rate of return.

- They must be repaid on a set date- when the debenture matures.

45
Q

What are two advantages of loans?

A
  • Banks don’t ask for a share in a business.

- Easy to apply for a business loan.

46
Q

What are two disadvantages of loans?

A
  • Banks charge interest on loans.

- Banks ask for security which could see a business owner’s assets being seized if the loan is not paid back.

47
Q

What is issued share capital?

A

The money raised from the sale of shares.

48
Q

What is authorised share capital?

A

The maximum amount shareholders want to raise.

49
Q

What is capital gain?

A

The profit made from selling a share for more than it was bought for.

50
Q

What are the three types of shares that can be issued?

A
  • Ordinary shares (most risk).
  • Preference shares (least risk).
  • Deferred shares (not used often).
51
Q

What is the riskiest type of share?

A

Ordinary shares are the riskiest because there is no guaranteed dividend.

52
Q

What are preference shares?

A

Shares where the owners of shares receive a fixed rate of return when a dividend is declared.

53
Q

Why do preference shares carry less risk?

A

Less risky because shareholders are entitled to their dividend before the holders of ordinary shares.

54
Q

What does it mean when shares are cumulative?

A

The holder is entitled to dividend arrears from years when dividends were not declared.

55
Q

What does it mean when shares are redeemable?

A

They can be bought back by the company.

56
Q

What are venture capitalists?

A

Providers of funds for small or medium-sized companies that may be considered too risky for other investors.

57
Q

What are two advantages to the borrower of venture capital?

A
  • Businesses can turn to venture capitalists for funding when they have been refused by other sources.
  • Useful for large amounts of money in a short period of time.
58
Q

What is a disadvantage to the borrower of venture capital?

A

Venture capitalists usually take a stake in the company, which means they have some control and are entitled to a share in the profit.

59
Q

What are two advantages of bank overdrafts?

A
  • Can be arranged on the phone or online.

- Businesses only pay interest on the amount overdrawn.

60
Q

What are two disadvantages of bank overdrafts?

A
  • Businesses can be charged heavily if they go over their overdraft.
  • Very high charges and interest rates.
61
Q

What is a lease?

A

A contract in which a business acquires the use of resources such as property, machinery or equipment, in return for regular payments.

62
Q

What are two advantages of a lease?

A
  • Lower monthly costs than a loan.

- The leasing firm maintain the equipment so the business will always have reliable working equipment.

63
Q

What are two disadvantages of a lease?

A
  • Over a long period of time, leasing is more expensive than the outright purchase of plant and machinery.
  • Loans cannot be secured on assets which are leased.
64
Q

What is trade credit?

A

Trade credit is when a business has a certain amount of time (usually between 30-90 days) to pay for goods instead of an instant payment.

65
Q

What are two advantages of trade credit?

A
  • Businesses can sell the goods before the stock needs to be paid for, so can make a profit before the costs have to be paid.
  • No interest has to be paid.
66
Q

What are two disadvantages of trade credit?

A
  • Failure to pay on time could risk being refused further credit by the supplier in the future.
  • Not all stock is available to buy using the trade credit method.
67
Q

What is a grant?

A

When the government provides financial help to businesses.

68
Q

What are three advantages of grants?

A
  • No interest.
  • Usually don’t have to pay grant back.
  • Don’t have to give away shares of the business.
69
Q

What are three disadvantages of grants?

A
  • Lots of competition for grants.
  • The application can be very complex and time-consuming.
  • The business may be expected to match the funds they are awarded.
70
Q

What are three implications of unlimited liability?

A
  • If a business collapses while owing money to external parties such as banks, the owners will have to meet these debts from their personal resources.
  • Owners of businesses with unlimited liability are liable for any unlawful acts committed by the owners or the employees.
  • Businesses with unlimited liability sometimes find it easier raising finance. This is because lenders will be reimbursed if a business defaults.
71
Q

What are three implications of limited liability?

A
  • If a limited company collapses, the owners’ private assets are fully protected.
  • Shareholders have protection from legal claims on the business because the owners and the business have separate legal identities.
  • Because shareholders’ private assets are protected, limited companies may find it easier to raise large amounts of money from investors.
72
Q

What is an incorporated business?

A

A business model in which the business and the owners have separate legal identities.

73
Q

What is an unincorporated business?

A

A business model in which there is no legal difference between the owners and the business.

74
Q

What is collateral?

A

An asset that might be sold to pay a lender when a loan cannot be repaid.

75
Q

What is meant by undercapitalised?

A

A business not raising enough capital when setting up.

76
Q

What factors influence the method of finance chosen by a business? (5)

A
  • Whether short term or long term finance is needed.
  • The financial position of the business.
  • The type of expenditure for which the money is needed.
  • Cost.
  • The legal status of the business.
77
Q

What methods of finance would a business use for short term finance? (3)

A
  • Trade credit.
  • Bank overdrafts.
  • Leasing.
78
Q

What methods of finance would a business use for long term finance? (3)

A
  • Mortgages.
  • Debentures.
  • Share capital.
79
Q

How does the financial position of the business impact the method of finance chosen by a business?

A

Financial institutions are more willing to lend to secure businesses, which have a large amount of collateral.

80
Q

In what way does the type of expenditure for which the money is needed, influence the method of finance chosen by a business?

A

When a company undertakes heavy capital expenditure, it is usually funded by a long-term source of finance.

81
Q

Why does the cost influence the decision of which method of finance is chosen by a business?

A

Businesses will prefer sources and methods that are less expensive.

82
Q

Why does the legal status of the business influence the choice of which method of finance to use?

A

Whether a business has limited or unlimited liability can have an influence on the best and most accessible methods of finance for a business.

83
Q

Do unlimited liability businesses have more or less sources and methods of finance to choose from than limited liability businesses?

A

They have fewer to choose from.

84
Q

Which sources and methods of finance are unlimited liability businesses most likely to use? (8)

A
  • Personal savings.
  • Retained profit.
  • Mortgage.
  • Unsecured bank loan.
  • Peer-to-peer lending.
  • Crowd funding.
  • Bank overdraft.
  • Grants.
85
Q

Which sources and methods of finance are appropriate for limited liability businesses? (10)

A
  • Share capital.
  • Debentures.
  • Retained profit.
  • Venture capitalists.
  • Business angels.
  • Other sources (bank overdrafts, trade credit, leasing, mortgages, etc).
86
Q

What is a business plan?

A

A document which sets out the future plans for a business.

87
Q

What are four reasons for writing a business plan?

A
  • To give owners some direction.
  • To provide an action plan that identifies key tasks that must be undertaken and goals that must be met to improve the chances of success.
  • Identify potential future problems.
  • To persuade lenders that the business will be able to pay back loans with interest due to profit forecasts.
88
Q

What are the nine contents of a business plan?(9)

A
  • An executive summary.
  • The business opportunity.
  • Buying and production.
  • Financial forecasts (including sales forecasts, cash flow forecasts, etc).
  • The business and its objectives (name, address, aims, objectives, etc).
  • The market (size of potential market, the nature of the competition, etc).
  • Personnel (who will run the business, etc).
  • Premises and equipment.
  • Finance.
89
Q

What is an executive summary?

A

It describes briefly the business opportunity to be exploited, the marketing and sales strategy, operations and then finance.

90
Q

Define cash-flow forecast.

A

The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month.

91
Q

What are the uses of cash flow forecasts? (4)

A
  • A forecast can help to identify in advance when a business might wish to borrow cash.
  • It helps to clarify aims and improve performance.
  • Helps control and monitor cash in and out of a business.
  • May help the owner to secure a better deal on their finance, e.g. lower rate loan.
92
Q

What are the limitations of cash-flow forecasts? (3)

A
  • Some of the financial information used in forecasts will be based on estimates.
  • Business activity is subject to external forces that are beyond the control of owners and managers.
  • An owner might spend too much time focusing on the cash-flow forecast at the expense of meeting customer needs.

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