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.
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.
3
Q
What is internal finance?
A
Internal finance is money generated by the business or the current owners.
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.
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.
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.
7
Q
What is the sale of assets?
A
When a business sells some unwanted assets to raise finance.
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.
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.
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.
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.
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.
13
Q
What are two advantages of selling assets (internal finance source)?
A
- Improve efficiency.
- Increase capacity utilisation.
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.
15
Q
What is external finance? Give three examples.
A
Money raised from outside the business. E.g. banks, investors, lenders.
16
Q
What are the six sources of finance?
A
- Family and Friends.
- Banks.
- Peer-to-peer lending.
- Business angels.
- Crowd funding.
- Other businesses.
17
Q
What are the 7 methods of finance?
A
- Loans.
- Share capital.
- Overdrafts.
- Venture capital.
- Trade credit.
- Grants.
- Leasing.
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.
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.
20
Q
What is an advantage of using banks as a source of finance?
A
Banks might offer free advisory services to businesses.
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.
22
Q
What is peer-to-peer lending?
A
Where individuals lend to other individuals without prior knowledge of them, on the internet.
23
Q
What is a debenture?
A
A long term loan to a business.
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.
25
What are three advantages of peer-to-peer lending?
- 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.
26
What are three key features of peer-to-peer lending?
- All transactions take place online.
- No previous knowledge or relationship between lenders and borrowers needed.
- Peer-to-peer sites make a charge.
27
What is a disadvantage of peer-to-peer lending?
If you are a lender, access to cash may not be instant (could be months).
28
What are business angels?
Individuals who typically invest between £10,000 and £100,000+, often in exchange for a stake in a business.
29
What are three disadvantages of using business angels?
- 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.
30
What is crowd funding?
Where a large number of individuals invest in a business or project on the internet.
31
What are two advantages of crowd funding?
- No upfront fees.
| - Businesses can generate funds and promote the business at the same time.
32
What is a disadvantage of crowd funding?
May need to create a promotional video which could be costly or time consuming.
33
What is a disadvantage of using other businesses as a source of finance?
Other businesses might only buy shares with a view of taking over the company in the future.
34
What is a loan?
An arrangement where the amount borrowed must be repaid over a clearly stated period of time, in regular instalments.
35
What are the three different sorts of loan capital?
- Bank loans.
- Mortgages.
- Debentures.
36
What is an unsecured loan?
A loan where the lender has no protection if the borrower fails to repay the money owed.
37
What is an advantage of a bank loan?
They can be used for long term or short term purposes depending on the needs of the business.
38
Are mortgages secured or unsecured loans?
Secured loans.
39
What are secured loans?
A loan where the lender requires security, such as property, to provide protection in case the borrower defaults.
40
What is an advantage of a mortgage to the lender?
Mortgages are usually cheaper than unsecured loans because there is less risk for the lender.
41
Why might a mortgage be used by a business?
They might be used by a business to fund the purchase of premises or a large item of capital equipment.
42
What is a creditor?
The holder of a debenture (someone to whom the business owes money).
43
Who uses debentures as a long-term source of finance?
Public limited companies
44
What two things are debenture holders entitled to?
- A fixed rate of return.
| - They must be repaid on a set date- when the debenture matures.
45
What are two advantages of loans?
- Banks don’t ask for a share in a business.
| - Easy to apply for a business loan.
46
What are two disadvantages of loans?
- 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
What is issued share capital?
The money raised from the sale of shares.
48
What is authorised share capital?
The maximum amount shareholders want to raise.
49
What is capital gain?
The profit made from selling a share for more than it was bought for.
50
What are the three types of shares that can be issued?
- Ordinary shares (most risk).
- Preference shares (least risk).
- Deferred shares (not used often).
51
What is the riskiest type of share?
Ordinary shares are the riskiest because there is no guaranteed dividend.
52
What are preference shares?
Shares where the owners of shares receive a fixed rate of return when a dividend is declared.
53
Why do preference shares carry less risk?
Less risky because shareholders are entitled to their dividend before the holders of ordinary shares.
54
What does it mean when shares are cumulative?
The holder is entitled to dividend arrears from years when dividends were not declared.
55
What does it mean when shares are redeemable?
They can be bought back by the company.
56
What are venture capitalists?
Providers of funds for small or medium-sized companies that may be considered too risky for other investors.
57
What are two advantages to the borrower of venture capital?
- 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
What is a disadvantage to the borrower of venture capital?
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
What are two advantages of bank overdrafts?
- Can be arranged on the phone or online.
| - Businesses only pay interest on the amount overdrawn.
60
What are two disadvantages of bank overdrafts?
- Businesses can be charged heavily if they go over their overdraft.
- Very high charges and interest rates.
61
What is a lease?
A contract in which a business acquires the use of resources such as property, machinery or equipment, in return for regular payments.
62
What are two advantages of a lease?
- Lower monthly costs than a loan.
| - The leasing firm maintain the equipment so the business will always have reliable working equipment.
63
What are two disadvantages of a lease?
- 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
What is trade credit?
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
What are two advantages of trade credit?
- 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
What are two disadvantages of trade credit?
- 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
What is a grant?
When the government provides financial help to businesses.
68
What are three advantages of grants?
- No interest.
- Usually don’t have to pay grant back.
- Don’t have to give away shares of the business.
69
What are three disadvantages of grants?
- 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
What are three implications of unlimited liability?
- 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
What are three implications of limited liability?
- 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
What is an incorporated business?
A business model in which the business and the owners have separate legal identities.
73
What is an unincorporated business?
A business model in which there is no legal difference between the owners and the business.
74
What is collateral?
An asset that might be sold to pay a lender when a loan cannot be repaid.
75
What is meant by undercapitalised?
A business not raising enough capital when setting up.
76
What factors influence the method of finance chosen by a business? (5)
- 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
What methods of finance would a business use for short term finance? (3)
- Trade credit.
- Bank overdrafts.
- Leasing.
78
What methods of finance would a business use for long term finance? (3)
- Mortgages.
- Debentures.
- Share capital.
79
How does the financial position of the business impact the method of finance chosen by a business?
Financial institutions are more willing to lend to secure businesses, which have a large amount of collateral.
80
In what way does the type of expenditure for which the money is needed, influence the method of finance chosen by a business?
When a company undertakes heavy capital expenditure, it is usually funded by a long-term source of finance.
81
Why does the cost influence the decision of which method of finance is chosen by a business?
Businesses will prefer sources and methods that are less expensive.
82
Why does the legal status of the business influence the choice of which method of finance to use?
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
Do unlimited liability businesses have more or less sources and methods of finance to choose from than limited liability businesses?
They have fewer to choose from.
84
Which sources and methods of finance are unlimited liability businesses most likely to use? (8)
- Personal savings.
- Retained profit.
- Mortgage.
- Unsecured bank loan.
- Peer-to-peer lending.
- Crowd funding.
- Bank overdraft.
- Grants.
85
Which sources and methods of finance are appropriate for limited liability businesses? (10)
- Share capital.
- Debentures.
- Retained profit.
- Venture capitalists.
- Business angels.
- Other sources (bank overdrafts, trade credit, leasing, mortgages, etc).
86
What is a business plan?
A document which sets out the future plans for a business.
87
What are four reasons for writing a business plan?
- 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
What are the nine contents of a business plan?(9)
- 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
What is an executive summary?
It describes briefly the business opportunity to be exploited, the marketing and sales strategy, operations and then finance.
90
Define cash-flow forecast.
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
What are the uses of cash flow forecasts? (4)
- 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
What are the limitations of cash-flow forecasts? (3)
- 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.
