2.1.1. + 2.1.2. Sources Of Finance Flashcards
What is one reason for raising finance?
To pay debts, which may involve a consolidation loan to pay off suppliers.
How can finance help a business during slow trading periods?
By using an overdraft.
What type of finance may a business apply for to expand?
Long term finance such as a loan.
What might a business do to raise finance for a start-up?
Apply for a loan with a business plan or ask friends and family to invest.
How can a business buy stock on credit?
By asking a supplier for trade credit, typically for 30, 60, or 90 days.
What are examples of costs involved in a business?
Rent, Chips, Paper to wrap chips, Wages, Fish, Insurance, Bank loan repayments, Electricity
What is managing working capital?
Managing working capital involves keeping on top of costs and ensuring sufficient funds are available for operations.
Is it easier to have one person or multiple people responsible for managing working capital?
This depends on the business structure and complexity; having one person may streamline decisions, while multiple people can provide diverse insights.
What are the top tips for managing working capital?
- Identify costs involved in making a product before setting a price.
- Work out how many products need to be sold to make a profit.
- Work out how much working capital is needed for the first few months, then pick the best way to get it.
- Keep tight control over spending.
What are start-up costs?
One-off costs incurred in starting up a new business.
What are running costs?
The day-to-day costs involved in keeping a business going once it has launched.
Why do businesses need finance?
All businesses need finance to get started, allow them to grow, and fund their continuing activity.
What is revenue expenditure?
Revenue expenditure is spending on raw materials or day-to-day expenses such as wages or utilities.
What are the two types of sources of finance?
Finance can come from inside the business (internal source) or outside the business (external source).
What constitutes internal finance?
Internal finance comes from the owner’s capital, retained profit, or the sale of assets.
What is owner’s capital?
Owner’s capital refers to personal savings that are a key source of funds when a business starts up.
How can owners provide capital to their business?
Owners may introduce their savings or a lump sum, such as money received from a redundancy payment.
Why might owners invest more in their business?
Owners may invest more as the business grows or if there is a specific need, such as a short-term cash flow problem.
What is retained profit?
Retained profit is the profit generated in previous years that is reinvested back into the business.
Why is retained profit considered a cheap source of finance?
Retained profit is cheap because it does not involve borrowing and associated interest and arrangement fees.
What is the opportunity cost of using retained profit?
The opportunity cost is that shareholders do not receive extra profit for their investment.
What is the sale of assets?
Selling business assets which are no longer required generates a source of finance.
What is a sale and leaseback arrangement?
A sale and leaseback arrangement allows a business to sell an asset and then rent it from the new owners.
