2.1.1 Internal Finance Flashcards
Define finance
Finance means the management of an investment needed to; open, run and grow a business.
What are the two types of finance?
1.) Internal: Investments from within the business.
2.) External: Investments from outside the business.
What are the 5 reasons for raising finance?
1.)To pay debts
2.)To help a business over a slow trading period
3.)To expand
4.)To start-up a business
5.)To buy stock
What is owners capital?
Shows the stake the owner has in the business, this represents the net assets of the company.
When is owner’s capital appropriate
Sole traders and partnerships would be the two business forms which would mostly use owner’s capital to expand and to grow.
What are retained profits?
Business profits made after a year or more of trading that can be re-invested into the business to help it grow.
When is using retained profit appropriate?
After a year or more of trading.
What is the sale of assets?
A business can raise finance by selling items that they already own, these are called assets.
When is the sale of assets appropriate?
When a business is growing it may need to raise cash fast to be able to continue to trade.
What are the advantages of selling assets?
The sale of assets can improve efficiency and increase capacity utilisation.
What are the disadvantages of selling assets?
-May not raise enough finance for growth or expansion.
-May draw questions about how well the business is run.
What are the advantages of using owners capital?
-No interests payments to be made on loans
-Easy access the owner may have the funds sitting in a bank acc.
-No complex paperwork + no security needed.
What are the disadvantages of using owners capital?
-Owner may not have the capital to put into the business + may still need to borrow.
What are the advantages of using retained profits?
-No interest payments to be made on loans
-Easy access to finance, if it is in a bank account it could be accessed the same day.
-Owners keep control
What are the disadvantages of using retained profits?
-Loss of interest payments on savings should the retained profits be left in a savings account instead
-Opportunity cost of not being able to use retained profits elsewhere in the business.
