3.1 Sources of finance

Question 1

Define Capital expenditure

Answer 1

money spent to acquire fixed assets in a business. Capital expenditures are long-term investments intended to assist businesses to succeed and grow. Fx buying a van(business car)

Question 2

Define Revenue expenditure

Answer 2

Money used in the day-to-day running of a business. Fx rent, wages, raw material, insurance and fuel. Do not involve the purchase of longer-term, fixed assets. Revenue expenditure needs to be covered immediately.

Question 3

Define Internal sources of finance

Answer 3

money obtained from within the business and is usually from already established businesses.

Question 4

Define Personal funds

Answer 4

a source of finance for sole traders that comes mostly from their own personal savings. This maximize their control over the business. This shows commitment to the business.

Question 5

Define Retained profit(ploughed-back profit)

Answer 5

profit that remains after a business has paid corporation tax to the government and dividends to shareholder.

Used in Profit & loss account and balance sheet.

Question 6

Outline the advantages of Retained profit(ploughed-back profit)

Answer 6

Cheap as it doesn’t incur interest charges

Permanent source of finance as it does not have to be repaid

Flexible as it can be used in a way the business deems fit

The owner have control over their retained profits without interference from other financial institutions such as banks.

Question 7

Outline the disadvantages of Retained profit(ploughed-back profit)

Answer 7

Start-up businesses will not have any retained profits as they are new ventures

If too low, it may not be sufficient for expansion

Some owners may overuse the retained profit and leave no buffer for emergencies or for future growth opportunities

A high retained profit may mean that either very little or nothing was paid out to shareholders as dividends.

Question 8

Define Sale of assets

Answer 8

when a business sells off its unwanted or unused assets to raise funds. In some cases businesses may adopt a sale and lease back option.

Question 9

Define Working capital

Answer 9

is money that is brought in through sales of a good or services. Many business use this to pay for revenue expenditures. Current assets(Stocks, cash, debtors) - current liabilities(Creditors, overdraft, short-term loans).

Question 10

Define External sources of finance

Answer 10

money obtained from sources outside the business.

Question 11

Define Share capital(equity capital)

Answer 11

money raised from the sale of shares of a limited company. Buyers of these shares are known as shareholders. Authorized share capital suggest the maximum amount the shareholder of a company intend to raise.

Question 12

Define Loan capital

Answer 12

money sourced from financial institutions such as banks, with interest charged on the loan to be repaid.

Question 13

Define overdrafts

Answer 13

when a lending institution allows a firm to withdraw more money than it currently has in its account

Question 14

Define Trade credit

Answer 14

an agreement between businesses that allows the buyer of goods or services to pay the seller at a later date

Question 15

Define grants

Answer 15

funds usually provided by a government, foundation, trust, or other agency to businesses that do not need to be repaid

Question 16

Define subsidies

Answer 16

financial assistance granted by a government, a non-government organization (NGO), or an individual to support business enterprises that are in the public interest

Question 17

Define debt factoring

Answer 17

a financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business with a percentage of the owed debt in cash

Question 18

Define leasing

Answer 18

a source of finance that allows a firm to use an assets without having to purchase it by cash

Question 19

Define venture capital

Answer 19

financial provided by investors to high-risk, high-potential start-up firms or small businesses.

Question 20

Define Business angels(angel investors)

Answer 20

highly affluent individuals who provide financial capital to small start-up or entrepreneurs in return for ownership equity in their businesses

Question 21

Define Short-, medium- and long-term finance

Answer 21

In determining wheter to classify a source of finance as short, medium or long term, it is important to consider the investor’s personal preference or the type of assets under consideration.

Question 22

Define Short-term finance

Answer 22

This is money needed for the day-to-day running of a business and therefore provides its needed working capital. (expected to be paid with 12 months of trading or financial year)

Question 23

Define medium-term finance

Answer 23

This is money mostly used to purchase assets such as equipment or vehicles that have useful lifespans for a specific period of time. (duration period between 1 and 5 years)

Question 24

Define long-term finance

Answer 24

This is funding obtained for the purpose of purchasing long-term fixed assets or other expansion requirements of a business.

Question 25

Define Purpose of use fund

Answer 25

Businesses will need to match the source of finance carefully to their specific requirements.

Question 26

Define cost

Answer 26

Business will need to consider thoroughly all the costs associated with obtaining a source of finance.

Question 27

Define status size

Answer 27

Public limited companies can obtain finance from various sources, whereas sole traders will not be able to, Because soletrader are less well known and smaller in size than public limited.

Question 28

Define Amount required

Answer 28

For small amounts, firms may consider mostly short-term sources of finance such as bank overdrafts while, for larger amounts, long-term bank loans or issue of share are available options.

Question 29

Define Flexibility

Answer 29

This look into the ease with which a business can switch from one source to another.

Question 30

Define State of the external environment

Answer 30

This involves factors that the business has no control of.

Question 31

Define gearing

Answer 31

This refers to the relationship between share capital and loan capital. If a company has a larger proportion of loan capital to share capital it is said to be high geared, while a company that is low geared has a smaller proportion of loan capital to share capital.

Question 32

Define business angels

Answer 32

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Question 33

Outline the sources of finance a partnership has

Answer 33

Business angels, Grants, leasing, loan, overdraft, personal funds, retained profit, trade credit, venture capital

Question 34

Outline the sources of finance a private limited company has

Answer 34

Business angels, Grants, leasing, loan, overdraft, retained profit, shares, trade credit, venture capital

Question 35

Outline the sources of finance a public limited company has

Answer 35

Grants, leasing, loan, overdraft, retained profit, shares, trade credit

Question 36

Outline the sources of finance a non-profit organization har

Answer 36

Donations, Grants, leasing, loan, overdraft, retained profit, trade credit

Question 37

Outline the sources of finance a sole trader has

Answer 37

Business angels, Grants, leasing, loan, overdraft, personal funds, retained profit, trade credit, venture capital

Question 38

Define crowdfunding

Answer 38

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Question 39

Define microfinance

Answer 39

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