3.2 - Finance Flashcards
What does sources of business mean?
The capital needed to start up, run and grow the business
What is the meaning of internal sources of finance?
Capital that is raised within a business
What is the meaning of external sources of finance?
Capital found outside the business
What are some internal sources of finance?
Retained profit
Personal savings
Selling assets
What are some eternal sources of finance?
Share capital Trade credit Hire purchase Loans from friends or family Government grants Bank loans or mortgages
What is retained profit?
This is profit that the business has effectively saved whilst it has been operating (running).
Retained profit is a cheap source of finance because a business does not have to pay any interest.
Internal
What is personal savings?
This is personal money that is invested by the owner of a company.
It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund their business venture.
Internal
What is selling assets?
A business can sell its assets to raise cash. For example, a company can sell buildings or machinery that they do not use.
Internal
What is a share capital?
A firm can sell share capital (some of its shares) to other people or companies. They give away a percentage of the company in return for getting finance invested in the business.
What is trade credit?
Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.
What is hire purchase?
This is when a business buys something and instead of paying for it upfront pays for it in instalments.
What is loans from family or friends?
Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment.
What is a grant?
A government may give grants (money) to companies to research things that the government is interested in.
What is a mortgage or bank loan?
A business borrows money from a bank and then pays interest on the money borrowed.
What is cash flow?
Cash flow is the amount of money that is coming in and out of a business and the timings of these cash transfers
What is cash inflow?
Cash inflows is the cash coming into the business
What is cash outflow?
Cash outflows is the cash going out of the business.
What is opening balance?
Opening Balance is the amount of cash that the business starts to trade with
What is closing balance?
Closing balance is the amount of cash that a business finishes trading with
What is net cash flow?
Net cash flow = cash inflows - cash outflows
receipts - payments
What is cash flow forecasts?
Cash flow forecasts are a business’ prediction of how much money will come in and out of the business in a given amount of time
How can businesses forecast cash inflows and outflows?
By using past data
Market research
What is a liquidity problem?
A liquidity problem is when a business runs out of cash in the short-term. They won’t have enough cash to pay peoples’ wages and pay rent.
