3.2 - Finance

Question 1

What does sources of business mean?

Answer 1

The capital needed to start up, run and grow the business

Question 2

What is the meaning of internal sources of finance?

Answer 2

Capital that is raised within a business

Question 3

What is the meaning of external sources of finance?

Answer 3

Capital found outside the business

Question 4

What are some internal sources of finance?

Answer 4

Retained profit
Personal savings
Selling assets

Question 5

What are some eternal sources of finance?

Answer 5

Share capital
Trade credit 
Hire purchase 
Loans from friends or family 
Government grants 
Bank loans or mortgages

Question 6

What is retained profit?

Answer 6

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

Question 7

What is personal savings?

Answer 7

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

Question 8

What is selling assets?

Answer 8

A business can sell its assets to raise cash. For example, a company can sell buildings or machinery that they do not use.
Internal

Question 9

What is a share capital?

Answer 9

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.

Question 10

What is trade credit?

Answer 10

Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.

Question 11

What is hire purchase?

Answer 11

This is when a business buys something and instead of paying for it upfront pays for it in instalments.

Question 12

What is loans from family or friends?

Answer 12

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.

Question 13

What is a grant?

Answer 13

A government may give grants (money) to companies to research things that the government is interested in.

Question 14

What is a mortgage or bank loan?

Answer 14

A business borrows money from a bank and then pays interest on the money borrowed.

Question 15

What is cash flow?

Answer 15

Cash flow is the amount of money that is coming in and out of a business and the timings of these cash transfers

Question 16

What is cash inflow?

Answer 16

Cash inflows is the cash coming into the business

Question 17

What is cash outflow?

Answer 17

Cash outflows is the cash going out of the business.

Question 18

What is opening balance?

Answer 18

Opening Balance is the amount of cash that the business starts to trade with

Question 19

What is closing balance?

Answer 19

Closing balance is the amount of cash that a business finishes trading with

Question 20

What is net cash flow?

Answer 20

Net cash flow = cash inflows - cash outflows

receipts - payments

Question 21

What is cash flow forecasts?

Answer 21

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

Question 22

How can businesses forecast cash inflows and outflows?

Answer 22

By using past data

Market research

Question 23

What is a liquidity problem?

Answer 23

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.