5. Sources of Finance Flashcards
What is the importance of finance in a business?
-Control costs and expenditure
-Monitor cash flow
-Forecast trends
-Monitor Performance
-Inform decision making
What is the role of finance in a business?
to make sure that a business has enough cash to survive and to produce financial documents that will help it to plan and record it financial performance
What are the benefits of effective financial management?
-More money available for activities
-Better business performance
-Increased satisfaction and sales
-Prevents bankruptcy and closure
What is finance required for?
-Purchase or use of premises
-Purchase or use of Capital
-Payment or use of labour
-Business growth and expansion
-General running costs
What is employees interest in financial information?
-to check to see if they are being paid fairly
-to understand decisions (redundances)
What is HMRC interest in financial information?
-to check the right amount of tax is being paid
What is shareholders interest in financial information?
-to help make decisions on how to vote at the AGM
-to decide whether to purchase more shares
-to see if the organisation is paying fair dividends on interest
What is suppliers interest in financial information?
to decide to whether to allow more credit
What is lenders (banks) interest in financial information?
-to determine is a loan should be given
-to show how able the business is at paying off short term debts
What are the 2 main sources of finance?
-internal (inside)
-external (outside)
What are the advantages of internal finance?
-no interest is charged, no additional costs
-owner is in control
What are the disadvantages of internal finance?
-organisations that use retained profits often do not have sufficient levels of income in order to grow quickly
-relying on profits is risky as some months a business may not make profits
What are the advantages of owner own savings?
-the owner has complete control
-reduces the amount which needs to be borrowed
What are the disadvantages to owner own savings?
-savings could be small and may not last long
-owners with unlimited liability would risk their savings
What are the internal sources of finance?
-internal finance
-sales of assests
-owner own finance
What are the advantages of bank overdraft?
-easy to set up
-quick to access finance
What are disadvantages of bank overdraft?
-must be paid back quickly or else can be expensive
What are the advantages of debt factoring?
-the factor chances up the unpaid debt savings the organisation time and moey
what are the disadvantages of debt factoring?
-factors are only interested in large outstanding debts
-the business does not receive the full amount of outstanding debt
What are the advantages of trade credit?
-can sell goods using materials not yet paid for. improving cash flow
What are the disadvantages of trade credit?
-trade credit is at the discretion of the buyer
-a business therefore may not get credit some months
what are the advantages of a bank loan?
-payments are in regular fixed installments
-this makes it easier to budget for
what are the disadvantages of a bank loan?
-interest must be paid along with the amount borrowed
-small businesses tend to pay higher interest
what are the advantages of hire purchases?
cost or purchase is spread over a period of time
what are the disadvantages of hire purchases?
high rates of interest can be charged
What are the advantages of leasing?
equipment can be changed regularly to keep up to date
what are the disadvantages of leasing?
-leasing over a long period of time might prove to be more expensive compared to buying outright
-leased items are not owned by the organisation and is therefore not an asset to them
what are the advantages to government grants?
provides finance which does not have to be repaid
what are the disadvantages to government grants?
-tend to be one off payments
-might be tied to specific projects which the business must undertake
what are the advantages of mortgages?
repayment is over a long period of time
what are the disadvantages of mortgages?
deposit is required upfront
what are the advantages of debentures?
large amounts of capital can be raised
what are the disadvantages of debentures?
if business fails to make interest payments the debentures holder can seize assets
what are the advantages of venture capitalists?
organisations who have poor credit rating might be able to get finance
what are the disadvantages of venture capitalists?
-they expect high returns on their interest
-they may want part ownership of the company (loss of control)
-they are usually only interested in large investment ventures
-not suitable for small organisations
what are the advantages of sale and leaseback?
-selling assets generate large sum of money for the business
-business no longer responsible for repairs
what are the disadvantages of sale and leaseback?
paying rent over a long period of time is more expensive for business
how can the stock market be used to raise finance for a PLC?
-selling new shares
-investing in shares
why invest in the stock market?
investors typically can earn more money buying stocks than they can buy having the money sit in a savings account at the bank
