5. Sources of Finance

Question 1

What is the importance of finance in a business?

Answer 1

-Control costs and expenditure
-Monitor cash flow
-Forecast trends
-Monitor Performance
-Inform decision making

Question 2

What is the role of finance in a business?

Answer 2

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

Question 3

What are the benefits of effective financial management?

Answer 3

-More money available for activities
-Better business performance
-Increased satisfaction and sales
-Prevents bankruptcy and closure

Question 4

What is finance required for?

Answer 4

-Purchase or use of premises
-Purchase or use of Capital
-Payment or use of labour
-Business growth and expansion
-General running costs

Question 5

What is employees interest in financial information?

Answer 5

-to check to see if they are being paid fairly
-to understand decisions (redundances)

Question 6

What is HMRC interest in financial information?

Answer 6

-to check the right amount of tax is being paid

Question 7

What is shareholders interest in financial information?

Answer 7

-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

Question 8

What is suppliers interest in financial information?

Answer 8

to decide to whether to allow more credit

Question 9

What is lenders (banks) interest in financial information?

Answer 9

-to determine is a loan should be given
-to show how able the business is at paying off short term debts

Question 10

What are the 2 main sources of finance?

Answer 10

-internal (inside)
-external (outside)

Question 11

What are the advantages of internal finance?

Answer 11

-no interest is charged, no additional costs
-owner is in control

Question 12

What are the disadvantages of internal finance?

Answer 12

-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

Question 13

What are the advantages of owner own savings?

Answer 13

-the owner has complete control
-reduces the amount which needs to be borrowed

Question 14

What are the disadvantages to owner own savings?

Answer 14

-savings could be small and may not last long
-owners with unlimited liability would risk their savings

Question 15

What are the internal sources of finance?

Answer 15

-internal finance
-sales of assests
-owner own finance

Question 16

What are the advantages of bank overdraft?

Answer 16

-easy to set up
-quick to access finance

Question 17

What are disadvantages of bank overdraft?

Answer 17

-must be paid back quickly or else can be expensive

Question 18

What are the advantages of debt factoring?

Answer 18

-the factor chances up the unpaid debt savings the organisation time and moey

Question 19

what are the disadvantages of debt factoring?

Answer 19

-factors are only interested in large outstanding debts
-the business does not receive the full amount of outstanding debt

Question 20

What are the advantages of trade credit?

Answer 20

-can sell goods using materials not yet paid for. improving cash flow

Question 21

What are the disadvantages of trade credit?

Answer 21

-trade credit is at the discretion of the buyer
-a business therefore may not get credit some months

Question 22

what are the advantages of a bank loan?

Answer 22

-payments are in regular fixed installments
-this makes it easier to budget for

Question 23

what are the disadvantages of a bank loan?

Answer 23

-interest must be paid along with the amount borrowed
-small businesses tend to pay higher interest

Question 24

what are the advantages of hire purchases?

Answer 24

cost or purchase is spread over a period of time

Question 25

what are the disadvantages of hire purchases?

Answer 25

high rates of interest can be charged

Question 26

What are the advantages of leasing?

Answer 26

equipment can be changed regularly to keep up to date

Question 27

what are the disadvantages of leasing?

Answer 27

-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

Question 28

what are the advantages to government grants?

Answer 28

provides finance which does not have to be repaid

Question 29

what are the disadvantages to government grants?

Answer 29

-tend to be one off payments
-might be tied to specific projects which the business must undertake

Question 30

what are the advantages of mortgages?

Answer 30

repayment is over a long period of time

Question 31

what are the disadvantages of mortgages?

Answer 31

deposit is required upfront

Question 32

what are the advantages of debentures?

Answer 32

large amounts of capital can be raised

Question 33

what are the disadvantages of debentures?

Answer 33

if business fails to make interest payments the debentures holder can seize assets

Question 34

what are the advantages of venture capitalists?

Answer 34

organisations who have poor credit rating might be able to get finance

Question 35

what are the disadvantages of venture capitalists?

Answer 35

-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

Question 36

what are the advantages of sale and leaseback?

Answer 36

-selling assets generate large sum of money for the business
-business no longer responsible for repairs

Question 37

what are the disadvantages of sale and leaseback?

Answer 37

paying rent over a long period of time is more expensive for business

Question 38

how can the stock market be used to raise finance for a PLC?

Answer 38

-selling new shares
-investing in shares

Question 39

why invest in the stock market?

Answer 39

investors typically can earn more money buying stocks than they can buy having the money sit in a savings account at the bank