5.1 Business Finance Flashcards
What is finance in a business context?
The money required in the business to set up, expand, and increase working capital.
What is start-up capital?
The initial capital used in the business to buy fixed and current assets before it can start trading.
Define working capital.
Finance needed by a business to pay its day-to-day running expenses.
What is capital expenditure?
Money spent on fixed assets that will last for more than a year, such as vehicles, machinery, and buildings.
What is revenue expenditure?
Money spent on day-to-day expenses that does not involve the purchase of long-term assets, such as wages and rent.
What is internal finance?
Finance obtained from within the business itself.
What is retained profit?
Profit kept in the business after owners have been given their share of the profit.
List the advantages of retained profit.
- Does not have to be repaid
- No interest has to be paid
List the disadvantages of retained profit.
- A new business will not have retained profit
- Profits may be too low to finance
- Keeping more profits to be used as capital will reduce owner’s share of profit
What is the sale of existing assets?
Selling assets that the business doesn’t need anymore to raise finance.
List the advantages of selling existing assets.
- Makes better use of capital tied up in the business
- Does not become debt for the business
List the disadvantages of selling existing assets.
- Surplus assets will not be available with new businesses
- Takes time to sell the asset and the expected amount may not be gained
What is the advantage of selling inventories?
Reduces costs of inventory holding.
What is a disadvantage of selling inventories?
If not enough inventory is kept, unexpected increase in demand cannot be fulfilled.
Define owner’s savings in terms of finance.
Finance directly invested by the owner from their own savings in unincorporated businesses.
List the advantages of owner’s savings as a source of finance.
- Available to the firm quickly
- No interest has to be paid
List the disadvantages of owner’s savings.
- Increases the risk taken by the owners.
What is external finance?
Finance obtained from sources outside of the business.
What is the issue of shares?
A method of raising capital for limited companies.
List the advantages of issuing shares.
- Permanent source of capital
- No need to repay the money to shareholders
- No interest has to be paid
List the disadvantages of issuing shares.
- Dividends have to be paid to shareholders
- Ownership may change hands with many shares bought
What are bank loans?
Money borrowed from banks.
List the advantages of bank loans.
- Quick to arrange
- Can be for varying lengths of time
- Large companies can get very low rates of interest
List the disadvantages of bank loans.
- Need to pay interest periodically
- Must be repaid after a specified time
- Requires collateral security
