5.1 – Business Finance: Needs and Sources Flashcards
What is Finance?
The money required in the business. Finance is needed to set up the business, expand it 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.
What is Working Capital?
Finance needed by a business to pay ti’s day-to-day running expenses
What is Capital Expenditure?
The money spent on fixed assets (assets that will last for more than a year)
What is Revenue Expenditure?
The money spent on day-to-day expenses which does not involve the purchase of long-term assets
What are Internal Finances?
Finances obtained within the business itself?
What is Retained Profit?
Profit kept in the business after owners have been given their share of the profit.
Name the advantages and disadvantages of Retained Profit?
Adv: Does not have to be repaid, unlike, a loan.
No interest has to be paid
Disadv: 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 and they may resist the decision.
What is Sale of Existing Assets?
Assets that the business doesn’t need anymore, for example, unused buildings or spare equipment can be sold to raise finance
Name the advantages and disadvantages of Sale of Existing Assets
Adv: Makes better use of capital tied up in the business
Does not become debt for the business, unlike a loan.
Disadv: Surplus assets will not be available with new businesses
Takes time to sell the asset and the expected amount may not be gained for the asset
What is Sale of Inventories?
Sell of finished goods or unwanted components in inventory.
Name the advantages and disadvantages of Sale of Inventories
Adv: Reduces costs of inventory holding
Disadv: If not enough inventory is kept, unexpected increase demand form customers cannot be fulfilled
What is Owners Saving?
For a sole trader and partnership, since they’re unincorporated any finance the owner directly invests from his own saving will be internal finance.
Name the advantages and disadvantages of Owners Saving
Adv: Will be available to the firm quickly
No interest has to be paid.
Disadv: Increases the risk taken by the owners.
What is External Finance?
Finance obtained from sources outside of the business.
What is Issue of Shares?
Issuing of shares by a Limited Company to raise Finance