5.26 Business finance Flashcards

1
Q

Working capital

A

The capital needed to pat for raw materials, day-to-day running costs and credit offered to customers. In accounting terms working capital = Current assets - current liabilities

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2
Q

Why business activity requires finance?

A
  • purchase essential capital equipment and premises
  • working capital: pay bills and expenses and build up stocks
  • business expand
  • special situations: decline in sales –> cash needs to keep the business stable; or large customer could fail to pay for essential expenses
  • pay for research and development, invest in new marketing strategies
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3
Q

Liquidity

A

The ability of a firm to be able to pay its short-term debts

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4
Q

Liquidation

A

When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

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5
Q

Capital expenditure

A

Involves the purchase of assets that are expected to last for more than one year, such as building and machinery

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6
Q

Revenue expenditure

A

Spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock

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7
Q

Start-up capital

A

Capital/ investment needed by an entrepreneur to set up a business.
eg: expenditure on premises and capital equipment

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8
Q

Sources for start-up capital

A
  • Angel groups
  • Personal savings or friends/family
  • Bank loans
  • Private funds
  • Government grants/ assistance
  • Venture capitalists
  • Equity funding
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9
Q

Internal source of finance

A
  • Retained profit
  • Sale of assets
  • Reductions in working capital
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10
Q

External source of finance

A
Long term: + Share issue 
\+ Debentures 
\+ Long-term loan 
\+ Grants 
Medium term: + Leasing 
\+ Hire purchase 
\+ Medium-term loan 
Short term: + Bank overdraft 
\+ Bank loan 
\+ Creditors 
\+ Factoring
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11
Q

Overdraft

A

Bank agree to a business borrowing up to a agreed limit as and when required

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12
Q

Factoring

A

Selling of claims over debtors to a debt factor in exchange for immediate liquidity - only a proportion of the value of the debts will be received as cash

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13
Q

Leasing

A

Obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. This avoids the need for the business to raise long-term capital to buy asset. Ownership remains with the leasing company

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14
Q

Hire purchase

A

An asset is sold to a company that agrees to pay fixed repayments over a agreed time period - the asset belongs to the company

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15
Q

Long term loans

A

Loans that do not have to be repaid for at least one year

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16
Q

Equity finance

A

Permanent finance raised by companies through the sale of shares

17
Q

Long-term bonds or debentures

A

Bonds issued by companies to raise debt finance, often with a fixed rate of interest

18
Q

Debt finance +

A

+ No shares sold –> ownership of the company does not change or is not “diluted” by the issue of additional shares
+ Loans will be repaid eventually –> no permanent increase in the liabilities
+ Lenders have no voting rights at AGM
+ Interest charges are paid out b4 the reduction of corporation tax, while dividends have to be paid from profits after tax
+ Gearing of the company increases –> shareholders are given higher chance of higher returns

19
Q

Equity capital +

A

+ Never has to be reapdi; permanent capital

+ Dividends don’t have to be paid every year, not like interest on loans

20
Q

Rights issue

A

Existing shareholders are given the right to buy additional shares at a discounted price

21
Q

2 types of flotation

A
  1. Listing on Alternative Investment Market (AIM): suitable for small companies since strict requirements are relaxed
  2. Full listing on Stock Exchange:
    a) Public issue by prospectus: advertises the company and its share sale to the public (expensive)
    b) Arranging a placing of shares with institutional investors without the expense of a full public issue ( ownership doesn’t change, cheap, reduce share price in short term bc of dilution)
22
Q

Grants

A

+ Long term
+ Given to small businesses or those expanding in developing regions of country
+ Don’t have to be repaid

23
Q

Venture capital

A

+ Risk capital invested in business startups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources
+ Specialist organisations or wealthy individuals
+ Risky
+ High-tech businesses
+ Share of future profits

24
Q

Business plan

A

A detailed document giving evidence about a new or existing business, aims to convince external lenders and investor to extend finance to that business

25
Q

Factors influencing finance choice

A
  1. Time + Risky for borrow long term finance to pay for short-term needs
    + Permanent capital is needed for long term expansion
  2. Cost +Considering opportunity costs
    + Loans are very expensive during periods of rising interest rates
  3. Amount required
  4. Legal structure and desire to retain control
  5. Size of existing borrowing + Higher the existing debts of a business, the greater the risk of lending more bc banks will be anxious of the ability to pay back
  6. Flexibility : Variable need for finance –> flexible form of finance is > longterm e.g: Overdrafts