7. Business Finance Flashcards
What are businesses financed by a combination of?
Equity (supplied by owners who want a dividend in return) - face higher risk but enjoy higher returns in the form of profits distributed as dividends
Debt (supplied by lenders who want interest in return) - face lower risk but lower returns
What is transaction motive?
To meet current day to day financial obligations
What is precautionary motive?
To cushion against unplanned expenditure
What is investment motive?
To take advantage of opportunities
What is finance motive?
To cover major transactions
What are the costs of holding cash?
Lost interest on deposits or other investments
What are the costs of running out of cash?
Loss of settlement discounts
Loss of supplier goodwill
Poor industrial relations if wages are not paid
Winding up of business, liquidation
What is short term financing?
Short term should be financed by short term funds. This is basically working capital (the balance of inventories, payable, receivables and cash) and overdrafts
What is long term financing?
Long term assets should be financed by long term funds, essentially debt and equity
Advantages of short term financing
Relatively cheap - shorter period of risk exposure for lenders. Trade payables are interest free. Although unsecured overdrafts are expensive
Flexible - a bank overdraft for example is only used when needed
Advantages of short term financing
Relatively cheap - shorter period of risk exposure for lenders. Trade payables are interest free. Although unsecured overdrafts are expensive
Flexible - a bank overdraft for example is only used when needed
What are the disadvantages of short term financing?
Renewal risk - an overdraft may be recalled on demand at the lenders discretion
Interest rate risk - short term interest rates can fluctuate
To finish
