Business Finance (12) Flashcards
What is working capital
the money needed
to finance the day-to-day running of the
business. It allows stock to be bought and
wages and bills to be paid.
What is capital expenditure
Businesses just
starting up need money to invest in fixed
assets such as buildings and equipment.
What are internal sources
Money that is generated from
within the business or from the business owners
own capital:
* reinvested profits
* squeezed out of working capital
* sale of assets
* owners’ savings.
Advantages and disadvantages of retained profits
Advantages
Cheapest form of finance as you do not
have to pay interest on own money.
Immediately available.
Disadvantages
Cannot use for other purposes
(opportunity cost)
Depends on if the business is making a profit
the loss of profit
distribution to owners.
Advantages and disadvantages of sale of assets
Established businesses are able to sell off assets that are no longer required, such as buildings and machinery
Smaller businesses are unlikely to have such unwanted assets and if growth is an objective, they are much more likely
to want to acquire assets as opposed to losing them.
Advantages and disadvantages of bank loans
If application for the loan is successful, the money becomes
immediately available.
Loans are made available for any amount
Disadvantages
Interest has to be paid on the loan; thus, businesses have to pay back more than what they borrowed.
Very difficult to obtain for small businesses. It is likely that most new start-ups are unlikely to receive a loan
If the business owner is not able to maintain payments, Personal assets may be lost
What is an overdraft
An overdraft is the facility to withdraw more from
an account than is in the bank account, resulting in
a negative balance.
Advantages & Disadvantages of overdraft
Advantages
Very useful for overcoming short term liquidity problems
useful for day-to-day transactions
Only pay interest when account is overdrawn, i.e. do not have to pay off regular sums.
Disadvantages
Interest charged can be very high indeed
- The overdraft limit tends to be fairly low for small
businesses. - May be arrangement fee.
- Can be called in immediately – it is repayable on demand.
What is Leasing
The company gains use
of a productive asset,
without ever owning it.
Advantages and Disadvantages of Leasing
Advantages
* The business acquires the use of resources without the need for a large sum of money.
* The maintenance and repair bills are met by the leasing company.
* Equipment can be updated regularly.
Disadvantages
Over a long period of time, it can be a very expensive and well in excess of the purchase price.
* The business never gets to own the items leased.
Breakeven =
= Fixed costs / Price of good - Variable costs per unit
