Business finance Flashcards
What do Finance departments
do?
- Recording all financial transactions
- Preparing final accounts
- Producing accounting information for managers.
- Forecasting cash flows
- Making important financial decisions
The main reasons why
businesses need finance and explain the points
Finance is money
-
Starting up a business:-
the finance need to start a new business is called Start-Up capital -
Expansion of an existing business:-
reason to increase the proifits, how thuough takeover or developing a new products. -
Additional working capital:-
is the money needed to pay its day to day running expenses.
why does the business finance in order to increases is working capital?
Business may need finance to pay for ethier Capital expenditure or Revenue expenditure.
= Capital expenditure is the money spent on non-current assets.
= Revenue expenditure is the money spent on day-to-day expenses.
define internal source of finance
finance that is obtained from within the business
= TYPES:- retained profit, sales of surplus assets, selling invertores
= SOLE TRADER OR PARTHERSHIP- owner’s saving
Retained profit
defination
pors and cons
internal source of finance
This is the profit kept in the BST after the owners have taken their share of the profit.
adv-
* does not have to be repaid
* no interest to pay.
dis-
* new BST will not have any retained profit.
* the profits may be too low to finance the expinsion needed
* Reduces payment to owners,
e.g., dividends for
shareholders.
Sale of Existing Assets
pros and cons
Advantages
* Better use of unwanted capital
* Doesn’t increase the debts of a business
Disadvantages
* It can take time to sell the assets, and the amount may not be the same as when purchased.
* Source of finance not available for new businesses
Sale of Inventories
pros and cons
Advantages
* Reduces opportunity cost
* reduces storage costs
Disadvantages
* It may disappoint customers if a sudden change in demand is not met.
Owner’s Savings
pros and cons
Advantages
* Quick availability
* No interest is paid
Disadvantages
* Savings may be low
* Increases risks for owners, as they
might have unlimited liability
External Sources of Finance
finance obtained from a source outside and septate form the bst
TYPES- bank loans, miocrofinance, crowdfunding, debentures, sells debts, subsidies, sales of shares.
Issue of Shares
definention
pros ans cons
External Sources of Finance and Long-term finance
Sale of business shares (only for limited companies)
Advantages
* A permanent source of capital
* It doesn’t need to be paid back
* No interest
Disadvantages
* Dividends are paid after tax.
* Shareholders expect dividends.
* Ownership will change if many shares are sold.
Bank Loans
definention
pros ans cons
External Sources of Finance and Long-term finance
A sum of money from a bank repaid with interest.
Advantages
* Quick, easy to arrange Must be repaid with interest
* Available for varying lengths of time.
* Large companies receive lowinterest rates if large sums
* are taken.
Disadvantages
* Security or collateral security must be given
* Must be repaid with interest
Selling Debentures
definention
pros ans cons
External Sources of Finance and Long-term finance
Debentures are certificates issued to a debenture holder for the money they lent, which must be repaid within 20 – 25 years.
Advantages
* Long term finance
Disadvantages
* Loans must be repaid, and interest
must be paid
Debt Factoring
definention
pros ans cons
External Sources of Finance and Short-term finance
a debtor is a person who owes the business money for the goods they have bought from the business.
Debt factors are specialist agents that can collect all the business’ debts from debtors.
Advantages:
* Immediate cash is available to the business
* Business doesn’t have to handle the debt collecting
Disadvantage:
* The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t get all of their debts.
Grants and subsidies
definention
pros ans cons
External Sources of Finance
government agencies and other external sources can give the business a grant or subsidy.
Advantage:
Do not have to be repaid, is free
Disadvantage:
There are usually certain conditions to fulfil to get a grant.
definention of Micro-finance
External Sources of Finance
Micro-finance: special institutes are set up in poorly-developed countries where financially-lacking people looking to start or expand small businesses can get small sums of money. They provide all sorts of financial services
Crowdfunding
definention
pros ans cons
External Sources of Finance
raises capital by asking small funds from a large pool of people
advantages-
- no internal fees to pay to the cowdfunding platforms
- fast way to raise substantial sums
- allows the public’s recation to the new bst venture to be tested.
disavantages-
- the platforms my reject an enterpreneur’s proposal.
- media interest and publicity need to be generated to increases success.
- competitors may steal the idea and reach the maket first with the similar product.
define Short-term finance
provides the working capital a business needs for its day-to-day operations.
Overdrafts
definention
pros ans cons
Short-term finance
- bank arranges overdrafts by allowing businesses to spend more than what is in their bank account.
Advantages:
* Flexible form of borrowing since overdrawn amounts can be varied each month
* Interest has to be paid only on the amount overdrawn
* Overdrafts are generally cheaper than loans in the long-term
Disadvantages:
* Interest rates can vary periodically, unlike loans which have a fixed interest rate.
* The bank can ask for the overdraft to be repaid at a short-notice.
Trade Credits
definention
pros ans cons
Short-term finance
when a business delays paying suppliers for some time, improving their cash position.
Advantage:
* No interests, repayments involved
Disadvantage:
* If the payments are not made quickly, suppliers may refuse to give discounts in the future or refuse to supply at all
define Long-term finance
is the finance that is available for more than a year.
- Loans: from banks or private individuals.
- Debentures
- Issue of Shares
- Hire Purchase
Hire Purchase
definention
pros ans cons
Long-term finance
allows the business to buy a fixed asset and pay for it in monthly instalments that include interest charges. This is not a method to raise capital but gives the business time to raise the capital.
Advantage:
* The firms doesn’t need a large sum of cash to acquire the asset
Disadvantage:
* A cash deposit has to be paid in the beginning
* Can carry large interest charges.
Leasing
definention
pros ans cons
Long-term finance
this allows a business to use an asset without purchasing it. Monthly leasing payments are made to the owner of the asset. The business can decide to buy the asset at the end of the leasing period.
Advantages:
* The firm doesn’t need a large sum of money to use the asset
* The care and maintenance of the asset is done by the leasing company
Disadvantage:
* The total costs of leasing the asset could finally end up being more than the cost of purchasing the asset!
Factors that affect choice of source of finance(5)
- Purpose
- Time-period
-
Amount needed
4. Legal form and size- only a limited company can issue shares and debentures. Small firms have limited sourced of finances available to choose from - Control-if limited companies issue too many shares, the current owners may lose control of the business. They need to decide whether they would risk losing control for business expansion.
- Risk- gearing: if business has existing loans, borrowing more capital can increase gearing risk of the business- as high interests have to be paid even when there is no profit, Banks and shareholders will be reluctant to invest in risky businesses.
a bank willing to lend a business finance is higher when (5)
- A cash flow forecast is presented detailing why finance is needed and how it will be used
- An income statement from the last trading year and the forecast income statement for the next year
- Details of existing loans and sources of finance being used
- Evidence that a security/collateral
- business plan
Chances of a shareholder willing to invest in a business is higher when (3)
- the company’s share prices are increasing- this is a good indicator of improving performance
- dividends and profits are high
- the company has a good reputations andfuture growth plans
