Business Finance Flashcards
what is working capital?
- money needed to finance the day-to-day running of the business
- allows stock to be bought and bills to be paid
what is investment capital?
- helps the business grow
what is capital expenditure?
- money to invest in fixed assets
what does the most suitable source of finance for a business depend on?
- how much funding is needed
- time period
- size of the business
- type of business
what are the 3 internal sources of finance?
- retained profit
- working capital
- sale of assets
what is retained profit?
- reinvesting net profit in the business
what is working capital?
- the difference between current assets and current liabilities
what is sale of assets?
- selling assets that are no longer required
what are 2 pros and 2 cons of retained profit?
+ no interest
+ immediately available
- opportunity cost
- loss of profit distribution
what are 2 pros and 2 cons of working capital?
+ reducing stock holdings
+ reducing trade credit period
- likely to drive customers away
- if demand increased they may not be able to meet delivery dates
what is 1 pro and 1 con of sale of assets?
+ no longer required
- smaller businesses unlikely tp have unwanted assets
what are the 11 sources of external finance?
- bank loans
- overdraft
- trade credit
- factoring
- leasing
- hire purchase
- commercial mortgages
- sale and leaseback
- share capital
- venture capital
- government grants
what is a bank loan?
- borrowing a fixed amount for a fixed period of time
what are 2 pros and 2 cons of bank loans?
+ payments are monthly, helps with cashflow planning
+ large sums of money
- interest
- hard to obtain for small businesses
what is an overdraft?
- the facility to withdraw more from an account than is in the bank account, resulting in a negative balance
what are 2 pros and 2 cons of overdrafts?
+ overcoming ST liquidity problems
+ only pay interest when account is overdrawn
- high interest
- may be an arrangement fee
what is trade credit?
- buying items and paying for them at a later date
what is 1 pro and 1 con of trade credit?
+ no interest
- failure to repay on time can damage supplier relationships
what is factoring?
- turning invoices into cash
what are 2 pros and 1 con of factoring?
+ flexible
+ savings in administration costs
- only offered if the business has a good trading record and reliable customers
what is leasing?
- gaining use of a productive asset without ever owning it
what are 2 pros and 2 cons of leasing?
+ use resources without the need for a large sum of money
+ equipment can be updated regularly
- expensive LT
- never get to own the leased items
what is hire purchase?
- gaining the use of capital goods whilst paying a monthly fee
what are 2 pros and 2 cons of hire purchase?
+ quick
+ at the end of the purchase period, the business will own the asset
- high interest
- business doesnt own the asset until the end
