Business Finance: needs and sources

Question 1

What do finance departments do?

Answer 1

• Records all financial transactions
• Prepares final accounts
• Produce accounting information
• Forecasts cash flows
• Makes important final decisions

Question 2

Reasons why business’ need finance?

Answer 2

• To start the business
• Expand an existing business
• Additional working capital

Question 3

Star-up capital

Answer 3

is the finance needed by new businesses to pay for essential non current and current assets before it can begin trading.

Question 4

Working capital

Answer 4

is the finance needed by a business to it’s day to day costs.

Question 5

Capital expenditure

Answer 5

is the money spent on non current assets which will last for more than a year.

Question 6

Revenue expenditure

Answer 6

is the money spent on dat to day expenses which do not involve the purchase of a long-term asset, for example, wages or rent

Question 7

Sources of finance

Answer 7

Internal or external finance

short-term or long-term finance

Question 8

Internal finance

Answer 8

is obtained from within the business itself

Question 9

External finance

Answer 9

is obtained from sources outside of and separate from the business

Question 10

Retained profit (Ads)

Answer 10

• Retained profit does not have to be repaid, unlike, for example a loan
• There is no interest to pay, since the capital is raised from within the business

Question 11

Retained profit (Dis)

Answer 11

• New businesses will not have profits
• Small firms profits might be too low to invest in expansions
• Keeping more profits would result in lower payments to the owner thus shareholders may invest into other businesses.

Question 12

Sales of existing assets (Ads)

Answer 12

• This makes better use of the capital tied up in the business
• It doesn’t increase the business debts

Question 13

Sales of existing assets (Dis)

Answer 13

• It may take time to sell the assets and the amount raised is never certain until the assets are sold
• Is not available for new businesses.

Question 14

Sales of inventories to reduce inventory levels (Ads)

Answer 14

• Reduces opportunity cost and storage cost of high inventory levels

Question 15

Sales of inventories to reduce inventory levels (Dis)

Answer 15

• Must be done carefully to avoid disappointing customers if not enough goods are kept in inventory.

Question 16

Owners Savings (Ads)

Answer 16

• No interests paid

- Available to the firm quick

Question 17

Owners Savings (Dis)

Answer 17

• Savings may be low

- It increases the risk taken by the owners as they have unlimited liability

Question 18

Issues of shares (Ads)

Answer 18

• A permanent source of capital which would not have to be repaid to shareholders
• No interests has to be paid

Question 19

Issues of shares (Dis)

Answer 19

• Dividends are paid after tax, whereas interest on loans is paid before tax is deducted
• Dividends will be expected by the shareholders
• The ownership of the company could change if many shares are sold

Question 20

Bank loans (Ads)

Answer 20

• These are usually quick to arrange
• They can be for varying lengths of time
• Large companies are often offered low rates of interest by banks if they borrow large sums

Question 21

Bank loans (Dis)

Answer 21

• A bank loans will have to be repaid eventually and interest must be paid
• Security is usually required, which means the banks may insist that some property of the business can be sold in order to pay their debts.

Question 22

Selling debentures (Ads)

Answer 22

• Can be used to raise finance for a very long term

Question 23

Selling debentures (Dis)

Answer 23

• Must be repaid and interest must be paid

Question 24

Factoring of debts (Ads)

Answer 24

• Immediate cash available

- The risk of collecting the debt becomes the factor’s and not the business’

Question 25

Factoring of debts (Dis)

Answer 25

• The business does not receive 100% of the value of its debts

Question 26

Micro-finance

Answer 26

is providing financial services - including small loans - to poor people not served by traditional banks.

Question 27

Crowdfunding

Answer 27

is funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet.

Question 28

Benefits of crowdfunding (Ads)

Answer 28

• No initial fees are payable to the crowd funding platform, only a percentage of the amount is charged
• Allows the public’s reaction reaction to the new business venture to be tested. If people are hesitant to invest, it may be a bad idea.
• faster to raise sums

Question 29

Benefits of crowdfunding (Dis)

Answer 29

• Crowdfunding platforms may reject an entrepreneurs proposal if it is not well thought out
• If the total amount required is not raised, the finance that has been promised will have to be paid
• Media interest needed to gain more capital
• publicising the business allows competitors to steal the idea and may gain more funders.

Question 30

Overdrafts (Ads)

Answer 30

• The bank allows the business to use more money than that currently present in their bank
• Flexible as the overdraft varies each month
• Interest will be paid to only the overdrawn amount
• Overdrafts may be cheaper

Question 31

Overdrafts (Dis)