Business Finance :Unit 25 - 27

Question 1

1. What is short-term finance?

Answer 1

short term finance is money borrowed for one year or less

Question 2

2, What is long-term finance?

Answer 2

Long-term finance is money borrowed for more than one year.

Question 3

3. What are the 4 needs for funds?

Answer 3

• to pay their suppliers and overheads, daily running of the business(short-term needs).
• to purchase machinery, property, and office furniture. (long-term needs).
• Start-up capital (setting up a business)
• Expansion.

Question 4

3.5 how would businesses want to expand?

Answer 4

• expand capacity to meet growing orders
  -develop new products.
  -branch into overseas markets.
  -diversify.

Question 5

4. What is capital?

Answer 5

finance provided by the owners of a business.

Question 6

5. What is internal finance?

Answer 6

finance generated by the business from its own means.

Question 7

6, What is external finance?

Answer 7

• finance obtained from outside the business.

Question 8

7. What are the 3 (4) internal sources of finance?

Answer 8

• personal savings
  -retained profit
  -selling inventory
  -sale of non-current assets

Question 9

8. What is retained profit?

Answer 9

• profit held by a business rather than returning it to the owners and which may be used in the future.

Question 10

9. What is personal savings?

Answer 10

-savings of the business owner invested in the business.

Question 11

10. what are the 2 advantages of retained profit? 2 disadvantages of retained profit?

Answer 11

Ad: - does not have to be repaid.
- no interest to pay

Dis: - Not available to a new business
- too low to finance the expansion needed for many small firms.

Question 12

11. What are 2 advantages and disadvantages of sale of existing assets?

Answer 12

Ad: - Makes better use of the capital tied up in the business
- Does not increase the debt of the business
Dis: It takes time to sell the assets.
- Not available for new businesses.

Question 13

12. What are the 1 advantage and disadvantage of the sale of inventory assets?

Answer 13

Ad:- reduces the opportunity cost and storage cost of high inventory levels
Dis:- may disappoint customers if insufficient goods are kept in inventory.

Question 14

13. What are the 2 advantages and disadvantages of owner savings?

Answer 14

Ad:- Available to the firm quickly
- No interest is paid
Dis:- Savings may be too low
- Increases the risk taken by owners.

Question 15

14. What are the 4 reasons for external finance?

Answer 15

• to borrow money due to seasonal trade.
• May need finance to pay for raw materials and wages.
• Firm might be short of money because it is waiting for a customer to pay.
• A business may need to meet emergency expenditures.

Question 16

15. What are the 3 main short-term, external finance?

Answer 16

• Bank overdraft
• Trade payables
• Credit cards

Question 17

15.1 What is bank overdraft?
What are trade payables/ trade credit?
What are credit cards?

Answer 17

• A bank overdraft is an agreement with a bank where a business spends more than it has in its account(up to an agreed limit)
• Trade payables is buying resources from suppliers, such as raw materials, and paying them later.
• A credit card is a payment card, usually issued by a bank, allowing its users to purchase goods or services or withdraw cash on credit.

Question 18

1, What are the 4 advantages of overdraft? 3 disadvantages of overdraft?

Answer 18

Ad: Flexible form of borrowing
- cheaper than loans in the short term.
- Interest rates are variable.
- Suppliers, leaving the business in a better cash position.
Dis: Interest is paid only to the amount overdrawn.
- The bank can ask for the overhead to be repaid at a very short period of time.
- Suppliers may refuse to give discounts or even refuse to give if payment is delayed.

Question 19

16. What are the 4 types of long-term external finance?

Answer 19

• Loan capital
• Share capital
• Venture capital
• Crowdfunding

Question 20

16.1 What are the 4 types of loan capital? Define each.

Answer 20

• mortgages:- a long-term financial loan where land or property is used as security.
• unsecured bank loans:- when a bank lends money without having a claim on one of your assets.
• Debentures:- these are long-term loans/ certificates issued by limited companies.
• Hire purchase:- it allows a business to buy fixed assets over a long period of time with monthly payments which include an interest charge.

Question 21

19. What is share capital? venture capital? crowdfunding?

Answer 21

• Share capital: is selling of shares to existing shareholders to raise large amounts of money
• Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
• Crowdfunding: where a large number of individuals invest in a business using an online platform and therefore avoid using bank.

Question 22

17. What are the 3 advantages and disadvantages of share capital? venture capital?

Answer 22

VENTURE CAPITAL
Ad: provides expert management assistance
- comes with networking opportunities
- comes without the need to pledge personal assets.
Dis: it is relatively scarce and difficult to obtain.
- Can be relatively expensive.
- Requires setting up a board of directors
SHARE CAPITAL
Ad: Permanent source of capital that would not have to be repaid.
No interest has to be paid.
Dis: Dividends are paid
- can lose ownership.

Question 23

19. What is the advantage and disadvantage of selling debentures?

Answer 23

ad: can be used to raise very long-term finance.
dis: must be repaid with interest.

Question 24

20. What are other external finance benefits? Give 2 advantages and a disadvantage

Answer 24

Ad: do not have to be repaid.
- no interest has to be paid.
Dis: often includes “string attached”.

Question 25

20.1 What are the 2 advantages and 4 disadvantages of crowdfunding?

Answer 25

Ad: Serves as proof of concept. Creates an organic customer base. A form of free marketing. Funding from multiple sources. Avoids business loan interest costs. A fast method of raising capital. Dis: -Your business idea may get swiped - Time requirements may be significant - Fees can be steep. - You may not have as much guidance.

Question 26

Who are venture capitalists?

Answer 26

- specialist investors who provide money for business purposes, often to new businesses.

Question 27

21. What is cash flow? cash inflow? cash outflow?

Answer 27

Cash flow: flow of money into and out of a business. Cash inflow: a flow of money into a business. Cash outflow: a flow of money out of a business.

Question 28

22. What is liquid?

Answer 28

Liquid is an asset that is easily changed into cash.

Question 29

23. What are the 2 reasons need cash?

Answer 29

- To pay suppliers, overheads, and employees. - To prevent business failure.

Question 30

24. What are overheads?

Answer 30

- money spent regularly on rent insurance, electricity, and other things that are needed to keep a business operating,

Question 31

25. What is insolvent?

Answer 31

- Inability to meet debts

Question 32

26. What is cashflow forecast?

Answer 32

- prediction of all expected receipts and expenses of a business over a future time period, which shows the expected cash balance at the end of each month.

Question 33

27. 3 ways a business can have better control over its cash flow?

Answer 33

- keep up-to-date records of financial transactions. - always plans ahead by producing accurate cash flow forecasts. - operates an efficient credit control system, which prevents slow or late payment.

Question 34

28. What are the 3 reasons for the difference between cash and profit?

Answer 34

- Some goods are sold on credit. - Sometimes owners might put more cash into the business. - Purchases of fixed assets.

Question 35

29. What is net cash flow?

Answer 35

it is the difference between the total cash inflow and the total cash outflow.

Question 36

30. What is the closing cash balance?

Answer 36

- the amount of cash that the business expects to have at the end of each month. (opening balance + net cash flow)

Question 37

31. What are the 4 reasons why cash flow forecasts are important?

Answer 37

- identifying cash shortages. - Supporting applications for funding. - Help When planning the business - Monitoring cash flow.

Question 38

32. What is costs?

Answer 38

costs are expenses that must be met when setting up and running a business.

Question 39

33. What are two types of costs?

Answer 39

- fixed costs - variable costs

Question 40

32. What is fixed cost? variable cost?

Answer 40

fixed costs: costs that do not vary with the level of output. variable costs: costs that change when output levels change.

Question 41

33. What is average costs? total costs?

Answer 41

- The average cost of production is the cost of producing a single unit of output. - Total costs is fixed costs and variable costs added together.

Question 42

34. How to calculate the average cost?

Answer 42

total costs/quantity produced

Question 43

35. How to calculate the total cost?

Answer 43

fixed costs+ variable costs

Question 44

36. What is total revenue? how to calculate total revenue.

Answer 44

money generated from the sale of output. ----price x quantity----

Question 45

35. How to calculate the profit?

Answer 45

profit = Total revenue- total cost