Business Finance :Unit 25 - 27 Flashcards
- What is short-term finance?
short term finance is money borrowed for one year or less
2, What is long-term finance?
Long-term finance is money borrowed for more than one year.
- What are the 4 needs for funds?
- 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.
3.5 how would businesses want to expand?
- expand capacity to meet growing orders
-develop new products.
-branch into overseas markets.
-diversify.
- What is capital?
finance provided by the owners of a business.
- What is internal finance?
finance generated by the business from its own means.
6, What is external finance?
- finance obtained from outside the business.
- What are the 3 (4) internal sources of finance?
- personal savings
-retained profit
-selling inventory
-sale of non-current assets
- What is retained profit?
- profit held by a business rather than returning it to the owners and which may be used in the future.
- What is personal savings?
-savings of the business owner invested in the business.
- what are the 2 advantages of retained profit? 2 disadvantages of retained profit?
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.
- What are 2 advantages and disadvantages of sale of existing assets?
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.
- What are the 1 advantage and disadvantage of the sale of inventory assets?
Ad:- reduces the opportunity cost and storage cost of high inventory levels
Dis:- may disappoint customers if insufficient goods are kept in inventory.
- What are the 2 advantages and disadvantages of owner savings?
Ad:- Available to the firm quickly
- No interest is paid
Dis:- Savings may be too low
- Increases the risk taken by owners.
- What are the 4 reasons for external finance?
- 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.
- What are the 3 main short-term, external finance?
- Bank overdraft
- Trade payables
- Credit cards
15.1 What is bank overdraft?
What are trade payables/ trade credit?
What are credit cards?
- 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.
1, What are the 4 advantages of overdraft? 3 disadvantages of overdraft?
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.
- What are the 4 types of long-term external finance?
- Loan capital
- Share capital
- Venture capital
- Crowdfunding
16.1 What are the 4 types of loan capital? Define each.
- 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.
- What is share capital? venture capital? crowdfunding?
- 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.
- What are the 3 advantages and disadvantages of share capital? venture capital?
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.
- What is the advantage and disadvantage of selling debentures?
ad: can be used to raise very long-term finance.
dis: must be repaid with interest.
- What are other external finance benefits? Give 2 advantages and a disadvantage
Ad: do not have to be repaid.
- no interest has to be paid.
Dis: often includes “string attached”.
20.1 What are the 2 advantages and 4 disadvantages of crowdfunding?
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.
Who are venture capitalists?
- specialist investors who provide money for business purposes, often to new businesses.
- What is cash flow? cash inflow? cash outflow?
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.
- What is liquid?
Liquid is an asset that is easily changed into cash.
- What are the 2 reasons need cash?
- To pay suppliers, overheads, and employees.
- To prevent business failure.
- What are overheads?
- money spent regularly on rent insurance, electricity, and other things that are needed to keep a business operating,
- What is insolvent?
- Inability to meet debts
- What is cashflow forecast?
- 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.
- 3 ways a business can have better control over its cash flow?
- 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.
- What are the 3 reasons for the difference between cash and profit?
- Some goods are sold on credit.
- Sometimes owners might put more cash into the business.
- Purchases of fixed assets.
- What is net cash flow?
it is the difference between the total cash inflow and the total cash outflow.
- What is the closing cash balance?
- the amount of cash that the business expects to have at the end of each month.
(opening balance + net cash flow)
- What are the 4 reasons why cash flow forecasts are important?
- identifying cash shortages.
- Supporting applications for funding.
- Help When planning the business
- Monitoring cash flow.
- What is costs?
costs are expenses that must be met when setting up and running a business.
- What are two types of costs?
- fixed costs
- variable costs
- What is fixed cost?
variable cost?
fixed costs: costs that do not vary with the level of output.
variable costs: costs that change when output levels change.
- What is average costs? total costs?
- 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.
- How to calculate the average cost?
total costs/quantity produced
- How to calculate the total cost?
fixed costs+ variable costs
- What is total revenue? how to calculate total revenue.
money generated from the sale of output.
—-price x quantity—-
- How to calculate the profit?
profit = Total revenue- total cost
