business finance unit 4 Flashcards
why does a bst need finance?
1) to start up a bsuiness
- need finance to purchase assests to start trading
finace also known as STARTUP CAPTIAL
2) expansion of existing bst
- owners of sucessful bst want to make higher profits
3) Bst in difficulty
- if bst faces diffuclty esp financial crisis –> finance required to help bst survive during difficult phase
4) to take over
50 declining sales
6) increase wc
- wc is the life blood of bst
needed for sufficent wc to meet all its requirements
mention short term loans
- bank overdrafts
- short term bank loans
-factoring debts - selling of esccessive assets
- selling of inventories
- trade credits
mention long term loans
- issue of shares
long term bank loans - debentures
- leasing
- hire purchase
Government grants
Venture capital
what are the business failure stages due to finance
- ADMINISTRATION
- if a bst fails due to financial shortages –> knows admistration
- specialist asdministrators apointed to keep bst operational + find buyers for it
BANKRUPCY
- if adminstrators not able to find buyer–> this situation known as bankrupcy
LIQUIDATION
- then failed bst will go in liquidation
means assets of bst will be sold out
- obj of seeling them is to be pay back the ppl + companies the failed bst owes money to
what is the meaning of Wokrking capital
is the finance needed to pay the day to day expenses
without sufficent wc bst will be illequid
what is the imp of working capital
if not suffeicient wc –> bst will be unable to pay off debts
- creditors may force bst into liquididation
too high wc may be disavantage + too low Wc may make bst illiquid
what are the 3 ways wc can be managed
1) MANAGING TRADE PAYABLES
- bst should try to negotriate best possible credit terms from suppliers
- higher credir period–> better for bst –> bst can obtain goods without any cash outflow–> will improve wc postion of company
2) MANAGINV TRADE RECIEVABLES
- bst shpuld try to offer minmum possible credit period to customers
- earlier the customer pays for goods –> earlier the cash Inflow –> betterthe WC position of company
what is capital expenditure
ammount spend to improve long term assets such as biulding or equipement
ammount spent on capital expensditure –> will be capitalized then depreciated over useful life of asset
what is revenue expenditure
ammount spent on day to day expenditures –> then these expenditures are expensed immediately
mention the internal sources of finace
- retained earnings
- sale of unwanted assets
- sale and lease back
explain retained earnings
mention adv + disadv
porfits kept in bst after owners have taken thier share of profit
- ploughed back profits
- do not have to be repaid
- no interest to be paid
- may be immediately available as from within bst
- new bst will not have retained profits
- may not be available for future prospects
- all might not be available in form of cash
explain sale of unwanted assets
Two types of assets sold
Asset not required any longer
Asset leased back
Explain decree in work capital
↓ current assets leads to capital being released
Too less working capital can lead it liquidation
Define bank overdraft
Allows business to overdraw on its account in bank → allowing payments and paying off cheques that are of his her value than in account
Define trade credit
Agreement where business can purchase goods on account and pay the supplier on a latter date
Define debt factoring
Selling of claims» over trade receivables → to a debt factor in exchange of immediate liquidity.
Only a proportion of debts received as cash
Debt factor makes profit →when full payment is received from customers
Define hire purchase
Asset sold to a company> which agrees to pay fixed repayment over a agreed time period until asset belongs to the company
Define leasing
Obtaining the use of equipment or machinery by paying a rental or LEASING charge over a fixed period
BST avoids raising long term capital to buy the assets
Ownership of asset remains with the company
Define long tem loans
Loans that don’t have to be paid for atleast a year
Fixed or variable interest rate
Fixed rate → greater uncertainty → can be expensive if loan agreed al a time of ↑ interest rate
May require security or collateral
Small firms without collateral have to pay ↑ interest rate
Define long term bonds / debentures
Bonds issued by company → to ↑ debt finance
Grant no rights of ownership
No fixed interest rate often
Convertible debentures can be converted into shares after a certain time periods
Define sale of shares
Permanent finance raised by companies → through sale of
shares upto limit of authorized share capital
