business finance unit 4

Question 1

why does a bst need finance?

Answer 1

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

Question 2

mention short term loans

Answer 2

• bank overdrafts
• short term bank loans
  -factoring debts
• selling of esccessive assets
• selling of inventories
• trade credits

Question 3

mention long term loans

Answer 3

• issue of shares
  long term bank loans
• debentures
• leasing
• hire purchase
  grants or subsidies

Question 4

what are the business failure stages due to finance

Answer 4

• 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

Question 5

what is the meaning of Wokrking capital

Answer 5

is the finance needed to pay the day to day expenses
without sufficent wc bst will be illequid

Question 6

what is the imp of working capital

Answer 6

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

Question 7

what are the 3 ways wc can be managed

Answer 7

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

Question 8

what is capital expenditure

Answer 8

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

Question 9

what is revenue expenditure

Answer 9

ammount spent on day to day expenditures –> then these expenditures are expensed immediately

Question 10

mention the internal sources of finace

Answer 10

• retained earnings
• sale of unwanted assets
• sale and lease back

Question 11

explain retained earnings
mention adv + disadv

Answer 11

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

Question 12

explain sale of unwanted assets

Question 13

explain sale and lease back