Ch 10 - Finance for small business Flashcards
What are the types of sources of finance for a business?
- Internal sources
- External sources
What are internal sources of finance?
- Fund provided by owner
May include: - Owner’s capital
- Retained profit
What are external sources of finance?
- Funds borrowed from an individual business that is external to the business seeking finance
eg: term loans, overdraft, leasing
What is proprietor’s capital?
Cash contributions from the owner
What are retained profits?
- Profit earned from business’s sales
- Then re-invested into the business for future
What is trade credit?
The purchase of inventory and/or necessary materials to provide service, via credit
What is an overdraft?
When the bank allows an entity to withdraw more than the amount that is in the business’ bank account
What is a term loan?
Borrowing money usually from a bank to purchase an asset
- long term loans 10-20
- short term loans 2-3 years
What is leasing?
- Alternative to buying an asset
- Like renting as business never owns asset
What is interest?
- The return paid on a loan
- The return earned on investment
What are the types of interest?
- Flat rate interest
- Reducing balance interest
What is flat rate interest?
Is interest calculated on the amount borrowed
What is reducing balance interest?
Is interest calculated on the amount owing
What is the formula for calculating rate of interest?
interest / amount owing = %
What is a credit rating affected by?
- Monthly income
- Monthly expenses
- Current credit commitments
- Previous credit history
- Statement of assets and liabilities
What accounting reports are usually required for a loan application?
- Budgeted cash flow statement
- Balance sheet
What is gearing?
The dependance of a business on borrowed funs, compared to owner’s equity funds
How is gearing measured? And what is the formula?
Debt ratio
total liabilities / total assets
What is a highly geared business
Relies heavily on borrowed funds
What is a lowly geared business?
Relies mainly on owner’s equity funds
What are implications of being a highly geared business?
- Higher interest costs
- Higher loan repayments
- More risk of financial collapse
What is return on investment?
Measures the percentage return the owner is earning on the investment made in the business
What is the formula for return on investment?
ROI = net profit / owner’s equity
