Ch 22 - Financial information Flashcards
3 main needs businesses need finance
-start up capital
-capital for expansion
-additional working capital
start up capital
-long term
-finance required to start a new business / to expand existing business
-finance needed to pay fixed and current assets
-low frequency of need
-huge amounts required
investment capital (capital for expansion - capital expenditure)
-medium term
-investing in something that lasts (assets)
-ex. machines
-medium frequency of need
-less amounts required than start up capital
working capital (revenue expenditure)
-short term
-finances needed on day to day running of business (runs out)
-spent on raw materials, facilities, wages
-high frequency of need
-low amounts needed
internal sources of finance? examples?
-finance sourced from within the business
–> revenue
–> selling objects
–> raising prices
advantages of internal sources of finance? [2]
-no need to pay back charges
-no borrowing or being in debt or interest
disadvantages of internal sources of finance? [1]
not a lot of money is raised
external sources of finance? examples?
finance raised from outside business
–> borrowing bank loans
advantages of external sources of finance? [1]
unlimited resources (no limit of money you can earn)
disadvantages of external sources of finance? [3]
-need to pay back (with charge / interest)
-theres a time limit to pay it back
-giving up control (giver controls you)
short term external source of finance?
need to pay back borrowed money in a year
medium term external source of finance?
need to pay back borrowed money between 1 and 5 years (few years)
long term external source of finance?
need to pay back borrowed money over a long time (10+ years)
–> lots of interest
–> for expensive things
4 examples of internal finance?
-retained profits
–>saving money instead of spending it, after owner’s take their share
-sale of unwanted assets
–> existing assets that are no longer use to the business
-sale of inventories
–> no stocks (just in time stock management)
-owner’s savings
–> owner puts in their savings for business
3 short term finance?
-trade credit
–> buying goods on credit
-bank overdraft
–> bank allowing more withdrawal than money in bank account
-debt factoring
3 medium term finance?
-hire purchase
–> installments (machines) (paying little bit up front and rest on monthly basis)
-leasing
–> renting out things (usually expensive things)
-bank loan
–> borrowing money from bank for a purpose
3 long term finance?
-shares
–> for limited companies, anyone can buy shares and become shareholder
-debentures
–> for limited companies, take money from investors
-mortgage
–> land is taken if loans can’t be paid back
disadvantages of trade credit [3]
-need to pay back before receiving next batch of goods
-if its not paid back, supplier might to go competitors
-may not get paid back (issue for sellers)
advantages of trade credit [2]
-can buy the goods needed immediately
-no interest unless theres a delay in repaying (sue / additional charges)
disadvantages of bank overdraft [4]
-in debt
-have to pay back on demand (short term)
–> lose control
-high rate of interest
-risky for bank –> no security
disadvantages of hire purchase [2]
-not the owner until payment is finished (can’t resell)
-company can repossess the asset
advantages of hire purchase [2]
-can immediately start to make output and earn money
-can use machine immediately to get income
advantages of leasing [4]
-flexibility
–> can easily change product
–> no hassle of ownership
-good for short term needs
disadvantages of leasing [2]
-never become the owner
-can’t own property
advantages of bank loans [2]
-cheap
-flexible
–> can use money for many purposes
disadvantages of bank loans [3]
-lots of paperwork
-need to pay back with interest
-lose control
advantages of shares [3]
-don’t need to return money earned
-no interest / charge
-raises huge sums of money
disadvantages of shares [2]
-have to share profits sometimes
-lose control
advantages of debentures [3]
-lending money, not ownership so still have control / no ownership loss
-lots of government formalities (no frauds)
-raises huge sums of money
disadvantages of debentures [2]
-have to return the money
-pay interest every year
who are business angels?
-people investing in new businesses for profit, not for making it flashy
-usually people with lots of money
what is mortgage?
-if you own lots of land, property is mortgaged to land
-you take a loan and if you can’t pay it back, property is taken away
4 alternative sources?
-grants
-subsidy
-microfinance
-crowd funding
what are grants?
money given to businesses from the government to help
–> no need to return / no charges
–> usually for businesses doing something that benefits society (located in remote area, product preserves culture / country)
what is subsidy?
products that are given by the government
–> necessary goods (petrol)
–> no need to pay back and the government takes loss
–> selling price is lowered to compete with international brands
what is microfinance?
borrowing small amounts / low cost items from specialist agents (specialised institutions / specific banks)
–> agriculture for farmers
–> need to pay back with interest
-made because banks don’t loan small amounts
what is crowd funding?
borrowing money from people, not banks (online sometimes)
–> small amounts sometimes
–> no paying back, donations / buying products
how do businesses make the choice of finance?
-purpose of money
-time period needed for
-amount needed
-form of business
–>sole trader? limited company?
-size of business
-control
–> losing / dividing control?
-risk
–> interests need to be repaid
–> could lead to bankruptcy
-gearing
–> relying too much on borrowings?
–> lots of borrowed money = high gear = bad reputation)
short term financial needs?
retained profits advantages [1]
no need to be repaid, no interest
retained profits disadvantages [3]
-for well developed businesses only
-profit too low
-reduced payments to owners
sale of unwanted assets advantages [2]
-makes better use of capital
-doesn’t increase business’s debts
sale of unwanted assets disadvantages [3]
-takes time to sell
-amount raised isn’t certain until it’s sold
-not for new businesses as they don’t have assets
sale of inventories advantages [2]
-saves storage costs
-reduces raw materials bought
sale of inventories disadvantages [1]
customers may be disappointed if there’s not enough goods in stock
owner’s saving advantages [2]
-no interest
-available quickly
owner’s saving disadvantages [2]
-savings may be low
-increases owner’s risk as they have unlimited liability
5 external finance examples?
-issue of shares
-bank loans
-selling debentures
-factoring of debts
-grants and subsidies from outside agencies
adv of issue of shares [2]
-permanent source (no repaying)
-no interest
adv of bank loans [3]
-varying for length of time
-quick to arrange
-large companies = low interest for large sums
adv of selling debentures [1]
to raise very long term finance (25 years)
adv of factoring of debts [2]
-immediate cash available
-risk of collecting debt is factor’s, not business’s
adv of grants / subsidies from outside agencies [1]
-no need to be repaid
disadv of grants and subsidies from outside agencies [1]
-given with strings attached (certain criteria)
–> particular area is the location
disadv of factoring of debts [1]
doesn’t receive 100% of the value of the debts
disadv of selling debentures [1]
need to be repaid with interest
disadv of bank loans [2]
-need to be repaid with interest
-security is required
–> bank can sell some of business’s or owner’s property if loan isn’t repaid
how to convince banks to give loans to business?
-cash flow forecast
–> why money is needed
–> where it will be used
-income statement, forecast for next
–> shows chances of business making profit
-details of existing loans and sources of finance being used
-evidence that security is available for bank
-business plan the clearly states business’s purpose
disadv of issue of shares [3]
-dividends are paid after tax
-dividends are expected by shareholders
-ownership of the business may change (lose control)
how to convince shareholders to buy shares?
-if company’s share price is increasing
-dividends are high
-profits are rising (dividends increase in future)
-if other companies are bad investments
-company has good reputation
-company has plans for future growth
