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Business > Ch 22 - Financial information > Flashcards

Ch 22 - Financial information Flashcards

1
Q

3 main needs businesses need finance

A

-start up capital
-capital for expansion
-additional working capital

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2
Q

start up capital

A

-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

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3
Q

investment capital (capital for expansion - capital expenditure)

A

-medium term
-investing in something that lasts (assets)
-ex. machines
-medium frequency of need
-less amounts required than start up capital

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4
Q

working capital (revenue expenditure)

A

-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

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5
Q

internal sources of finance? examples?

A

-finance sourced from within the business
–> revenue
–> selling objects
–> raising prices

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6
Q

advantages of internal sources of finance? [2]

A

-no need to pay back charges
-no borrowing or being in debt or interest

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7
Q

disadvantages of internal sources of finance? [1]

A

not a lot of money is raised

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8
Q

external sources of finance? examples?

A

finance raised from outside business
–> borrowing bank loans

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9
Q

advantages of external sources of finance? [1]

A

unlimited resources (no limit of money you can earn)

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10
Q

disadvantages of external sources of finance? [3]

A

-need to pay back (with charge / interest)
-theres a time limit to pay it back
-giving up control (giver controls you)

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11
Q

short term external source of finance?

A

need to pay back borrowed money in a year

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12
Q

medium term external source of finance?

A

need to pay back borrowed money between 1 and 5 years (few years)

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13
Q

long term external source of finance?

A

need to pay back borrowed money over a long time (10+ years)
–> lots of interest
–> for expensive things

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14
Q

4 examples of internal finance?

A

-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

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15
Q

3 short term finance?

A

-trade credit
–> buying goods on credit

-bank overdraft
–> bank allowing more withdrawal than money in bank account

-debt factoring

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16
Q

3 medium term finance?

A

-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

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17
Q

3 long term finance?

A

-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

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18
Q

disadvantages of trade credit [3]

A

-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)

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19
Q

advantages of trade credit [2]

A

-can buy the goods needed immediately
-no interest unless theres a delay in repaying (sue / additional charges)

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20
Q

disadvantages of bank overdraft [4]

A

-in debt
-have to pay back on demand (short term)
–> lose control
-high rate of interest
-risky for bank –> no security

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21
Q

disadvantages of hire purchase [2]

A

-not the owner until payment is finished (can’t resell)
-company can repossess the asset

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21
Q

advantages of hire purchase [2]

A

-can immediately start to make output and earn money
-can use machine immediately to get income

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21
Q

advantages of leasing [4]

A

-flexibility
–> can easily change product
–> no hassle of ownership
-good for short term needs

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21
Q

disadvantages of leasing [2]

A

-never become the owner
-can’t own property

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21
Q

advantages of bank loans [2]

A

-cheap
-flexible
–> can use money for many purposes

22
Q

disadvantages of bank loans [3]

A

-lots of paperwork
-need to pay back with interest
-lose control

23
Q

advantages of shares [3]

A

-don’t need to return money earned
-no interest / charge
-raises huge sums of money

24
Q

disadvantages of shares [2]

A

-have to share profits sometimes
-lose control

25
Q

advantages of debentures [3]

A

-lending money, not ownership so still have control / no ownership loss
-lots of government formalities (no frauds)
-raises huge sums of money

26
Q

disadvantages of debentures [2]

A

-have to return the money
-pay interest every year

27
Q

who are business angels?

A

-people investing in new businesses for profit, not for making it flashy
-usually people with lots of money

28
Q

what is mortgage?

A

-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

29
Q

4 alternative sources?

A

-grants
-subsidy
-microfinance
-crowd funding

30
Q

what are grants?

A

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)

31
Q

what is subsidy?

A

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

32
Q

what is microfinance?

A

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

33
Q

what is crowd funding?

A

borrowing money from people, not banks (online sometimes)
–> small amounts sometimes
–> no paying back, donations / buying products

34
Q

how do businesses make the choice of finance?

A

-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)

35
Q

short term financial needs?

A
36
Q

retained profits advantages [1]

A

no need to be repaid, no interest

37
Q

retained profits disadvantages [3]

A

-for well developed businesses only
-profit too low
-reduced payments to owners

38
Q

sale of unwanted assets advantages [2]

A

-makes better use of capital
-doesn’t increase business’s debts

39
Q

sale of unwanted assets disadvantages [3]

A

-takes time to sell
-amount raised isn’t certain until it’s sold
-not for new businesses as they don’t have assets

40
Q

sale of inventories advantages [2]

A

-saves storage costs
-reduces raw materials bought

41
Q

sale of inventories disadvantages [1]

A

customers may be disappointed if there’s not enough goods in stock

42
Q

owner’s saving advantages [2]

A

-no interest
-available quickly

43
Q

owner’s saving disadvantages [2]

A

-savings may be low
-increases owner’s risk as they have unlimited liability

44
Q

5 external finance examples?

A

-issue of shares
-bank loans
-selling debentures
-factoring of debts
-grants and subsidies from outside agencies

45
Q

adv of issue of shares [2]

A

-permanent source (no repaying)
-no interest

46
Q

adv of bank loans [3]

A

-varying for length of time
-quick to arrange
-large companies = low interest for large sums

47
Q

adv of selling debentures [1]

A

to raise very long term finance (25 years)

48
Q

adv of factoring of debts [2]

A

-immediate cash available
-risk of collecting debt is factor’s, not business’s

49
Q

adv of grants / subsidies from outside agencies [1]

A

-no need to be repaid

50
Q

disadv of grants and subsidies from outside agencies [1]

A

-given with strings attached (certain criteria)
–> particular area is the location

51
Q

disadv of factoring of debts [1]

A

doesn’t receive 100% of the value of the debts

52
Q

disadv of selling debentures [1]

A

need to be repaid with interest

53
Q

disadv of bank loans [2]

A

-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

54
Q

how to convince banks to give loans to business?

A

-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

54
Q

disadv of issue of shares [3]

A

-dividends are paid after tax
-dividends are expected by shareholders
-ownership of the business may change (lose control)

55
Q

how to convince shareholders to buy shares?

A

-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

Business (7 decks)

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