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business > chapter 22 > Flashcards

chapter 22 Flashcards

1
Q

why do businesses need finance

A

1.start up a business
2.expand an existing business
3.increase working capital

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2
Q

define start up capital

A

the initial capital used in the business to buy fixed and current assets before it can start trading.

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3
Q

define working capital

A

finance needed by a business to pay day to day expenses

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4
Q

what are the two types of spending

A

capital expenditure
revenue expenditure

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5
Q

define capital expenditure

A

money spent on fixed assets which will last for more than a year

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6
Q

define revenue expenditure

A

the money spent on day-to-day expenses which does not involve the purchase of long-term assets

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7
Q

define current assets

A

items owned by a business for less than a year

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8
Q

define non current assets

A

items owned by a business for more than a year

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9
Q

define current liabilities

A

money owed by a business for less than a year

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10
Q

define non current liabilities

A

money owed by a business for more than a year

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11
Q

internal finance sources

A

1.retained profit
2.sale of existing assets
3.sale of inventories
4.owner’s saving

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12
Q

what is retained profit

A

profit kept in the business after owners have been given their share of the profit

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13
Q

advantages of retained profit

A

1.doesn’t have to be repaid
2.no interest to pay

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14
Q

what is sale of existing assets

A

items of value that are no longer required by a business

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15
Q

disadvantages of retained profit

A

1.a new business will not have retained profit
2.Profits may be too low
3.reduces payment to owners

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16
Q

advantages of sale of existing assets

A

1.Makes better use of capital tied up in the business
2.doesn’t increase business debts

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17
Q

disadvantages of sale of existing assets

A

1.may take time to sell assets
2.amount of money raised may be not be enough

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18
Q

what is sale of inventories

A

selling finished goods or unwanted items in inventory.

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19
Q

advantages of sale of inventories

A

1.Reduces costs of inventory holding

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20
Q

disadvantages of sale of inventories

A

must be done carefully to avoid customer disappointment

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21
Q

what is owner’s savings

A

(only in partnership and sole trader)any finance the owner directly invests from his own saving will

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22
Q

advantages of owner’s saving

A

1.available to firm quickly
2.no interest is paid

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23
Q

disadvantages of owner’s savings

A

1.savings may be too low
2.increases the risk taken by owners

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24
Q

evaluation of internal sources of finance

A

although internal sources of finance doesn’t have direct cost to business, doesn’t increase liabilities, and there is no risk of original owner losing control, however there will be leasing charges if assets are leased back once sold, and it won’t be available for all companies especially small businesses, and only depending on internal sources of finance will slow down expansion. i recommend using external finance sources if the business is a rapidly expanding one

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25
Q

what are external sources of finance

A

1.issues of shares
2.selling debentures
3.bank loans
4.grants and subsidies
5.micro finance
6.crowdfunding

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26
Q

issue of shares:

A

only for limited companies

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27
Q

advantages of issue of shares

A

1.A permanent source of capital, no need to repay the money to shareholders
2.no interest paid

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28
Q

disadvantages of issue of shares

A

1.Dividends have to be paid to the shareholders
2.If many shares are bought, the ownership of the business will change hands

29
Q

what are bank loans

A

money borrowed from banks

30
Q

advantages of bank loans

A

1.ownership is not affected
2.usually quick to arrange
3.flexible payment plan
4.large companies are offered low rates of interest

31
Q

disadvantages of bank loans

A

1.has to be repaid with interest
2.Need to give the bank a collateral security

32
Q

what is selling debentures

A

long term certificate sold to interested investors

33
Q

advantages of selling debentures

A

1.can be used to raise very long term finance up to 25 years

34
Q

disadvantages of selling debentures

A

has to be repaid with an interest

35
Q

what are grants and subsidies

A

gained by outside agencies, usually the government

36
Q

advantages of grants and subsidies

A

usually not repaid

37
Q

disadvantages of grants and subsidies

A

they are given under certain conditions

38
Q

what is micro finance

A

providing financial services to poor people not served by traditional banks

39
Q

why don’t banks lend poor people

A

1.loans required are of small size, less profit for the bank to make
2.they don’t have assets to act as “security”

40
Q

what is crowdfunding

A

raises capital by asking small funds from a large number of people

41
Q

advantages of crowdfunding

A

1.fast way to raise large amount of capital
2.available when other traditional sources are not available

42
Q

disadvantages of crowdfunding

A

1.media and publicity needed
2.crowdfunding platforms may reject an entrepreneur’s proposal

43
Q

sources of short term finance

A

1.overdrafts
2.trade credit
3.debt factoring

44
Q

what is overdraft

A

banks allowing businesses to spend more than what is in their bank account

45
Q

advantages of overdraft

A

1.most flexible sources of finance
2.can be cheaper than loans in short term
3.Interest has to be paid only on the amount overdrawn

46
Q

disadvantages of overdraft

A

1.interest rates are variable
2.banks can ask for the overdrafts to be paid at very short notice

47
Q

what is trade credit

A

when a business delays paying to it’s suppliers

48
Q

advantages of trade credit

A

1.puts business in better cash position

49
Q

disadvantages of trade credit

A

If the payments are not made quickly, suppliers may refuse to give discounts in the future or refuse to supply at all

50
Q

what is debt factoring

A

specialist agents that can collect all the business’ debts from debtors.

51
Q

advantages of debt factoring

A

1.immediate cash is available to business
2.Business doesn’t have to handle the debt collecting

52
Q

disadvantages of debt factoring

A

business doesn’t receive 100% value of it’s debts

53
Q

define trade receivable(debtor)

A

amount owed to a business by it’s customers who bought good on credit

54
Q

define trade payable(creditor)

A

amount owed by the business to it’s suppliers for goods bought on credit

55
Q

what are sources of long term finance

A

1.hire purchase
2.leasing
3.equity finance(issue of shares)
4.debt finance(bank loan, debentures)

56
Q

what is hire purchase

A

allows the business to buy a fixed asset and pay for it in monthly payments that include interest charges.

57
Q

advantages of hire purchase

A

the business doesn’t need to have a large cash sum to purchase

58
Q

disadvantages of hire purchase

A

1.cash deposit is paid in the beginning
2.interest payments can be high

59
Q

what is leasing

A

this allows a business to use an asset without purchasing it

60
Q

advantages of leasing

A

1.The firm doesn’t need a large sum of money to use the asset
2.The care and maintenance of the asset is done by the leasing company

61
Q

disadvantages of leasing

A

total cost of leasing may be higher than purchasing the asset

62
Q

what is equity finance

A

permanent finance provided by the owners of a limited company

63
Q

what are the two ways to issue shares

A

1.new issue
2.rights issue

64
Q

what is new issue

A

selling a large number of shares to the general public

65
Q

what is rights issue

A

existing shareholders are given the right to buy additional shares at a discounted price

66
Q

debt or equity finance evaluation

A

although in debt no shares are sold, so the ownership of the company doesn’t change, but interest chargers are an expense of the business. however, equity is a permanent capital, doesn’t have to be repaid, but if too many shares are sold ownership may change hand

67
Q

how can a bank be sure of a business before giving out a loan

A

1.cash flow forecast
2.income statement
3.business plan
4.evidence of collateral security

68
Q

why would shareholders buy additional shares

A

1.company’s share price is increasing
2.dividends are higher
3.company has good reputation

69
Q

Factors that affect choice of source of finance

A

1.purpose
2.amount required
3.size and legal form of business

business (25 decks)

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