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IGCSE Business > Chapter 22 - Business Finance: Needs And Resources > Flashcards

Chapter 22 - Business Finance: Needs And Resources Flashcards

1
Q

Responsibilities of the finance department (5)

A

Recording all financial transactions
Preparing final accounts
Producing accounting information for managers
Forecasting cash flows
Making important financial decisions (what source of finance to use for different things)

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2
Q

Main reasons why a business needs finance (3)

A

Starting up a business
Additional working capital
Expansion on an existing business

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3
Q

Start up capital

A

Finance needed by a new business to pay for essential non-current (fixed) and current assets before it can begin trading

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4
Q

Why is finance needed when starting up a business

A

Start up finance is needed to buy land, labour, inventories to be sold etc along with other current and non-current assets

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5
Q

Working capital

A

The finance needed by a business to pay its day-to-day costs

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6
Q

Capital expenditure

A

Money spent on non-current (fixed) assets which will last more than 1 year

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7
Q

Revenue expenditures

A

Money spent on day-to-day expenses which do not involve the purchase of a long term asset eg. Wages or rent

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8
Q

Why finance is needed when expanding an existing business

A

Additional non current assets could be purchased (larger buildings/more machinery)
Money for research and development of new products to reach new markets

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9
Q

Why finance for additional working capital is needed

A

To pay wages, buy raw materials and other day-to-day activities.
Businesses do not close because they are unprofitable, it’s because they lack working capital.

Capital and revenue expenditure

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10
Q

Internal finance

A

Finance obtained from within the business itself

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11
Q

External finance

A

Finance obtained from sources outside of and separate from the business

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12
Q

Ways of classifying sources of finance (2)

A

Internal/external
Short-term/long-term

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13
Q

Retained profit

A

Net profit reinvested back into a company after deducting tax payments to owners

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14
Q

Retained profit advantages (2)

A

Doesn’t have to be repaid
No interest charged on it

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15
Q

Internal sources of finance (4)

A

Retained profit
Sale of existing assets
Sale of inventories to reduce inventory levels
Owners’ savings

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16
Q

Disadvantages of retained profit (3)

A

New business won’t have any
Small firms’ profit may be too small for expansion needed
Keeping profits in business reduces payments to owners

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17
Q

Sale of existing assets advantages (2)

A

Makes better use of capital tied up in the business
Does not increase the debt of the business

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18
Q

Disadvantages of sales of existing assets as an internal income source (2)

A

Takes time and no amount is garuanteed
Source is not available for new businesses as they have no surplus assets to sell

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19
Q

Advantages of sales of inventory to reduce inventory levels as a source of finance (1)

A

Reduces opportunity and storage level costs

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20
Q

Disadvantages of sales of inventories to reduce inventory levels as a source of finance

A

Must be done carefully to ensure customers will be satisfied

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21
Q

Advantages of owners savings as an internal finance source (2)

A

Quickly available
No interest paid

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22
Q

Disadvantages of owners savings as an internal finance source (2)

A

Savings may be too low
Increases the risk taken by owners as they have unlimited liability

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23
Q

External finance (8)

A

Issue of shares ONLY FOR LIMITED COMPANIES
Bank loans
Selling debentures
Factoring of debts
Grants and subsides from outside agents
Alternative sources of capital
Micro-finance
Crowdfunding

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24
Q

Issue of shares as a source of external shares advantages (2)

A

Permanent source of capital that does not need to be repaid
No interest has to be paid

25
Issue of shares as a source of external finance disadvantages (3)
Dividends paid after tax, interest on loans paid before tax is deducted Dividends expected by shareholders Ownership may change if too many shares are sold
26
Bank loans as a source of external finance advantages (3)
Quick to arrange Can be for varying lengths of time Large companies offered low interest rates if they borrow large sums
27
Bank loans as a source of external finance disadvantages (2)
Security/collateral required Loan and interest must be payed eventually
28
Debentures
Long term loan certificates issued by limited companies
29
Selling debentures as a source of external finance advantages (1)
Can be used to raise very long-term finance
30
Selling debentures as a source of external finance disadvantages (1)
Must be repaid with interest
31
Micro-finance
Providing financial services - including small loans - to poor people not serviced by traditional banks
32
Factoring of debts
When debt factors (specialist agencies) buy the claims on debtors of businesses for immediate cash
33
Factoring of debts as a source of external finance advantages (2)
Cash is immediately available to the business Risk of collecting the debt becomes the factors and not the business’s
34
Factoring of debts as a source of external finance disadvantages (1)
Business does not receive 100% of the value of its debts
35
Grants and subsidies from outside agencies as a source of external finance disadvantages (1)
Often have strings attached
36
Grants and subsidies from outside agents as a source of external finance advantages (1)
Usually don’t have to be repaid
37
Why banks don’t lend money to poor people (2)
The size of the loans is not enough to make a profit on The people often have nothing to offer as collateral
38
Crowdfunding
Funding a project/venture by raising money from a large number of people who each contribute a relatively small amount typically via the internet
39
Crowdfunding benefits (4)
Used by engineers when other traditional sources aren’t available Can be a fast way to raise substantial sums Allows the publics reaction to a new business venture to be tested No initial fees need to be payed to the platform, only later once the required finance is raised
40
Crowdfunding limitations (4)
Crowdfunding platforms may reject the proposal if not well thought out If the total amount required isn’t raised, the promised finance must still be paid Media interest and publicity needs to be generated for success Could allow competitors to steal the idea and reach the market first with a similar product
41
Short term finance sources (3)
Factoring debts Overdrafts Trade credit
42
Overdraft advantages (5)
Bank gives money to overdraw bank account Business could use finance to pay wages/suppliers immediately Flexible form of borrowing Interest paid only on amount overdrawn Overdrafts can be cheaper than short term loans.
43
Overdrafts disadvantages (2)
Interest rates are variable Bank can asked for overdraft to be paid at short notice
44
Trade credit
When a business delays paging its suppliers to be in a better cash position, almost interest free loan for the time it is delayed for
45
Trade credit disadvantages
Supplier may refuse to supply if the payment is not made quickly
46
Main sources of long-term finance (6)
Debentures Long-term loans/dept finance Issue of shares leasing Hire purchase Bank loans Leasing
47
What is it called when a business sells some of its non-current assets for cash and then lease them back from a leasing company
Sale and leaseback
48
Hire purchase def. And advantage (1)
Allows a business to buy a non-current asset over a long period of time with monthly payments including interest -the business does not have to find a large cash sum to purchase the asset
49
Hire purchase disadvantages (2)
Cash deposit is paid at the start of the period Interest payments can be high
50
Leasing advantages (2)
Care + maintenance carried out by the leasing company Business does not have to find a large cash sum to purchase the asset
51
Leasing disadvantages (1)
Total cost of leasing assets will be higher than purchasing them
52
Another name for the sale of shares
Equity finance
53
How long-term loans/debt finance differ from share capital (4)
Loan interest is paid before tax and is an expense Loan interest must be payed yearly but dividends don’t if the business has made a loss Loans must be repaid Loans are secured against particular assets
54
What businesses consider when choosing a source of finance (5)
Purpose and time period Amount needed Legal form and size Control Risk and gearing
55
What does it mean if a business is highly geared
A large proportion of the total capital raised is from long-term loans. They are financing themselves in a risky manner and banks will be reluctant to lend money
56
What must be available to increase the chances of a bank investing (5)
A cash flow forecast Income statement for the current period and a forecast one Details of existing loans and sources of finance being used Evidence that collateral is available to reduce the banks risk Business plan
57
What makes share holders more likely to invest (4)
Share price increasing High dividends and rising profits Better option than other companies Company has a good reputation with plans for future growth
58
What the income statement for limited companies also contains (4)
Corporation tax payed on the companies net profits Dividends payed out to shareholders Retained profits left Results from previous years to allow easy comparisons

IGCSE Business (30 decks)

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