Chapter 29: Business finance Flashcards
Start-up capital
Capital needed by the entrepreneur to set up a business
Working capital
Capital needed to pay for raw materials, day-to-day running costs and credit offered to customers
Why do businesses need finance?
Cash injections to purchase capital equipment
Day-to-day finance to pay bills and expenses
Buying assets
Paying for takeovers to achieve growth
Short-term finance
Money required for short periods of up to one year
Long-term finance
Money required for more than one year
Profit
Value of goods (revenue) less costs
Liquidity
The ability of a business to pay off its short-term debts
Administration
When administrators manage a business that is unable to pay its debts with the intention of selling it as a going concern
Bankruptcy
The legal procedure for liquidating a business which cannot fully pay its debts out of its current assets
Liquidation
When a business ceases trading and its assets are sold for cash to pay suppliers and other creditors
Working capital (formula)
current assets - current liabilities
Current assets
Assets that are either cash or likely to be turned into cash within 12 months
Current liabilities
Debts that usually have to be paid within one year
Trade receivables
Money that customers owe the business
Trade payables
Money owed to creditors
Methods of managing inventory
Keeping smaller inventory levels
Using IT systems to record sales and inventory levels
Efficient inventory control, use and handling
Just-in-time inventory ordering
Delivering goods quickly to speed up payments
Methods of managing trade payables
Delaying payments to suppliers to increase credit period
Buying goods from suppliers who offer credit
Methods of managing trade receivables
Selling for cash only, no credit
Reducing the credit period offered to customers
Capital expenditure
Purchase of non-current assets that are expected to last for more than one year
e.g. machinery and buildings
Revenue expenditure
Spending on all costs and assets other than non-current assets including wages, salaries, and inventory
Internal sources of finance
Raising finance from a business’s assets or profits left in the business.
External sources of finance
Raising finance from sources outside the business
e.g. banks
Retained profit
Profit after tax retained in a company rather than paid out to shareholders as dividends
non-current assets
assets kept and used by the business for more than one year
Short-term external sources of finance
Bank overdrafts
Trade credit
Debt factoring
Overdraft
A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required
Factoring
Selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in exchange for immediate liquidity
Long-term external sources of finance
Hire purchase and leasing
Bank loans (long-term)
Debentures
Share/equity capital
Business mortgages
Government grants
Venture capital
Hire purchase
An arrangement for buying goods, where the buyer makes an initial down payment and pays the balance plus interest in instalments.
Leasing
Obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to purchase the asset
Long-term loans
Loans that do not have to be paid for at least a year
Debentures
Long-term bonds issued by companies to raise debt finance, often with a fixed rate of interest
Share/equity capital
Permanent finance raised through the sale of shares
Business mortgages
long-term loans to companies purchasing a property for the business, with the property acting as collateral
Venture capital
A type of financing that investors provide to startup companies that are believed to have long-term growth potential.
Collateral security
An asset which a business pledges to a lender and which must be sold off to pay a debt if the loan is not repaid
Rights issue
Existing shareholders are given the right to purchase additional stock at a discounted price
Microfinance
Providing financial services for poor and low-income customers who do not have access to banking services such as loans and overdrafts
Crowdfunding
Use of small amounts of capital from a large number of individuals to finance a new business venture
Factors affecting the source of finance
Why finance is needed and the period
Cost of financial source
Amount required
Form of business ownership and desire to keep control
Level of existing borrowing
Flexibility of finance required
