chapter 29 business finance

Question 1

start-up capital

Answer 1

the capital needed by an entrepreneur to set up a business

Question 2

working capital

Answer 2

the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers

Question 3

short-term finance

Answer 3

money required for short periods of time of up to one year

Question 4

long-term finance

Answer 4

money required for more than one year

Question 5

profit

Answer 5

the value of goods sold (revenue) less costs

Question 6

liquidity

Answer 6

the ability of a business to pay its short-term debts

Question 7

administration

Answer 7

when administrators manage a business that is unable to pay its debts with the intention of selling it as going concern

Question 8

bankruptcy

Answer 8

the legal procedure for liquidating a business (or property owned by a sole trader) which cannot fully pay its debt out of its current assets

Question 9

liquidation

Answer 9

when a business ceases trading and its assets are sold for cash to pay suppliers and other creditors

Question 10

current assets

Answer 10

assets that either are cash or likely to be turned into cash within 12 months (inventory and trade receivables or debtors)

Question 11

current liabilities

Answer 11

debts that usually have to be paid within one year

Question 12

capital expenditure

Answer 12

the purchase of non-current assets that are expected to last for more than one year, such as buildings and machinery

Question 13

revenue expenditure

Answer 13

spending on all costs and assets other than non-current assets , which includes wages, salaries and inventory of materials

Question 14

internal sources

Answer 14

raising finance from the business’s own assets or from profits left in the business (retained earning)

Question 15

external sources

Answer 15

raising finance from sources outside the business for ex banks

Question 16

retained earnings

Answer 16

profit after tax retained in a company rather than paid out to shareholders as dividends

Question 17

non-current assets

Answer 17

assets kept and used by the business for more than one year

Question 18

overdraft

Answer 18

a credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required

Question 19

hire purchase

Answer 19

a company purchases an asset and agrees to pay fixed repayments over an agreed time period. the asset belongs to the purchasing company once the final payment has been made

Question 19

factoring

Answer 19

selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in exchange for immediate liquidity

Question 19

leasing

Answer 19

obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to raise long-term capital to buy the asset . the asset is owned by the leasing company

Question 20

long-term loans

Answer 20

loans that do not have to be repaid for at least one year

Question 21

debentures

Answer 21

long-term bonds issued by companies to raise debts finance, often with a fixed rate of interest

Question 22

share ( or equity ) capital

Answer 22

permanent finance raised by companies through the sales of shares

Question 23

business mortgages

Answer 23

long-term loans to companies purchasing a property for business premises, with the property acting as collateral security on the loan

Question 24

venture capital

Answer 24

risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources

Question 25

collateral security

Answer 25

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

Question 26

rights issues

Answer 26

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

Question 27

microfinance

Answer 27

providing financial services for poor and low-income customers who do not have access to the banking services, such as loans and overdrafts, offered by traditional commercial banks

Question 28

crowd funding

Answer 28

the use of small amounts of capital from a large number of individuals to finance a new business venture