Decision making to improve financial performance - 5.3 Flashcards
What is an internal source of finance?
One that exists within the business
What is an external source of finance?
Injection of funds into the business from individuals, other businesses and financial institutions such as banks or government
What is retained profits?
Profits from current or previous trading years. Avoid paying interest on loans and avoid need for selling shares. Internal source of finance.
What is sale of assets?
Land, buildings or other assets that are not required and businesses decide to sell these. Also an internal source of finance?
What is an overdraft?
Offered by banks and allow businesses to borrow an agreed limit. Very flexible as amounts borrowed can vary and simple to arrange. However, interest is charged. External source of finance.
What is debt factoring?
Offered by banks. If businesses have sent out bills that have not yet been paid, they can sell these to gain cash immediately. Financial institution retains around 5% of value of invoice. Small firms use debt factoring as overdrafts become more difficult to arrange.
What is a bank loan?
Financial institution advances business a set figure and business makes repayments over time. Can be arranged if business seeking credit is financially sound with good financial history. If the institution considers the loan risky, then it’s likely to charge higher rate of interest.
What is share capital?
Funds a company raises by issuing shares to investors. Ordinary shares have voting rights and the potential of dividends while preference shares have a fixed dividend but limited to no voting rights.
What is venture capital?
Private equity provided by investors to start up and small businesses which are believed to have long-term growth potential.
