FINANCE Flashcards
What is finance?
Finance is the money required in the business. Finance is needed to set up the business, expand it and increase working capital (the day-to-day running expenses).
What is start up capital?
Start-up capital is the initial capital used in the business to buy fixed and current assets before it can start trading.
What is working capital?
finance needed by a business to pay its day-to-day running expenses
What is capital expenditure?
Capital expenditure is the money spent on fixed assets (assets that will last for more than a year). Eg: vehicles, machinery, buildings etc. These are long-term capital needs.
What is Revenue expenditure?
Revenue Expenditure, similar to working capital, is the money spent on day-to-day expenses which does not involve the purchase of long-term assets. Eg: wages, rent. These are short-term capital needs.
What is Retained Profit?
Give one advantage and disadvantage
The profit remaining after all the expenses, tax and dividens have been paid and which is ploughed back into the buisness
Advantage: Does not have to be repaid, unlike, a loan.
– No interest has to be paid
Disadvantage: A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce owner’s share of profit and they may resist the decision.
What is sale of exisitng assets
What are the advantages and disadvantages?
Sale of inventories: sell of finished goods or unwanted components in inventory.
Advantage:
– Reduces costs of inventory holding
Disadvantage:
– If not enough inventory is kept, unexpected increase demand form customers cannot be fulfilled
What is issue share? What are the advantages and disadvantages?
Issue of share: only for limited companies.
Advantage:
A permanent source of capital, no need to repay the money to shareholders
no interest has to be paid
Disadvantages:
Dividends have to be paid to the shareholders
If many shares are bought, the ownership of the business will change hands. (The ownership is decided by who has the highest percentage of shares in the company)
What is a Bank loan? what are the advantages and disadvantages
money borrowed from banks
Advantages:
Quick to arrange a loan
Can be for varying lengths of time
Large companies can get very low rates of interest on their loans
Disadvantages:
Need to pay interest on the loan periodically
It has to be repaid after a specified length of time
Need to give the bank a collateral security (the bank will ask for some valued asset, usually some part of the business, as a security they can use if at all the business cannot repay the loan in the future. For a sole trader, his house might be collateral. So there is a risk of losing highly valuable assets)
What is debenture issues? What are the advantages and disadvantages
Debenture issues: debentures are long-term loan certificates issued by companies. Like shares, debentures will be issued, people will buy them and the business can raise money. But this finance acts as a loan- it will have to be repaid after a specified period of time and interest will have to be paid for it as well.
Advantage:
Can be used to raise very long-term finance, for example, 25 years
Disadvantage:
Interest has to be paid and it has to be repaid
What is Debt factoring? What is the advantage and disadvantage
Debt factoring: a debtor is a person who owes the business money for the goods they have bought from the business. Debt factors are specialist agents that can collect all the business’ debts from debtors.
Advantages:
Immediate cash is available to the business
Business doesn’t have to handle the debt collecting
Disadvantage:
The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t get all of their debts
What is Grant and subsidies? What are the advantages and disadvantages
Grants and subsidies: government agencies and other external sources can give the business a grant or subsidy
Advantage:
Do not have to be repaid, is free
Disadvantage:
There are usually certain conditions to fulfil to get a grant. Example, to locate in a particular under-developed area
What is micro finance?
Micro-finance: special institutes are set up in poorly-developed countries where financially-lacking people looking to start or expand small businesses can get small sums of money. They provide all sorts of financial services
What is crowdfunding?
Crowdfunding: raises capital by asking small funds from a large pool of people, e.g. via Kickstarter. These funds are voluntary ‘donations’ and don’t have to be return or paid a dividend.
What are overdrafts? What are the advantages and disadvantages
Overdrafts: similar to loans, the bank can arrange overdrafts by allowing businesses to spend more than what is in their bank account. The overdraft will vary with each month, based on how much extra money the business needs.
Advantages:
Flexible form of borrowing since overdrawn amounts can be varied each month
Interest has to be paid only on the amount overdrawn
Overdrafts are generally cheaper than loans in the long-term
Disadvantages:
Interest rates can vary periodically, unlike loans which have a fixed interest rate.
The bank can ask for the overdraft to be repaid at a short-notice.
What is trade credits? give advantages and disadvantages
Trade Credits: this is when a business delays paying suppliers for some time, improving their cash position
Advantage:
No interests, repayments involved
Disadvantage:
If the payments are not made quickly, suppliers may refuse to give discounts in the future or refuse to supply at all
