Finance for a small business

Question 1

What does finance mean?

Answer 1

Finance is the management of money. This means how a business gets money to start up and how it manages its money once it is trading.

Question 2

Bank loans:

Answer 2

If a bank believes that an entrepreneur has a good business idea then it may be prepared to lend them money. This money will be paid back over time but with interest on it. They may also ask for collateral which is something that the bank can sell if the entrepreneur fails to keep making the payments.

Question 3

Mortgages:

Answer 3

These are specialist loans from banks used to purchase land or buildings. They are normally very long term. If the borrower fails to pay back, the lender can take the property.

Question 4

Overdrafts:

Answer 4

Overdrafts are short term loans that allow the entrepreneur to borrow variable amounts of money when there is a short term problem with money in the business.

Question 5

Friends and family:

Answer 5

Many entrepreneurs borrow money from friends and family. This may not carry any interest but friends and family may need to get their money back at very short notice.

Question 6

Hire Purchase and leasing:

Answer 6

Hire purchase and leasing is a way of buying an asset over a period of time. It enables you to keep more money in the business but it may mean you pay much more for the asset over time.

Question 7

Government grants:

Answer 7

The government wants people to start businesses as it is good for the economy and can reduce unemployment. So governments will quite often offer money for businesses to set up in certain areas. This money may not need paying back but may come with very strict conditions about how it can be used.

Question 8

Issuing grants:

Answer 8

Only limited companies can issue shares. A share is the ownership of a little bit of the business. Selling shares means that you are selling some of your business in order to gain the finance needed to start or expand the business.

Question 9

Factoring:

Answer 9

Factoring is the selling of debts you are owed by customers. You sell them for a bit less than they are worth but you do not have the expense of chasing up the debts. It is a good way of getting money into the business quite quickly.

Question 10

Trade credit:

Answer 10

This is the delaying of payment for a period of time. It would be negotiated between the business and its suppliers. It allows a firm to sell something before it has paid for it.

Question 11

Price:

Answer 11

This is the amount of money a company charges for its goods or services.

Question 12

Sales:

Answer 12

This is the number of products sold by a company over a period of time. This isn’t stated in financial terms.

Question 13

Revenue:

Answer 13

This is the income that a company receives from Sales.

Revenue-= Selling price x Sales

Question 14

Fixed costs:

Answer 14

These are costs that do not change as a business produces more products. They remain the same no matter what the level of output.

Question 15

Variable costs:

Answer 15

These are costs which rise as the volume of production goes up. They are directly related to the level of output.

Question 16

Total costs=

Answer 16

Fixed costs+variable costs

Question 17

Cash Flow

Answer 17

Cash flow is the money that flows in to and out from the business. Money would come into the business from sales and goods or service and money would flow out to suppliers. It is vital that the business manages these flows, because if there is not enough money in their bank account they will not be to pay their bills.