Finance - Sources

Question 1

What is finance?

Answer 1

Every business needs finance to carry out their aims and objective. Finance is available through internal and external sources

Question 2

What are 3 advantages of internal finance?

Answer 2

1. No interest has to be paid
2. The affairs of the business are kept private
3. Doesn’t have to be repaid

Question 3

What is a disadvantage of internal sources of finance?

Answer 3

There may not be enough money available

Question 4

Name the 5 internal sources of finance

Answer 4

1. Owners investment
2. Retained profits
3. Sale of inventory
4. Sales on non current (fixed) things
5. Debt collection

Question 5

Name 3 advantages of owners investment

Answer 5

1. A cheaper form of finance for most businesses
2. The money invested belongs to the owner and therefore doesn’t have to be repaid
3. Doesn’t attract payment interests

Question 6

Name 2 disadvantages of owners investment

Answer 6

1. Owners may not have access to additional money
2. If used in a sole trader business or partnership, unlimited liability means owners could lose their private assets

Question 7

Name 3 advantages of retained profits

Answer 7

1. Cheaper form of finance for most businesses
2. The source of this finance doesn’t attract interest payments
3. Accumulated profits belong to the owner and doesn’t have to be repaid

Question 8

Name 2 disadvantages of retained profits

Answer 8

1. This source of finance is only available when the business is making a profit
2. Many businesses withdraw all profits through drawing or dividends

Question 9

Name an advantage of sale of inventory

Answer 9

This makes cash available very quickly

Question 10

Name a disadvantage of sale of inventory

Answer 10

The cash is required for buying more inventory so the business can continue to make a profit, so it isn’t able to spend on other things

Question 11

Name an advantage of sales on non current (fixed) things

Answer 11

This source raises finance very quickly without any debt and interest charges

Question 12

Name a disadvantage of sales on non current (fixed) things

Answer 12

Very few businesses are able to sell valuable and continue trading at the same level

Question 13

Name an advantage of debt collection

Answer 13

1. The business has access to finance immediately

Question 14

Name a disadvantage of debt collection

Answer 14

There’s no guarantee that the discounted offers to pay early will be accepted by customers