Finance - Sources Flashcards
What is finance?
Every business needs finance to carry out their aims and objective. Finance is available through internal and external sources
What are 3 advantages of internal finance?
- No interest has to be paid
- The affairs of the business are kept private
- Doesn’t have to be repaid
What is a disadvantage of internal sources of finance?
There may not be enough money available
Name the 5 internal sources of finance
- Owners investment
- Retained profits
- Sale of inventory
- Sales on non current (fixed) things
- Debt collection
Name 3 advantages of owners investment
- A cheaper form of finance for most businesses
- The money invested belongs to the owner and therefore doesn’t have to be repaid
- Doesn’t attract payment interests
Name 2 disadvantages of owners investment
- Owners may not have access to additional money
- If used in a sole trader business or partnership, unlimited liability means owners could lose their private assets
Name 3 advantages of retained profits
- Cheaper form of finance for most businesses
- The source of this finance doesn’t attract interest payments
- Accumulated profits belong to the owner and doesn’t have to be repaid
Name 2 disadvantages of retained profits
- This source of finance is only available when the business is making a profit
- Many businesses withdraw all profits through drawing or dividends
Name an advantage of sale of inventory
This makes cash available very quickly
Name a disadvantage of sale of inventory
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
Name an advantage of sales on non current (fixed) things
This source raises finance very quickly without any debt and interest charges
Name a disadvantage of sales on non current (fixed) things
Very few businesses are able to sell valuable and continue trading at the same level
Name an advantage of debt collection
- The business has access to finance immediately
Name a disadvantage of debt collection
There’s no guarantee that the discounted offers to pay early will be accepted by customers