Financial information and decisons

Question 1

What are the main reasons business need finance?

Answer 1

*start-up capital to buy the factors of production and inventory need for a business to start trading
*additional working capital
*capital for expansion so the business can expand pre existing operation

Question 2

what are long term finance needs and short term finance needs and what are their differences

Answer 2

*well short term finance needs are finance needs need to pay for things that last less then a year in a business(working capital) wages and rents
*long term finance needs are investemnt or purchaces of assets which last more then a year in a business e.g purchaces of non current assets

Question 3

what are external and internal sources of finance

Answer 3

*internal sources of finance are obtained from the business itself within
*external sources of finance are obtained from outside the business

Question 4

Retained profit adv and dis

Answer 4

retained profit is profit that remains after distribution of shares to owners or shareholders
ADV
*there are no interests
*You dont have to payback anybody
DIS
*A new business wont have any retained profit
*A business might not have enough retained profit to expand
*This will reduce payment to owners

Question 5

Sales of existing assets adv and dis

Answer 5

adv
*No debt will be accumulated
*It will be better use of capital tied up to the business
disv
*It takes time to sell assets
*A new business may not have surplus assets

Question 6

Owners savings adv and dis

Answer 6

Adv
*The money is available fast to the business
*The is no interest to be payed back
Dis
*It increases the owners risk
*The owners capital may not be enough

Question 7

Issues of shares

Answer 7

Adv
*It is a permanent source of finance
*There is no interest
Dis
*The owners could lost control of business if way to many share are sold
*Shareholder will expect dividens

Question 8

Bank loans

Answer 8

A bank loan is a long term liabilty in which a bank will borrow a firm a sum of money to be payed back with interest
Adv
*They easy and quick to arrange
*They have varried lengths
*Larger companies will borrow large sums of money at lower interest rates
Dis
*Money has to be payed back with interest
*The may be need for collateral and assets may need to be sold

Question 9

Debt factoring

Answer 9

Debts factorers are specialisst agencies that buy the claims of debtors of a business for immediate cash
Adv
*Immediate cash is available to business
*The risk of collecting the debts becomes of the factors and not the business
Dis
The business does not receive 100%

Question 10

Overdrafts

Answer 10

Adv
cheaper alternative to loans
varied interest rates
Dis
interest has to be payed
short period to payback money

Question 11

Crowd-funding

Answer 11

crowndfunding is funding a project or venture by raising money from a large number of people who each contribute a relativley small amount
Adv
*they are no initial fees however when target is met the platform will deduct a percentage
*It is a way to gauge if idea is good or not as if people do not invest in business it may be a bad idea
*it is a fast way of generating substantial amounts of money
*Alternative source of finance as others may not be available
Dis
*Ideas may be stolen by competitors and they may beat you to market
*A lot of advertsing needs to be done to gain publicity in order for target to be met
*If target not met money will have to be repaid
*Crowdfunding may reject an entrepreneurs proposal if it is not well thought out