IB_Business_Finance_Flashcards

Question 1

What is finance?

Answer 1

The financial resources used by business organizations to cover their financial needs. Without money, businesses cannot operate.

Question 2

When might a business need finance?

Answer 2

1. When it is starting up
2. When it needs to buy equipment or premises
3. When it wants to expand into a new location (market development and diversification).

Question 3

What are the main uses of finance?

Answer 3

There are two main uses: Capital expenditure and Revenue expenditure.

Question 4

What is capital expenditure?

Answer 4

The money used to buy fixed assets—durable, physical assets that belong to a business and are used to generate future revenues (e.g., buildings, factories, machines, materials).

Question 5

What is revenue expenditure?

Answer 5

The money used to cover day-to-day, short-term activities (e.g., rent, property taxes, utilities, employee salaries).

Question 6

What are sources of finance?

Answer 6

Methods or ways that business organizations can use to acquire resources (funds, financial resources, money, etc.).

Question 7

What are internal sources of finance?

Answer 7

Sources of finance that exist within the business itself. There are three: personal funds, retained profits, and sale of assets.

Question 8

What are personal funds?

Answer 8

An internal source of finance where the owners use their personal savings to cover the business’s financial needs.

Question 9

Advantages of personal funds?

Answer 9

1. Permanent source of finance (no repayment needed).
2. Cheap (no interest charges).
3. Flexible (owners decide amount and timing).

Question 10

Disadvantages of personal funds?

Answer 10

1. Limited (may not cover all needs).
2. Risky (owners may lose all their money if the business fails).
3. Opportunity costs (savings could be used elsewhere).

Question 11

What are retained profits?

Answer 11

Also known as ploughed-back profits—profits accumulated over time after covering expenses like taxes and dividends.

Question 12

Advantages of retained profits?

Answer 12

1. Useful for expansion.
2. Cheap (no interest charges).
3. Safe (no repayment required).

Question 13

Disadvantages of retained profits?

Answer 13

1. Shareholder dissatisfaction (lower dividends).
2. Less flexibility in emergencies.
3. Not viable for all businesses (mostly for larger firms).

Question 14

What is sale of assets?

Answer 14

Selling unused or obsolete physical resources to acquire funds.

Question 15

Advantages of sale of assets?

Answer 15

1. Improves liquidity (converts assets to cash).
2. Cheap (no interest charges).
3. Can update financial resources (replace outdated assets).

Question 16

Disadvantages of sale of assets?

Answer 16

1. Time-consuming (fixed assets take time to sell).
2. Loss of market value (buyers bargain for lower prices).
3. Reduced production capacity (fewer resources).

Question 17

General advantages of internal sources of finance?

Answer 17

1. Cheap
2. Permanent source of finance
3. Flexible
4. Owners maintain control.

Question 18

General disadvantages of internal sources of finance?

Answer 18

1. Start-ups lack retained profits.
2. Limited amount available.
3. Reduced ability to handle emergencies.
4. Shareholders may be dissatisfied (lower dividends).

Question 19

What are external sources of finance?

Answer 19

Sources of finance that exist outside the business. There are seven: share capital, loan capital, overdraft, trade credit, crowdfunding, leasing, and business angels.

Question 20

What is share capital?

Answer 20

A long-term source of finance where a business sells shares to external investors to acquire funds.

Question 21

Advantages of share capital?

Answer 21

1. Permanent (no repayment needed).
2. Cheap (no interest charges).
3. Provides large financial resources.
4. Supports business expansion.

Question 22

Disadvantages of share capital?

Answer 22

1. Loss of control (ownership dilution).
2. Dividends must be paid to shareholders.
3. Risk of takeover.
4. Not available for all businesses (only public companies).

Question 23

What is loan capital?

Answer 23

A business borrows funds from financial institutions (e.g., banks) and repays them with interest over time.

Question 24

Advantages of loan capital?

Answer 24

1. Satisfies financial needs.
2. Allows small installment repayments.
3. No effect on ownership.
4. Available for most businesses.

Question 25

Disadvantages of loan capital?

Answer 25

1. Expensive (interest charges). 2. Requires collateral. 3. Interest rates may be variable (increasing cost).

Question 26

What is an overdraft?

Answer 26

A short-term banking facility that allows businesses to withdraw more than their account balance, repayable quickly.

Question 27

Advantages of overdrafts?

Answer 27

1. Easily accessible. 2. Covers emergencies. 3. Flexible (businesses control usage).

Question 28

Disadvantages of overdrafts?

Answer 28

1. Limited (short-term use only). 2. High interest rates. 3. Quick repayment required.

Question 29

What is trade credit?

Answer 29

Allows a business to buy now, pay later. Businesses acquire raw materials from suppliers on credit, usually repaid in 1-3 months.

Question 30

Advantages of trade credit?

Answer 30

1. Improves cash flow. 2. Provides financial flexibility. 3. Strengthens supplier relationships.

Question 31

Disadvantages of trade credit?

Answer 31

1. Risk of overreliance. 2. Late payments harm credit rating. 3. May lose cash discounts for immediate payment.

Question 32

What is crowdfunding?

Answer 32

Raising funds from the public for business or social causes.

Question 33

Advantages of crowdfunding?

Answer 33

1. Can raise large amounts quickly. 2. Time-saving. 3. Permanent (no repayment needed). 4. No effect on ownership.

Question 34

Disadvantages of crowdfunding?

Answer 34

1. May be illegal in some countries. 2. Limited funding availability. 3. Risk of scams. 4. Requires time to gain public support.

Question 35

What is leasing?

Answer 35

Renting fixed assets instead of buying them outright. The owner (lessor) rents the asset to the user (lessee).

Question 36

Advantages of leasing?

Answer 36

1. Access to assets without purchase. 2. Lower costs (lessor handles maintenance). 3. Ability to upgrade resources.

Question 37

Disadvantages of leasing?

Answer 37

1. No ownership until all payments are made. 2. Long-term costs may exceed purchase price.

Question 38

What are business angels?

Answer 38

Private investors providing funds to start-ups in exchange for a stake in the company.

Question 39

Advantages of business angels?

Answer 39

1. Permanent (no repayment required). 2. Provide technical support. 3. No interest charges.

Question 40

Disadvantages of business angels?

Answer 40

1. Loss of control. 2. Investors may prioritize their own interests over the business.

Question 41

Types of finance based on duration?

Answer 41

1. Short-term (e.g., overdraft, trade credit) 2. Medium-term (e.g., leasing) 3. Long-term (e.g., share capital, loan capital).

Question 42

Factors influencing the choice of finance?

Answer 42

1. Purpose of funds 2. Cost 3. Business size/status 4. Amount required 5. Economic environment 6. Gearing ratio (debt vs capital).