Internal Finance

Question 1

Definition of finance

Answer 1

Finance means the management of the investment needed to; open, run and grow a business

Question 2

Reasons for raising finance

Answer 2

To pay debts, this is likely to be a consolidation loan which may pay off suppliers
B. To help a business over a slow trading period - overdraft
C. To expand: a business may apply for long term finance such as a loan
D. To start-up a business may apply for a loan with a business plan or ask friends and family to invest

Question 3

What is owners capital

Answer 3

This is also sometimes called owners equity
• It shows the stake the owner has in the business
• This represents the net assets of the company – if all the debts of the business were paid off how much would be owed to the owner

Question 4

When is owners capital appropriate

Answer 4

Sole traders and partnerships would be the two business forms which would mostly use owner’s capital to expand and to grow

Question 5

What is retained profit

Answer 5

After a year or more of trading a business may have some profits that they are able to re-invest into the business to help it grow.
• The advantage of retained profits is there is no interest to pay

Question 6

When is retained profit appropriate

Answer 6

If a business is in its first year of trading it will NOT have any retained profits – as it will not have made any to retain

Question 7

What is sale of assets

Answer 7

A business can raise finance by selling items that they already own, these are called assets
• This could be: • Machinery
• Land
• Premises • Vehicles

Question 8

When is sale of assets appropriate

Answer 8

All types of business can sell their assets
• When a business is growing it may need to raise cash fast to be able to continue to trade
• Assets (like a van) can be sold quickly (same day) for cash

Question 9

Advantages of selling assets

Answer 9

In a larger business which has a portfolio of products, then the sale of assets can improve efficiency and increase capacity utilisation

Question 10

Disadvantages of selling assets

Answer 10

This may not raise enough money for growth or expansion
• Selling assets may draw into question just how well run the business is, if it needs to sell its assets to pay bills or to continue to trade