internal finance Flashcards
Explain finance.
the management of the investment needed to; open, run and grow a business.
What are some reasons for raising finance?
To pay debts, this is likely to be a consolidation loan which may pay off suppliers
To help a business over a slow trading period - overdraft
To expand: a business may apply for long term finance such as a loan
To start-up a business may apply for a loan with a business plan or ask friends and family to invest
To buy stock: a business would ask a supplier for trade credit, typically 30, 60, 90 days
Explain personal savings as finance.
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
The owner may have used savings or a redundancy pay out to start up the business. This is, in theory, still owed back to the owner, although they may never take it back out in the lifetime of the business.
When is owner’s capital appropriate?
Sole traders and partnerships would be the two business forms which would mostly use owner’s capital to expand and to grow.
What are retained profits?
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.
In contrast to a loan, for which you may be able to increase the amount borrowed, the disadvantage is once retained profit is used it has gone and cannot be used elsewhere in the business.
When is retained profit appropriate?
Retained profits are profits that have been kept in a business when all the costs have been paid. An owner may draw a salary and the retained profit is left in the business to reinvest in new products and growth for the next year.
If a business is in its first year of trading it will probably NOT have any retained profits – as it will not have made any to retain.
If a business has not been profitable then there will not be any retained profit to spend.
Explain sale of assets as a form of finance?
A business can raise finance by selling items that they already own This could be: Machinery Land Premises Vehicles
The business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company – meaning the business will look less attractive to investors.
When is the sale of assets appropriate?
All types of business can sell their assets, except those that have just started up
This may not raise enough money for growth or expansion
Also, how well run is the business if they need to sell their assets to expand
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
