Introduction To Finance Flashcards
What is finance?
Money needed to start up and run a business
When is finance needed?
- Start up a business
- Run a business day to day
- Develop and grow a business
What is capital expenditure?
Spending on business resources that can be used repeatedly over time
What is revenue expenditure?
Spending on business resources that have already been consumed or will be very shortly
What is fixed costs?
Those that do not change as the number of sales change
E.g rent or salaries
What is variable costs?
Those that change in line with the amount of business
E!g the cost of buying raw materials
What is working capital?
The finance available for the day to day running of the business
Sources of finance: short term (under one year)
- Bank overdraft
- Trade credit
Bank overdraft
- Allowing the firm’s bank account to go onto the red up to an agreed limit
- Flexible and easy to sarangi but interest charges are high
Trade credit
- Suppliers agree to accept cash payment at a given date in the future
- Failure to pay on time can present problems for future orders
Sources or finance: medium terms (2-4 years)
- Bank term loan
- Leasing
Bank term loan
- Banks lend sums of capital, often at a fixed rate of interest
- Makes financial planning easy but interest rates can be high, particularly for small firms
Leasing
- Firms sign a contract to pay a rental fee to the owner of an assets in return for the use of that asset over a period of 2-4 years
- Expensive, but avoids large cash out flows when buying new assets
Sources of finance: Long term (5+ years)
- Owner’s savings
- Sale of shares
- Reinvested profits
- Venture capital loans
Sale of shares
- Private and public limited companies can sell shares in the ownership of the company
- In return, shareholders gain a say in how the firm is run ana are entitled to a share of profits
