Management of Finance - Sources of Finance Flashcards
What is owners personal finance?
This includes personal savings and money borrowed from family and friends.
What are the advantages of owner’s personal finance?
- This allows the owner to keep control of the business.
- It can reduce the amount to be borrowed from other sources.
What are the disadvantages of owner’s personal finance?
- It can be difficult to withdraw savings once they are invested in the business.
- There is a risk that the owner could lose their savings if the business fails.
What are retained profits?
A business holding back profits from previous years.
What are the advantages of retained profits?
- This can be used to make larger purchases, such as assets or for bulk buying.
- The business doesn’t go into debt.
What are the disadvantages of retained profits?
- A business can find it more difficult to grow if it regularly uses retained profits, especially to solve short-term cash-flow problems.
What are sale of assets?
This refers to selling something that the business no longer needs.
What are the advantages of sale of assets?
- Money can be raised from the sale of an asset to boost cash flow.
- The money does not need to be repaid.
What are the disadvantages of sale of assets?
- If the finance is required urgently, the business may have to sell the asset for less than it is worth.
What is sell and lease back?
This refers to selling an asset and leasing (renting) it back.
What are the advantages of sell and lease back?
- The use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/factory/office.
- The business passes over responsibility for maintaining and renewing equipment to the leasing company.
What are the disadvantages of sell and lease back?
- Leasing over a long period of time can be expensive - ultimately, the business may pay back more than it received from the sale.
What is share issue?
This refers to selling shares in the business. PLC’s sell on the stock market. Ltds sell shares privately.
What are the advantages of share issue?
- Very large sums of money can be raised through the sale of shares.
- The money does not need to be repaid.
What are the disadvantages of share issue?
- Dividends have to be paid to shareholders.
- It can be expensive to advertise and organise the sale of shares.
What is debentures?
These refers to loans given to the business by individuals. Interest is paid annually and the loan is paid back in full of an agreed date in the future.
What are advantages of debentures?
- Control of the business is retained.
- These can be paid back over a long time.
What are disadvantages of debentures?
- Interest must be paid annually, even if a loss is made, unlike with shares where dividends are only paid out if profits are made.
What is bank overdraft?
This refers to a facility which allows a business to spend more money than is in its bank account.
What are advantages the bank overdraft?
- This is usually easy for a business to arrange with its bank.
- It allows a business to continue to pay business expenses despite having no money in its bank account.
What are disadvantages the bank overdraft?
- High interest rates are usually applied by the bank for borrowing money in this way.
- The overdraft can be withdrawn by the bank at any time and must then be repaid.
What is trade credit?
Allows a business to buy good from suppliers and pay them at a later date.
What are the advantages of trade credit?
- This allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid.
- It helps a business to keep going when cash flow is poor.
What are the disadvantages of trade credit?
- Discounts for prompt payment are lost.
- Suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period.