Section 5 - Finance (Chap 22 - 26) Flashcards
note: don’t say money, uses finance/ capital
eg of need for finance
-make new products
-pay fixed cots
-start new business
-advertising
-maintenance of machines
-buy raw materials
-insurance
-relocation
3 needed for finanace
1)Expand existing business/ Start up capital - finance required to start a new business
-low frequency of need
-need most money
-long term
2)Capital expenditure - purchasing assets (machines & tech)
-low frequency of need
3)Working capital - finance needed for day to day running of business
-high frequency
-need lest money
4) Revenue expenditure
note: bank never gives full amount asked for
types of sources of finanace
1)Internal = finance raised from inside the business
-can’t raise a lot
-don’t need to be repaid’
-no charge
-not in debt - business can’t be controlled by others
-has a limit to how much money you can make
eg, selling objects, raising prices
2)External = finance that comes form outside the business
-have to pay charge & return money after some time
-in debt = gives up control of business
-no limit to amount of money that can be earned
eg, bank loans, overdrafts
types of external finance
1) short term - finance that has to be paid within a year
eg, cheap things
2)medium term - finance that has to be paid in a couple of years
3)long term - finance that has to be paid after a long time
eg. expensive things
Sources of internal finance
1) retained profits = profit after paying tax & dividends
-don’t have to be repaid
-no charge
-only for established businesses
-shareholders are unhappy if you don’t give them more profit
2) sale of unwanted assets & use money to buy other things
-better use of capital
-sell second hand - don’t get full price as before
-have to buy again if need item
-not sold immediately
3) Sale of inventories to reduce inventory level
-reduces opportunity & storage costs oh high inventory levels
-there may no be enough good for customers
4) Owner’s savings = owner puts in personal money
-no charge
-saving may be too low
-increases risk to owner - unlimited liability
Sources of external finance
1) Sell shares
-no need to repay capital
-no charge
-dividends are expected by shareholders
-loss of control
2) Bank loans
-can be for varying period of time
-large business get lower bank rate when borrowing a large sum
-repaid with charges
-need a collateral = bank owns a property if business can’t repay money
3) Debentures = shares but you have to pay back with charge
-can raise money for long term
-have to repay with interest
4) Grants = money given by gov to help the business
-no charge
-don’t have to return money
-only gives it it helps society
eg, located in remote area to give employment there, make products that help preserve culture
Sources of finance in short term
1) trade credit = buying on credit = paying supplier after selling goods
-only for goods, not services
-no charge unless delayed payment
-suppliers may not be able to collect money on time
-supplier refuse to give discounts
2) Bank overdraft = businesses can withdraw more money than the amount of money in their account
-has high charge since risky for bank
-have to pay on demand
-interest only on the amount overdrawn
-in debt = lose control
3) Debt factoring
Sources of finance in medium term
1) higher purchase = pay down payment & installments
-has charge
-use machine to generate income to pay installments
-can immediately start earning om after buying machines
-company can repose assets if installments aren’t paid; insurance on assets in case
2) Leasing = renting something
-never have full ownership of the rented asset
-insurance on machine is done by leasing company
-total cost of leasing is higher than buying the machine
3) Bank loan = borrowing money from the bank
-need to show why business needs the money
-lots of paperwork
-banks are at risk
-cheap interest
Sources of finance in long term
1) shares
-only for Pub Ltd company
-can get lots of money by people buying that shares
-no need to repay capital
-no charge
-dividends are expected by shareholders
-loss of control
-no need to give dividends
2) Debentures = shares but you have to pay change & money back
-no ownership loss
-can get lots of money
-can raise money for long term
-have to repay with interest
-lots of paperwork to prevent fraud
3) mortgage
-giving land to a bank and if you can’t pay back, bank takes the land
-higher purchase when buying a hose: pay mortgage in installments for a long time, full ownership once full payment
Other sources of finance
1) Grants = money given by gov to help the business
-no charge
-don’t have to return money
-only gives it it helps society
eg, located in remote area to give employment there, make products that help preserve culture
2) Subsidy = money given by gov to help lower selling prices
-helps local business compete with foregin businesses
-only for necessary goods eg, petrol, electricity
-gov. bears the loss
-no need to pay back money
-no charge
3) Micro finance = provide financial services to poor people who are not served by the bank
4) Crowd Funding = funding by raising money from lots of people who each contribute a little amount
-little money from each person accumulates
-need publicity to increase chances of it working
-if target money isn’t raised, money has to be repaid
5) business angels = people who anonymously invest in other businesses to get a profit
define micro financing
provide financial services to poor people who are not served by the bank
define crowdfunding
-funding by raising money from lots of people who each contribute a little amount
factors affecting which finance to take
1) purpose = what the money will be used for
2)time period = how long you need money for
3)amount of money needed = large or small
4)type of business size = eg. sole trader, Pub Ltd
5) Control = lose control of business or not
eg, sole trader converting to partnership, getting a bank loan
6) risk & gearing = to what extent the business is funded by borrowings
-shouldn’t rely on borrowed funds too much = risky
-if you continue borrowing without paying back, less likely to get loans
-safer to be low geared
