Sources of finance

Question 1

What is retained profit

Answer 1

Profit(TR-TC) kept within a business after tax to help finance future activity
Retained so it becomes part of total equity or distributed as dividends

Question 2

Advantages of retained profit

Answer 2

Do not have to repay which helps cash flow
No interest charges which reduces costs
Does not dilute business ownership

Question 3

Disadvantages of retained profit

Answer 3

Only an option if sufficient profit exists within the business
May cause shareholder dissatisfaction if done at the expense of dividends

Question 4

What are net current assets

Answer 4

Difference between current assets and current liabilities that can be used to fund day to day activities e.g replenish inventory

Question 5

What are current assets

Answer 5

Items of value owned by a business that will be used and change in value within a year e.g inventory, trade receivables, cash and cash equivalents

Question 6

What are current liabilities

Answer 6

Items owned by a business that are to be repaid within a year e.g trade payables and overdrafts

Question 7

Advantages of net current assets

Answer 7

No interest payments

No loss of ownership

Question 8

Disadvantages of net current assets

Answer 8

May lower profitability if customers are lost due to short credit terms
May lose discounts from suppliers if long credit terms are required

Question 9

What are sale of assets

Answer 9

Method of raising short term finance by disposing of a business asset for cash
Improves short term cash flow problems but may affect long term profitability

Question 10

Advantages of sale of assets(non current)

Answer 10

No interest charges/repayments
May turn obsolete asset into finance
Immediate lump sum of cash injection

Question 11

Disadvantages of sale of non current assets

Answer 11

Expensive in the long run if need to lease the asset back
Loss of the use of asset/future value
One off option(Can’t be resold)

Question 12

What are external sources of finance

Answer 12

Funds raised from outside the business

Involves taking on debt, issuing equity or applying financial support

Question 13

What is owners capital

Answer 13

Entrepreneur invests their own money into a business

Question 14

Advantages of External sources/owners capital

Answer 14

No repayment which helps cash flow
No interest charges which reduces costs
Owners maintain control giving them greater autonomy in decision making
No lengthy application procedures

Question 15

Disadvantages of external sources/owners capital

Answer 15

Limited amounts available
Threat to personal finances/family
Opportunity cost of the investment

Question 16

What are loans

Answer 16

Lender provides capital to a borrower and the borrower agrees to repay with interest over a period of time

Question 17

Advantages of loans

Answer 17

Quick and easy to secure
Fixed interest rates which allow for budgeting
Improved cash flow as cost is spread out

Question 18

Disadvantages of loans

Answer 18

Interest must be paid regardless of financial situation
More expensive than other forms of finance
Penalty for early repayment

Question 19

What is crowdfunding

Answer 19

Raising finance from a large number of people investing different amounts of money(often small)
Internet is used to explain details

Question 20

Advantages of crowdfunding

Answer 20

Saves time/money
Helps establish customer base
High level of control

Question 21

Disadvantages of crowdfunding

Answer 21

Investor is only tied into their promised contribution if total amount is raised
Some crowdfunding websites only release funds if 100% target is reached
Larger sums may require bank loans

Question 22

What is venture capital

Answer 22

Investment from an established business/person into another business in return for a percentage equity in the new business
High risk/high reward investment
Venture capitalist can mentor the business
High rate of return in a specific time period

Question 23

Advantages of venture capitalist

Answer 23

Potential for large sums of money from investment
Mentoring from venture capitalist
Provides required capital for expansion

Question 24

Disadvantages of venture capital

Answer 24

Long complex process
Expensive for the business at first(e.g legal/accounting fees)
Partial loss of ownership
Risk of conflict/interference

Question 25

What is hire purchase

Answer 25

Financial agreement that allows the use of an asset whilst paying for it in regular instalments

Question 26

Advantages of hire purchase

Answer 26

Avoids one of lump sum payments
Makes budgeting easier
Helps cash flow management

Question 27

Disadvantages of hire purchase

Answer 27

Interest can reduce profitability

Business doesn’t own the asset until instalments have been paid

Question 28

What is leasing

Answer 28

Contract that allows other parties to rent assets

Question 29

Advantages of leasing

Answer 29

Allows business to use asset with owning it
Instalments makes budgeting easier
Lease company is responsible for repairs/maintenance

Question 30

Disadvantages of leasing

Answer 30

Costly in the long run reducing profitability

Business never actually owns the asset

Question 31

What is trade credit

Answer 31

Supplier pays for goods/services received at an agreed later date
Impacts cash flow for both parties
Business may lose out on discounts offered for immediate or quick payments which increases costs

Question 32

What are grants

Answer 32

Fixed amounts of capital provided to business by the government or other organisations to fund specific projects.
Difficult to obtain/lengthy application process
Limited availability

Question 33

What are the conditions attached to grants

Answer 33

Located in a high area of deprivation
Provide employment
Reduce environmental impacts
Support a good cause

Question 34

What is invoice discounting

Answer 34

Negotiating discounts e.g reduction in prices on invoices from suppliers
Reduces costs
Result of early payment/bulk buying
May affect profitability if you’re giving people discounts