Sources of finance (session 9)

Question 1

4 sources of internal finance available to a business

Answer 1

Tighter credit control
Retained earnings
Reducing inventory levels
Deferring payments to creditors

Question 2

Advantages and disadvantages of retained earnings

Answer 2

Adv-
No costs involved
Some shareholders happy as increase in investment increase share price

Dis-
Less dividends
No effect on control of business
Amount of future profits unknown

Question 3

Adv and disadv of reducing inventory levels

Answer 3

Adv-
Increases finance
Lower chance of theft
Too much stock loses possible opportunities

Dis-
May have not enough stock
Dis econ of scale
reliant on fast delivery

Question 4

Adv and disadva of tighter credit control

Answer 4

Adv-
More cash
Quick flow
No risk with credit

Disadv-
May lose customers
May ruin relationship

Question 5

Long term external sources of finance available to a business

Answer 5

Ordinary shares
Loans
Mortgages

Question 6

Short term sources of external finance

Answer 6

Bank overdraft
Debt factoring

Question 7

Adv and dis of ordinary shares

Answer 7

Adv
Difficult times they can avoid paying dividends

Dis
Subject to strict rules on buy back

Question 8

Adv and disadv of loans

Answer 8

Adv-
Only have to pay back long term

Disadv-
Don’t know if this will work and can seize land, assets etc

Question 9

Adv and disadv of bank overdraft

Answer 9

Adv-
Very flexible
Cheap to arrange

Disadv-
Repayable on demand

Question 10

Adv and disadv of debt factoring

Answer 10

Adv-
Saves in credit management

Disadv-
The company takes a cut

Question 11

Discuss Effect of loan notes you should consider

Answer 11

Gearing ratio
Internet cover
Earnings per share