The Need for Capital and Sources of Finance

Question 1

What is capital?

Answer 1

Capital is a general term for resources that can create value for the business. It can refer to financial assets, physical resources, or human skills.

Question 2

State the 4 types of capital

Answer 2

 Start up capital
 Working capital
 Investment capital
 Venture capital

Question 3

What is start-up capital?

Answer 3

Start-up can be defined as the resources needed when creating a business. For example the funding required for the business.

Question 4

State the steps in starting a business

Answer 4

Market research
Business plan
Start-up capital
Funding
Buy/Franchise
Choose a structure
Register for VAT
Business bank account
Insurance
Financial management

Question 5

What is working capital?

Answer 5

Working capital is the money available to meet the day to day needs of the business. It is calculated as CURRENT ASSETS – CURRENT LIABILITIES.

Question 6

What assets are in the current assets?

Answer 6

1. Stock/inventory
2. Debtors/accounts receivables
3. Bank
4. Prepayments
5. Cash

Question 7

What liabilities are in current liabilities?

Answer 7

1. Creditors
2. Accruals
3. Bank overdraft
4. Short term loans

Question 8

Outline the difference between liquidity a profitability?

Answer 8

Liquidity is the amount of physical cash a business has while profitability is the amount a business makes.

Question 9

Explain the difference between overtrading and over-capitalisation?

Answer 9

This is when working capital is too low to support daily operations and too high leading to inefficiency.

Question 9

Define investment capital.

Answer 9

This is capital required for the purchase of assets for the business.