Topic 1 - Small businesses in Australia

Question 1

Three different types of businesses

Answer 1

1. manufacturing
2. trading (retail or wholesale)
3. service providing

Question 2

Manufacturing business

Answer 2

Converts raw materials such as wood, clay or cloth into finished products such as toys, coffee mugs or dresses.
Eg, coca cola, peters, smith, apple

Question 3

Trading business

Answer 3

Buys and sells inventory. Inventory mainly consists of products purchased by a business with the intention of reselling these products at a profit.
2 types:
- Retailing
- Wholesaler

Question 4

Retailing, trading business

Answer 4

Sells inventory to the public
Eg, coles, kmart, target, bunnings

Question 5

Wholesaler, trading business

Answer 5

Purchases inventory from manufacturer and sells this inventory to a retailer.
Eg, computers, books, furniture (don’t make and don’t sell to public)

Question 6

Service business

Answer 6

Provides a service to a customer in exchange for a fee.
Eg, solicitor, accountant, hairdresser, cleaner, lawn mower

Question 7

sources of finance other than equity

Answer 7

• loan from family or friends
• credit card
• bank overdraft
• term bank loan
• lease finance
• factoring

Question 8

family or friend loan
definition, advantages, disadvantages

Answer 8

a sum of money to be paid back to family or friend who lended money.
adv: dont have to pay interest, easy to obtain
dis: unofficial, cause friction in friend/relationship

Question 9

credit card
definition, advantages, disadvantages

Answer 9

card allowing user to purchase g/s on credit, short term that must be paid back in few months, if not paid back 17% or more interest rate applies
adv: having money available at any time, earn rewards
dis: very expensive, short time to pay off

Question 10

bank overdraft
definition, advantages, disadvantages

Answer 10

loan made by bank in which the customer can withdraw more money than what is in the account, there is a limit, interest is paid monthly and should only be used for few months at time
adv: always there for you, quick to arrange
dis: must pay interest even if dont use, short term

Question 11

term bank loan
definition, advantages, disadvantages

Answer 11

loan, bank uses factors to decide if they want to give loan:
- the quality of the business plan
- the collateral available to secure the loan
- the capacity of the business to repay the loan
adv: long term, boosts business credit
dis: takes while to obtain, need documentation

Question 12

lease finance
definition, advantages, disadvantages

Answer 12

agreement to rent an item of plant and equipment for a fixed number of months or years
finance lease: purchase item at end of agreement
operating lease: item must be returned at end of agreement
adv: less expensive, no upfront cost
dis: don’t own it, may pay more overtime

Question 13

factoring
definition, advantages, disadvantages

Answer 13

business selling accounts receivable to a third party at a discount
adv: gain higher liquidity, more efficient
dis: reduces profit, labour intensive

Question 14

collateral

Answer 14

the security that a prospective business owner can provide to repay a loan in the event the business fails.
eg, land

Question 15

business plan

Answer 15

sets out in detail, how the business will run, the market and how business will gain share of the market. bank will also want to see cash flow.

Question 16

capacity

Answer 16

bank will examine the ability of bus to meet regular loan payments, review in and out cash flows to see if they are reasonable. (amount of work that can be done in x amount of time)

Question 17

liquidity

Answer 17

the efficiency or ease that an asset or security can be converted into ready cash without affecting its market price, banks will want high liquidity

Question 18

guarantor

Answer 18

having someone else to pay back money you owe if you cant, banks will want you to have one