Unit 3: Finance And Accounts Flashcards
3.1 what is capital expenditure?
It is the money spent on assets for a business, lasting over a year.
3.1 examples of capital expenditure
Machinery, land, vehicles, computers
They help business’s grow
3.1 what is revenue expenditure?
It is the money spent on daily business operations
3.1 examples of revenue expenditure
Raw materials, insurance, supplies, advertising, and fuel
It’s important for immediate functionality, but doesn’t lead to long-term assets
3.2 what is personal funds? (Internal)
It’s the capital provided by owners from their savings, personal property or retirement funds
(Sole traders commonly use this source of finance)
3.2 What are the advantages and disadvantages of personal funds?
Advantages:
- Maximize his control over the business
- No interest is paid and the money doesn’t have to be paid back
- Show commitment to the investors
Disadvantages:
- Huge risk for the entrepreneur
- Amount is usually limited
3.2 what is retained profit (internal)
It’s the money remaining in a business after all expenses, including tax and dividends to shareholders that have been paid
3.2 What are the advantages and disadvantages of retained profit?
Advantages:
- Cheapest and easiest to get
- Does not have to be used immediately
- No interest is paid
Disadvantages:
- Opportunity cost - money cannot be returned to the owners
- Not possible for a new business or struggling ones
- Eliminates emergency funds
3.2 what is sale of assets? (internal)
In the process of where an established business sells unwanted items, such as machinery, old stock, land, or buildings in order to raise funds for other projects or purposes
3.2 what is share capital (external)
It’s the money raised from the sale of the shares of a public or private limited company (also known as equity capital)
3.2 what are some advantages and disadvantages of share capital
Advantages:
- This is permanent finance and does not need to be repaid
- Cheaper than a loan
- Can raise large amounts of money
Disadvantages:
- Need to pay shareholders dividends
- Could lose some part of the ownership of the company
- Can only be done by public and private limited (private can only share to current shareholders)
3.2 what is a loan capital? (External)
It’s the money borrowed from financial intuitions like banks, with interest payments.
(When used for properties it’s called a mortgage)
3.2 what are some advantages and disadvantages of loan capital
Advantages:
- it can be arranged quickly
- owner still have full control
- Repayment is spread out overtime
- The exact amount needed can be borrowed
Disadvantages:
- interest is changed on the loan
- repayment must be made (even if the company isn’t making money)
- Some businesses might have a hard time getting a loan based on internal and external factors
3.2 what is an overdraft? (External)
It’s when a firm withdraws more money than it has with a pre-set limit.
3.2 what are the advantages and disadvantages of overdraft?
Advantages:
- it’s a very flexible source of finance
- good for short-term cash flow problems
- only pay interest on the amount of the overdraft
Disadvantage:
- must pay interest on the overdraft
- the bank can ask for the money back at short notice
- Normally high interest rates
3.2 what is trade credit
It’s an agreement between businesses where the buyer of goods or services is allowed to pay the seller at a later date (normally within 30-90 days)
3.2 what are the advantages and disadvantages of trade credit
Advantage:
- no interest
- helps businesses with cash problems
Disadvantage:
- may lose discounts for not paying quickly or in cash
- can cause conflict with suppliers if the payment is delayed
3.2 what is crowdfunding
It involves collecting small to medium accounts of money from a large number of people to fund a business or project
(Primarily done through the internet)
3.2 what are the advantages and disadvantages of crowdfunding?
Advantage:
- provides access to thousands of investors who can see and interact with the campaign
- business maintains full control
- available to the businesses that have been turned down by banks etc.
Disadvantage:
- many businesses do crowdfunding so it’s hard to stand out
- lots of regulations to post on the platform
- fees are paid to the hosting website
3.2 what is leasing
It’s when a business contracts with a leasing company to use assets like machinery or property without owning them
3.2 what are the advantages and disadvantages of leasing
Advantage:
- periodic or monthly payments are made
- a large amount of capital is not needed to purchase an asset
- useful for short-term or occasional asset needs
Disadvantage:
- leasing is costlier than outright purchase and can’t serve an asset
- can only be used for certain items
Item does not belong to the business
3.2 what is microfinance
Provides banking service to unemployed or low income individuals, who lack access to finance
3.2 what are the advantages and disadvantages of microfinance
Advantage:
- do not require assets to provide a loan
- loans are given out quickly and without many formalities as a bank
Disadvantage:
- the amount is small
- interest rates can be high
3.2 what is business angels
They are individuals who invest in small startups for ownership equity
3.2 what are short term finance
Retained profits
Overdraft
Trade credit
3.2 What are the long term finance
Retained profits
Lone capital
Crowdfunding
Micro finance
Business Angels
Share capital
leasing
3.3 what is fixed costs
The cost that remain fixed no matter what’s the level of output is. These expenses have to be paid regardless of any business activity.
3.3 what are some examples of fixed cost?
Rent
Insurance
Salaries
Interest
Bills
3.3 what is variable cost?
Cost that vary or change with the number of goods or services produced
(if there’s an increase in sales leads to increased and variable cost)
3.3 what are some examples of variable cost?
Raw materials cost
Sales
Commission
Packing
3.3 what is direct cost?
expense directly tied to the production of goods or service
3.3 what are some examples of direct cost?
Raw materials
Commission
Packing
3.3 what is indirect costs. (also called overhead cost)
It’s essential for the business but it’s not specific to a product or service
3.3 what are some examples of indirect cost/overhead costs
Rent
Fees
Insurance
Marketing expenses
Security
Storage
Interest on loans
3.3 what is revenue
It’s the businesses income or earnings over a period of time
3.3 What’s the formula for revenue
Total revenue = price per unit x quantity
3.3 what are revenue streams
It’s the different ways a business earns money
3.3 what are some examples of revenue streams
Dividends
Sponsorships
Rentals
Merchandise
Advertising
Subscriptions
Education/training
3.3 what are the advantages and disadvantages of revenue streams?
advantage:
- It should lead to higher
revenue for the business
(more products = more
money)
- Form of diversification- if
one product isn’t doing well
it can support another
- Can be motivating for the
employees
disadvantage:
-Can cause the business to
lose focus and confuse
customers
- Usually means more costs
and more workers
- Could be a failure which
wastes time and resources
3.4 what are the two main final account?
Profit and loss
Balance sheet
3.4 whats the difference between a profit and loss and balance sheet sheet (explain)
Profit and loss: shows the income and expenditures of a business over a specific period
Balance sheet: it records, the assets and debts of a business at a specific point in time
