Unit 5

Question 1

The need for business finance

Answer 1

• Need for start-up capital, capital for expansion, and additional working capital.

Question 2

What is the difference between short-term
and long-term finance needs?

Answer 2

Long-term finance: Any financial source that is expected to be used/payed off in a year or more e.g. bank loans, bonds, leasing etc.

Short-term finance: Short-term financing is the use of credit that is repaid in one year or less e.g. Trade credit, Line of credit, payday loan etc.

Question 3

What are Internal sources of finance

Answer 3

Internal finance: Financing from within the Business.
- Retained profit: Profit business keeps after taxes are paid to the government and dividends.

• Revenue from asset sales: Finance raised from a business selling assets that it no longer needs e.g. machines or equipment.
• Revenue from inventory sales – This is the finance raised by a business selling some of the raw materials and components that it keeps as inventory.

Question 4

What are External sources of finance?

Answer 4

External finance: Financing from outside the business.
- Bank loans: Financing by borrowing money from a bank (a common source of capital).
- Issuing shares: Raising finance by issuing new shares.
-Debentures: Raising finance by selling debentures (long-term loan certificates). These loans do not give voting rights but ensure that interest is paid to the debenture buyers at the end of the loan period.

Question 5

What is cash flow?

Answer 5

Cash flow is the amount of cash that goes in and out of the company. The cash that goes into the business is called cash inflow and the cash that goes out of the business is called cash outflow