Unit 5 - Management of Finance Flashcards
why do businesses need finance?
- To start up the business
- Survival
- Growth
- Paying wages, electricity bills, rent, etc
what is a bank over draft?
Allows a business to overdraw an amount of money from their bank account
advantages of bank overdraft?
- Easy to setup, quick to access finance
* very easy to arrange with the bank
disadvantages of bank overdraft?
- Must be paid back quickly, else can be expensive due to interest (Interest is calculated on a daily rate depending on the amount of money withdrawn)
- Usually only available for small sums of money
what is a government grant?
A grant is a fixed amount of money usually awarded by the government. The government offers expert knowledge as well as financial assistance.
advantages of a government grant?
• Provides finance which does not have to be repaid
disadvantages of a government grant?
• Tend to be one off payments
what are retained profits?
This is when a business saves a portion of its profits and reinvests back into the company.
advantages of retained profits?
- Profits belong to the company, so owner is in control
* Does not need to be paid back
disadvantages of retained profits?
- For profits to build up to use in this way can take too long and good business opportunities missed
- Relying on profits is risky, as some months a business may not make profits!
what is trade credit?
This is when a business can purchase goods from suppliers with a delayed payment.
Trade credit can run for set periods, perhaps 28 days from supply to payment
advantages of trade credit?
• Can sell goods using materials not yet paid for, improving cash flow.
disadvantages of trade credit?
• Trade credit is at the discretion of the supplier. A business therefore may not get credit some months
what is owner savings?
when the owner of the business invests their own money into the business. Most new business begin with this.
advantages of owner savings?
- The owner has complete control
* Reduces the amount which needs to be borrowed
disadvantages of owner savings?
- Savings could be small and may not last long
* Owners with unlimited liability would risk losing their savings
what is a bank loan?
It is a fixed amount of money that is given to a business by the bank that has to be repaid over time with interest, usually in monthly instalments.
what are the advantages of a bank loan?
- Payments are in regular fixed instalments. This makes it easier to budged for
- Loan can be repaid over a long period of time
what are the disadvantages of a bank loan?
- Interest must be paid along with the amount borrowed
* Small businesses tend to pay higher interest rates
what is hire purchase?
Used to buy an asset, such as a van, paying it up in instalments after paying an initial deposit. They own the asset at the end of the payment period.
advantages of hire purchase?
- Can obtain asset without full payment
* Can split cost into easier payments
disadvantages of hire purchase?
- Don’t own asset till fully paid off
* If you miss payments the asset will be taken away
what is leasing?
Businesses can rent equipment or premises, paying each month rather than buying them outright
advantages of leasing
- Saves on having to purchase equipment
* Can update equipment as soon as needed
disadvantages of leasing
- Leasing for long period can actually be more expensive
* The leased item is never owned by organisation so not an asset
what is share issue?
selling shares of the business to raise finance
advantages of share issue?
- Large sums of money can be raised
* This does not need to be paid back
disadvantages of share issue?
- More shareholders mean more dividends (profits are shared)
- Selling shares may result in less control of the business
what is venture capital?
Venture capital is money that investors provide to a company that is starting up or expanding. Provide finance when banks decide a loan is too risky
advantages of venture capital?
- Are more willing to take a risk by giving finance
* Can provide expertise to the business
disadvantages of venture capital?
- They expect high returns on their investment
- They may want part ownership of the company (loss of control)
- They are usually only interested in large investment ventures
what is crowd funding?
Small amounts of money from a large number of people are raised to fund a new business or a project. This is usually done through a website.
advantages of crowd funding?
- Access to large amount of investors
* Fast way to raise finance
disadvantages of crowd funding?
- A public request for investment risks your project being copied by competitors
- If the targeted amount isn’t reached the money is returned to investors and the business gets nothing
what is short term finance?
Finance which is needed to cover the day to day expenses and running costs and is usually from a 3-6 month period up to a year. For example, paying bills and buying stock.
what are some examples of short term finance?
Short term methods of finance: • Bank overdraft • Government grant • Trade credit • Retained profits
what is long term finance?
Finance which is used to grow and is paid back over a number of years, such as buying new premises
what are some examples of long term finance?
Long term methods of finance:
• Bank loan
• Share issue
• Venture capital
what is internal finance?
This is finance generated from within the business
examples of internal finance?
This is finance sourced from outside the business
what is external finance?
Retained profits
Owner savings
examples of external finance?
Bank loan Bank overdraft Venture capital Trade credit Government grant Share issue
