Unit 5 - Management of Finance

Question 1

why do businesses need finance?

Answer 1

• To start up the business
• Survival
• Growth
• Paying wages, electricity bills, rent, etc

Question 2

what is a bank over draft?

Answer 2

Allows a business to overdraw an amount of money from their bank account

Question 3

advantages of bank overdraft?

Answer 3

• Easy to setup, quick to access finance

* very easy to arrange with the bank

Question 4

disadvantages of bank overdraft?

Answer 4

• 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quickly, else can be expensive due to interest (Interest is calculated on a daily rate depending on the amount of money withdrawn)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

Question 5

what is a government grant?

Answer 5

A grant is a fixed amount of money usually awarded by the government. The government offers expert knowledge as well as financial assistance.

Question 6

advantages of a government grant?

Answer 6

• Provides finance which does not have to be repaid

Question 7

disadvantages of a government grant?

Answer 7

• Tend to be one off payments

Question 8

what are retained profits?

Answer 8

This is when a business saves a portion of its profits and reinvests back into the company.

Question 9

advantages of retained profits?

Answer 9

• Profits belong to the company, so owner is in control

* Does not need to be paid back

Question 10

disadvantages of retained profits?

Answer 10

• 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!

Question 11

what is trade credit?

Answer 11

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

Question 12

advantages of trade credit?

Answer 12

• Can sell goods using materials not yet paid for, improving cash flow.

Question 13

disadvantages of trade credit?

Answer 13

• Trade credit is at the discretion of the supplier. A business therefore may not get credit some months

Question 14

what is owner savings?

Answer 14

when the owner of the business invests their own money into the business. Most new business begin with this.

Question 15

advantages of owner savings?

Answer 15

• The owner has complete control

* Reduces the amount which needs to be borrowed

Question 16

disadvantages of owner savings?

Answer 16

• Savings could be small and may not last long

* Owners with unlimited liability would risk losing their savings

Question 17

what is a bank loan?

Answer 17

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.

Question 18

what are the advantages of a bank loan?

Answer 18

• Payments are in regular fixed instalments. This makes it easier to budged for
• Loan can be repaid over a long period of time

Question 19

what are the disadvantages of a bank loan?

Answer 19

• Interest must be paid along with the amount borrowed

* Small businesses tend to pay higher interest rates

Question 20

what is hire purchase?

Answer 20

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.

Question 21

advantages of hire purchase?

Answer 21

• Can obtain asset without full payment

* Can split cost into easier payments

Question 22

disadvantages of hire purchase?

Answer 22

• Don’t own asset till fully paid off

* If you miss payments the asset will be taken away

Question 23

what is leasing?

Answer 23

Businesses can rent equipment or premises, paying each month rather than buying them outright

Question 24

advantages of leasing

Answer 24

• Saves on having to purchase equipment

* Can update equipment as soon as needed

Question 25

disadvantages of leasing

Answer 25

* Leasing for long period can actually be more expensive | * The leased item is never owned by organisation so not an asset

Question 26

what is share issue?

Answer 26

selling shares of the business to raise finance

Question 27

advantages of share issue?

Answer 27

* Large sums of money can be raised | * This does not need to be paid back

Question 28

disadvantages of share issue?

Answer 28

* More shareholders mean more dividends (profits are shared) * Selling shares may result in less control of the business

Question 29

what is venture capital?

Answer 29

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

Question 30

advantages of venture capital?

Answer 30

* Are more willing to take a risk by giving finance | * Can provide expertise to the business

Question 31

disadvantages of venture capital?

Answer 31

* 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

Question 32

what is crowd funding?

Answer 32

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.

Question 33

advantages of crowd funding?

Answer 33

* Access to large amount of investors | * Fast way to raise finance

Question 34

disadvantages of crowd funding?

Answer 34

* 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

Question 35

what is short term finance?

Answer 35

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.

Question 36

what are some examples of short term finance?

Answer 36

``` Short term methods of finance: • Bank overdraft • Government grant • Trade credit • Retained profits ```

Question 37

what is long term finance?

Answer 37

Finance which is used to grow and is paid back over a number of years, such as buying new premises

Question 38

what are some examples of long term finance?

Answer 38

Long term methods of finance: • Bank loan • Share issue • Venture capital

Question 39

what is internal finance?

Answer 39

This is finance generated from within the business

Question 40

examples of internal finance?

Answer 40

This is finance sourced from outside the business

Question 41

what is external finance?

Answer 41

Retained profits | Owner savings

Question 42

examples of external finance?

Answer 42

``` Bank loan Bank overdraft Venture capital Trade credit Government grant Share issue ```