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Higher Business Management > Unit 5 - Management of Finance > Flashcards

Unit 5 - Management of Finance Flashcards

1
Q

why do businesses need finance?

A
  • To start up the business
  • Survival
  • Growth
  • Paying wages, electricity bills, rent, etc
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2
Q

what is a bank over draft?

A

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

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3
Q

advantages of bank overdraft?

A
  • Easy to setup, quick to access finance

* very easy to arrange with the bank

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4
Q

disadvantages of bank overdraft?

A
  • 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quickly, else can be expensive due to interest (Interest is calculated on a daily rate depending on the amount of money withdrawn)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
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5
Q

what is a government grant?

A

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

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6
Q

advantages of a government grant?

A

• Provides finance which does not have to be repaid

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7
Q

disadvantages of a government grant?

A

• Tend to be one off payments

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8
Q

what are retained profits?

A

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

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9
Q

advantages of retained profits?

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

* Does not need to be paid back

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10
Q

disadvantages of retained profits?

A
  • 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!
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11
Q

what is trade credit?

A

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

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12
Q

advantages of trade credit?

A

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

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13
Q

disadvantages of trade credit?

A

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

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14
Q

what is owner savings?

A

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

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15
Q

advantages of owner savings?

A
  • The owner has complete control

* Reduces the amount which needs to be borrowed

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16
Q

disadvantages of owner savings?

A
  • Savings could be small and may not last long

* Owners with unlimited liability would risk losing their savings

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17
Q

what is a bank loan?

A

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.

18
Q

what are the advantages of a bank loan?

A
  • Payments are in regular fixed instalments. This makes it easier to budged for
  • Loan can be repaid over a long period of time
19
Q

what are the disadvantages of a bank loan?

A
  • Interest must be paid along with the amount borrowed

* Small businesses tend to pay higher interest rates

20
Q

what is hire purchase?

A

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.

21
Q

advantages of hire purchase?

A
  • Can obtain asset without full payment

* Can split cost into easier payments

22
Q

disadvantages of hire purchase?

A
  • Don’t own asset till fully paid off

* If you miss payments the asset will be taken away

23
Q

what is leasing?

A

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

24
Q

advantages of leasing

A
  • Saves on having to purchase equipment

* Can update equipment as soon as needed

25
Q

disadvantages of leasing

A
  • Leasing for long period can actually be more expensive

* The leased item is never owned by organisation so not an asset

26
Q

what is share issue?

A

selling shares of the business to raise finance

27
Q

advantages of share issue?

A
  • Large sums of money can be raised

* This does not need to be paid back

28
Q

disadvantages of share issue?

A
  • More shareholders mean more dividends (profits are shared)
  • Selling shares may result in less control of the business
29
Q

what is venture capital?

A

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

30
Q

advantages of venture capital?

A
  • Are more willing to take a risk by giving finance

* Can provide expertise to the business

31
Q

disadvantages of venture capital?

A
  • 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
32
Q

what is crowd funding?

A

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.

33
Q

advantages of crowd funding?

A
  • Access to large amount of investors

* Fast way to raise finance

34
Q

disadvantages of crowd funding?

A
  • 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
35
Q

what is short term finance?

A

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.

36
Q

what are some examples of short term finance?

A 
Short term methods of finance:
•	Bank overdraft 
•	Government grant 
•	Trade credit 
•	Retained profits
37
Q

what is long term finance?

A

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

38
Q

what are some examples of long term finance?

A

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

39
Q

what is internal finance?

A

This is finance generated from within the business

40
Q

examples of internal finance?

A

This is finance sourced from outside the business

41
Q

what is external finance?

A

Retained profits

Owner savings

42
Q

examples of external finance?

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

Higher Business Management (5 decks)

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