Unit 5: Sources of finance Pages:42-45 (3)

Question 1

Business Finance (Pg 43)

Answer 1

Business finance is basically the methodology of allocating financial resources, with a financial value, in an optimal manner to maximize the wealth of a business enterprise. There are three major decisions to be made in this allocation process: capital budgeting, financing, and dividend policy. It generally involves balancing risk and profitability.

Question 2

Working Capital A
ca-cl=wc
Current Assets – Current Liabilities = Working Capital

Answer 2

Working capital is money available to a company for day-to-day operations. The formula for working capital is: Current Assets less Current Liabilities. Examples of current assets are cash, stock and debtors. Examples of current liabilities are creditors and loans.

Question 3

Working Capital B
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Current Assets – Current Liabilities = Working Capital

Answer 3

Working capital is a common measure of a [company’s liquidity, efficiency, and overall health. It includes cash, inventory, accounts receivable and accounts payable.] A company’s working capital reflects that result of a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.

Question 4

Working Capital C

How to Ensure a Positive Working Capital

Answer 4

a. Ensure it’s current liabilities is less than its current assets.
b. Monitor to ensure it has cash to meet daily business operations
c. Do not keep too much stock that would hold up its cash balance.
d. Do not over-commit to creditors ie live within its means
e. Ensure debtors pay up on time.
f. Minimize debtors so company has money to use for its operations
g. Any other acceptable answers

Question 5

Positive Working Capital *****

Answer 5

Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately.

Question 6

Negative Working Capital *****

Answer 6

Negative working capital generally indicates a company is unable to do so. When not managed capital generally indicates a company is unable to do so.

Question 7

Working Capital D

Answer 7

When not managed carefully, businesses can grow themselves out of cash by needing more working capital to fulfil expansion plans than they can generate in their current state. This usually occurs when a company has used cash to pay for everything, rather than seeking financing that would smooth out the payments and make cash available for other uses. As a result, working capital shortages cause many businesses to fail even though they may actually earn a profit. The most efficient companies invest excess working capital wisely to avoid these situations.

Question 8

Internal Sources of Finance (4)

Answer 8

Personal Savings
Retained Profit
Working Capital
Sales of Assets

Question 9

External Sources of finance (7)

Answer 9

Shares
Loans
Overdraft
Hire Purchase
Credit from Suppliers
Grants
Venture Capital

Question 10

Internal Sources of Finance

Personal Savings

Answer 10

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Personal savings: Owner has some saving available to use as they wish.

Question 11

Internal Sources of Finance

Retained profit

Answer 11

This is profit already made that has been set aside to reinvest in the business. It could be used for new machinery, marketing and advertising, vehicles or a new IT system.

Question 12

Internal Sources of Finance

Working Capital

Answer 12

This is short-term money that is reserved for day-to-day expenses such as stationery, salaries, rent, bills and invoice payments.

Question 13

Internal Sources of Finance

Sales of Assets

Answer 13

Sell of surplus fixed assets, such as buildings and machinery to generate money for new areas.
Decisions to sell items that are still used should be made carefully as it could affect capacity to deliver existing products and services.

Question 14

External Sources of Finance

Shares

Answer 14

Limited companies could look to sell additional shares, to new or existing shareholders, in exchange for a return on their investment.

Question 15

External Sources of Finance

Loans

Answer 15

Loans are usually secured against the asset being invested in, so the loan company will have a legal shared interest in the investment.

Question 16

External Sources of Finance

Overdraft

Answer 16

A bank overdraft may be a good source of short-term finance. The advantage here is that interest is calculated daily and an overdraft is therefore cheaper than a loan.

Question 17

External Sources of Finance

Hire Purchase

Answer 17

Hire purchase arrangements enable a firm to acquire an asset quickly without paying the full-price for it. The company will pay a deposit followed by monthly instalments. This is often used to fund purchases of vehicles, machinery and printers.

Question 18

External Sources of Finance

Credit from Suppliers

Answer 18

Many invoices have payment terms of 30days or longer. A company can take the maximum amount of time to pay and use the money in the interim period to finance other things.

Question 19

External Sources of Finance

Grants

Answer 19

Funds available from government to use in the early stages of a new business.

Grants are often available from government bodies for specific issues. For example, governments grant a loan to an organisation that helps young entrepreneurs to launch new businesses.

Question 20

External Sources of Finance

Venture Capital

Answer 20

This source is most often used in the early stages of developing a new business. There may be huge risk of failure but the potentials returns may also be big