Unit 6: Financing business activity

Question 1

What are funds and what are its main purposes?

Answer 1

• Funds are sums of money which are set aside for a particular purpose for use in a business.
  1. Setting up the business
  2. Running the business on a day to day basis
  3. Expanding the business

Question 2

What is working capital?

Answer 2

Short term funds. Regular payments: wages, cost of supplies, utility bills.

Question 3

What may long term funds include?

Answer 3

Land, buildings, machinery - fixed assets.

Question 4

What are the major source of finance?

Answer 4

• Owner’s funds: The owner investing capital or reinvested profits.
• Loans: Taken out from the bank over a period of years, then payed back with an interest.
• Mortgage: method of long term finance for purchase of property.
• Short term finance: Overdraft or trade credit (credit card)
• Microcredit: provides small funds to set up micro-businesses who would otherwise have no means of earning income.

Question 5

What are internal and external finance?

Answer 5

• Internal finance is raised within the business which may be the owner’s capital or profit, or in a company - share capital.
• External finance is raised outside of the business, which may be mortgages, loans.

Question 6

Other sources of finance could be?

Answer 6

• Hire purchasing: A scheme so that a customer can receive goods and make payments over time. Goods on hire purchasing remain belonging to the company until the payments have been made.
• Leasing: Allows a company to use an asset without having to pay for it. The lessee uses the asset and makes regular payments to the lessor.
• Government grant: the government provides funds for the business for particular purposes.
• Venture capital: the shareholders provide finance in return for a share and some control.

Question 7

What is the gearing ratio?

Answer 7

Describes the relationship between the funds raised externally or internally. If high percentage of funds is borrowed (external) the gearing ratio is high. The the gearing ratio is too high, is may build debts for the business

Question 8

Variables to consider when choosing a source of funds?

Answer 8

• The sum required
• The cost of borrowing
• Risk
• Permanent or temporary funding
• The size of the business
• Influence and control
• Advice