Business Finance Overview
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Questions and Answers

What is the primary purpose of long-term finance?

  • To purchase fluctuating inventory
  • To buy fixed assets for long-term use (correct)
  • To pay off short-term debts
  • To cover daily operational costs

Which statement about crowdfunding is true?

  • Businesses can access crowdfunding without a business plan.
  • Crowdfunding involves small contributions from a large number of investors. (correct)
  • Crowdfunding usually requires businesses to pay back the funds with interest.
  • Crowdfunding guarantees the business will receive all pledged funds.

What is a disadvantage of crowdfunding?

  • Campaigns require no promotion to attract backers.
  • Investors are not interested in product incentives.
  • Successful campaigns may not receive any funds if the target isn't met. (correct)
  • Funds can be acquired without reaching the target amount.

What is microfinance primarily intended for?

<p>Small start-up businesses in less developed countries (C)</p> Signup and view all the answers

Which of these is NOT typically a characteristic of long-term finance?

<p>Involves smaller, incremental payments (D)</p> Signup and view all the answers

Which financing option is most suitable for covering day-to-day operational costs?

<p>Overdraft (B)</p> Signup and view all the answers

What factor is most likely to influence the decision to choose equity financing over additional borrowing?

<p>High levels of existing debt (C)</p> Signup and view all the answers

For what purpose is a long-term source of finance such as a bank loan most appropriate?

<p>Fixed assets acquisition (B)</p> Signup and view all the answers

Which of the following statements is true regarding the legal structure of a business?

<p>Public Limited Companies can issue debentures. (C)</p> Signup and view all the answers

Which financing method involves less risk due to the return of assets if finance costs are unpaid?

<p>Leasing (B)</p> Signup and view all the answers

What term is commonly used to refer to the money needed to start and operate a business?

<p>Capital (A)</p> Signup and view all the answers

What is the purpose of start-up capital for a new business?

<p>To cover fixed assets and current assets before trading (C)</p> Signup and view all the answers

In which scenario might a business require additional short-term finance?

<p>When cash flow is poor during a slow season (A)</p> Signup and view all the answers

What is one consequence of lacking sufficient working capital?

<p>Inability to cover day-to-day expenses (B)</p> Signup and view all the answers

Why might a business need finance for capital expenditure?

<p>To purchase equipment and expand production (A)</p> Signup and view all the answers

What large financial commitment did Apple make in 2023?

<p>Investing in Artificial Intelligence and R&amp;D (B)</p> Signup and view all the answers

What do businesses estimate in their business plan regarding start-up capital?

<p>The amount of start-up capital required (B)</p> Signup and view all the answers

When might a business face a cash-flow problem?

<p>If a large customer payment is delayed (C)</p> Signup and view all the answers

What is a potential risk for business owners who access loans from multiple microfinance institutions?

<p>Getting into excessive debt (D)</p> Signup and view all the answers

Which of the following is considered an internal source of finance?

<p>Owner's capital (C)</p> Signup and view all the answers

What is the opportunity cost associated with using retained profit as a source of finance?

<p>Shareholders not receiving extra profit (A)</p> Signup and view all the answers

What is a potential benefit of selling stock at reduced prices?

<p>Reduction of excess inventory costs (A)</p> Signup and view all the answers

What is a key characteristic of financial institutions that aim to assist women?

<p>They offer long-term advice and guidance. (C)</p> Signup and view all the answers

How can a business create finance through the sale of assets?

<p>By selling unnecessary machinery or land (A)</p> Signup and view all the answers

What is one of the implications of a sale and leaseback arrangement?

<p>The business can continue using the asset while generating cash. (D)</p> Signup and view all the answers

Why might a business owner use personal savings as a source of finance?

<p>To avoid high interest rates from loans (B)</p> Signup and view all the answers

What is a potential consequence of issuing too many shares in a limited company?

<p>Owners may lose some control of the business. (B)</p> Signup and view all the answers

What factor can reduce the risk of not being able to raise finance?

<p>Presenting a convincing business plan. (C)</p> Signup and view all the answers

When are bank loans most likely to be approved?

<p>When collateral is offered to reduce risk. (A)</p> Signup and view all the answers

What is a signal for investment from shareholders?

<p>The share price is improving. (B)</p> Signup and view all the answers

What is a recommendation for the retail store after increased sales due to influencer promotion?

<p>To reinvest profits to sustain results. (D)</p> Signup and view all the answers

What might influence a finance manager's recommendation on financing?

<p>All of the above. (D)</p> Signup and view all the answers

Why could a bank loan be recommended for a successful company needing finance?

<p>It minimizes the need for external investors. (B)</p> Signup and view all the answers

Which of the following is NOT a reason shareholders might invest?

<p>The share price is stable. (A)</p> Signup and view all the answers

What is a key advantage of using internal finance for a business?

<p>It can often be organized quickly. (A)</p> Signup and view all the answers

Which of the following is NOT a characteristic of external finance?

<p>It is usually free of interest costs. (D)</p> Signup and view all the answers

What is a potential disadvantage of using a bank overdraft?

<p>Interest charges can accumulate quickly. (C)</p> Signup and view all the answers

What does debt factoring allow a business to do?

<p>Receive immediate cash for unpaid invoices. (B)</p> Signup and view all the answers

Why might a business prefer trade credit?

<p>It allows for immediate stock increases without immediate payment. (B)</p> Signup and view all the answers

What is a significant risk associated with bank loans?

<p>A fixed schedule for repayments imposes cash flow constraints. (B)</p> Signup and view all the answers

What is an implication of issuing shares as a source of finance?

<p>Shareholders have a say in business decisions through voting rights. (B)</p> Signup and view all the answers

What is a common drawback of leasing over purchasing an asset outright?

<p>Leasing requires a greater financial outlay over time. (A)</p> Signup and view all the answers

In what situation is internal finance generally less effective?

<p>For large capital investments or expansion projects. (D)</p> Signup and view all the answers

What is a feature of debentures as a source of finance?

<p>They must be repaid with interest. (A)</p> Signup and view all the answers

Why may a business face opportunity costs when utilizing internal finance?

<p>Funds used from retained profits can't be reinvested elsewhere. (D)</p> Signup and view all the answers

How do grants and subsidies differ from loans?

<p>They typically provide funds without the need for repayment. (B)</p> Signup and view all the answers

What is an important consideration when using external finance?

<p>Interest and fees can vary significantly between providers. (D)</p> Signup and view all the answers

What typically characterizes short-term sources of finance?

<p>They are often intended to cover unexpected costs. (A)</p> Signup and view all the answers

Flashcards

Start-up Capital

The funds required by a new business to cover initial costs, including fixed assets and current assets, before it can start trading.

Start-up Loan

A type of loan provided to a new business to cover the initial expenses required to begin operations.

Working Capital

The amount of cash a business needs to pay for its ongoing operations, such as wages, utilities, and raw materials.

Short-term Finance

A type of finance used to cover short-term needs, such as managing seasonal cash flow fluctuations or covering unexpected customer payment delays.

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Long-term Finance

Financial resources used for investments that are expected to generate long-term benefits, such as purchasing equipment or expanding operations.

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Finance Department

The department within a business responsible for managing financial resources, ensuring financial health, and overseeing the company's liquidity.

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Liquidity

The ability of a business to meet its short-term financial obligations, essentially having enough cash on hand to cover immediate expenses.

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R&D (Research and Development)

Investments made by businesses in research and development activities to create new products or improve existing ones.

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Overdraft

A short-term loan used to cover temporary cash flow shortages, often used by small businesses to buy inventory when facing a surge in demand.

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Fixed Assets

Expensive items essential to a business's operations for an extended period, e.g., buildings, machinery, vehicles.

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Crowdfunding

A method of fundraising where projects are funded by many small investors, often via online platforms like Kickstarter.

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Microfinance

Provides small loans to start-up businesses in developing countries, empowering entrepreneurs and supporting economic growth.

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Level of Existing Debt

The amount of money a business already owes to lenders. A high level of existing debt makes borrowing more difficult, as lenders may see the business as risky.

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Timescale of Finance

The length of time for which the finance is needed and when it can be repaid. Short-term needs can be met with options like overdrafts, while long-term investments may require mortgages.

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Purpose of Finance

The specific reason for seeking finance. This helps determine the type of financing needed. For example, purchasing fixed assets (buildings, equipment) might require a long-term loan, while covering daily expenses could be managed through a short-term overdraft.

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Legal Structure of Business

The legal structure of a business affects its financing options. Public Limited Companies (PLCs) can issue shares, while sole traders often rely on personal funds.

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Control and Ownership

The amount of control and ownership a company wants to retain. Issuing shares can dilute ownership, while loans allow for more control.

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Owner's Capital

Capital provided by the owners of a business for its operations.

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Retained Profit

Profits retained by a business for reinvestment rather than being distributed as dividends.

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Sale of Assets

Selling assets that are no longer needed by a business to generate cash.

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Sale and Leaseback

A financial arrangement where a business sells an asset, usually a building, and then leases it back from the new owner.

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Sale of Stock

Selling inventory at discounted prices to raise cash quickly.

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Internal Sources of Finance

Money that comes from within a business, such as owner's capital, retained profits, or sale of assets.

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External Sources of Finance

Money that is introduced into a business from outside sources, such as loans or share capital.

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Bank Loan Approval

A business plan outlining financial projections, such as cash flow and income statements, is crucial for obtaining a bank loan.

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Shareholder Investment Factors

Factors such as a growing share price, generous dividends, strong profit potential, and attractive investment opportunities compared to alternatives can influence shareholder investment.

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Loss of Control Through Share Issuance

The loss of control over a company can occur when issuing too many shares, as existing owners' ownership percentage decreases.

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Borrowing & Control

Borrowing funds through loans allows businesses to maintain control over their operations while incurring interest payments.

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Reducing Finance Risk

When a company faces a risk of not being able to raise sufficient funds, alternative strategies like selling shares, obtaining loans, or seeking investor funding can be implemented.

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Factors Influencing Bank Loan Approval

Good business performance, a solid track record, and a strong reputation can increase the likelihood of receiving a bank loan.

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Collateral & Loan Approval

The ability to provide collateral, which is an asset used as security for a loan, strengthens a company's loan application.

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Recommending Finance Sources

Recommending an appropriate source of financing involves analyzing factors like company size, financial needs, and risk tolerance, aligning with the best financial solution.

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Managing Working Capital

A business can manage its working capital more effectively by negotiating longer payment terms with suppliers, encouraging prompt payments from customers, and adjusting inventory levels to optimize cash flow.

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Internal Finance

Internal finance refers to using a business's own resources like retained profits, depreciation, and cash flow to fund operations and growth.

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Advantages and Disadvantages of Internal Finance

Internal finance is often readily available, doesn't involve external stakeholders, and can be arranged quickly. However, it may not be enough, can be less tax-efficient, and has an opportunity cost as it ties up funds.

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External Sources of Finance (What are they)

External sources of finance are funds obtained from outside the business, like bank loans, share capital, and grants. These can be used to fund large investments or projects when internal resources are insufficient.

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Examples of External Sources of Finance

External sources of finance include borrowing (loans, overdrafts), equity financing (share capital), government grants, and newer methods like crowdfunding.

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Bank Overdraft

A bank overdraft allows a business to spend more than its current account balance, but interest is charged daily.

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Bank Loan

A loan involves borrowing a fixed sum for a specified duration with interest, requiring repayment with interest in installments.

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Hire Purchase/Leasing

Hire purchase and leasing involve using assets without outright purchase. The cost is spread over time, but ownership remains with the lender.

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Share Issue/Debentures

A company can raise funds by selling shares to the public, offering existing shareholders the right to buy more shares, or selling shares to investors like venture capitalists.

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Debt Factoring

Debt factoring involves selling invoices to a third party at a discount, receiving immediate cash while the third party collects from customers.

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Trade Credit

Trade credit extends payment terms for suppliers, giving businesses more time to pay for goods and services, enhancing their cash position.

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Grants and Subsidies

These are grants or subsidies provided by governments or agencies. They usually don't need to be repaid but may have conditions attached, such as job creation or location restrictions.

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Short-Term vs. Long-Term Finance

Short-term financing covers immediate and short-term needs, such as unexpected costs or meeting suppliers, while long-term financing is used for long-term investments like purchasing equipment or buildings.

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Advantages and Disadvantages of Overdrafts

Overdrafts offer flexibility and can be used for immediate needs but have higher interest rates and may be revoked by the bank if they doubt a business's ability to repay.

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Advantages and Disadvantages of Trade Credit

Trade credit is interest-free, improving cash flow, but suppliers may prioritize customers with quicker payment terms and careful cash management is key.

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Study Notes

Business Finance

  • Businesses need finance to start, grow, and operate continuously. Capital is the money needed for this.
  • Finance departments manage finances, ensuring liquidity.
  • Starting a business requires start-up capital for fixed and current assets. Businesses estimate this in their business plans. Start-up loans cover initial costs.
  • Expanding a business may require more capital for expenditure: equipment, buildings, infrastructure, vehicles. R&D costs are needed to develop new products.
  • Working capital is essential to cover day-to-day expenses. A steady flow of working capital prevents cash flow problems and business failure. This includes spending on raw materials, wages, and utilities.
  • Short-term finance aids cash flow, especially during seasonal slowdowns or delayed payments. Examples include overdrafts (for when cash flow is poor) and trade credit (paying suppliers later).
  • Long-term finance is for buying fixed assets (used for long periods). Examples include purchasing new facilities and equipment for expansion and improvement.
  • Sources of Alternative Business funding have grown (crowdfunding and microfinance) to help business access funding faster

Internal Sources of Finance

  • Internal funds come from within the business. Examples include owner's capital (personal savings), retained profits (profits not distributed), and selling existing assets.

External Sources of Finance

  • External sources involve introducing funds from outside the business. These include loans, shares, grants, bank overdrafts, crowdfunding, and lease agreements.
  • Loans: borrowed money that has to be repaid with interest.
  • Bank Overdrafts: arrangement that allows spending more than the amount in the account and paying interest when used.
  • Hire Purchase: agreement to pay for an asset over time.
  • Leasing: rent on an asset; you don't own it.
  • Shares: selling portions of the business.
  • Debentures: long-term loan certificates issued by companies.

Sale of Assets

  • Selling unused assets (buildings, machinery).
  • Sale and leaseback allows a business to use an asset (e.g., a building) while receiving cash, and then rent the asset back from a new owner.

Debt Factoring

  • Selling accounts receivable to a third party for a percentage discount. The third party receives payment later.

Trade Credit

  • An agreement to delay payments to suppliers for a predetermined period (30, 60, 90 days). Improves business cash flow.

Grants and Subsidies

  • Financial aid from governments or agencies.
  • Often come with conditions attached, like creating jobs or locating in specific areas.

Short-Term Finance

  • Used for relatively small amounts to pay bills or cover unexpected costs.

Long-Term Finance

  • Used for larger amounts over longer periods (e.g. for major capital investments).

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This quiz covers essential aspects of business finance, including the importance of start-up and working capital, financing through loans, and managing cash flow. Understand how finance departments support business operations and the differences between short-term and long-term financing options. Test your knowledge on the concepts crucial for a business's financial health.

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