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Business Finance Essentials
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Business Finance Essentials
Business Finance Essentials
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1
Question
Why do businesses need finance?
Answer
Businesses need finance for several reasons: starting a new business, expanding an existing business, and obtaining additional working capital to manage day-to-day operations.
2
Question
What is capital expenditure?
Answer
Capital expenditure refers to the money spent on fixed assets that will last for more than a year, such as machinery, buildings, and vehicles.
3
Question
What is revenue expenditure?
Answer
Revenue expenditure is the money spent on day-to-day expenses that do not involve the purchase of a long-term asset, like wages, utility bills, and rent.
4
Question
What is internal finance?
Answer
Internal finance is capital obtained from within the business itself, rather than through external sources.
5
Question
What is retained profit?
Answer
Retained profit is the profit kept in the business after owners have taken their share of the profits.
6
Question
What are the advantages of using retained profit as a source of finance?
Answer
1. It does not have to be repaid. 2. No interest needs to be paid.
7
Question
What are the disadvantages of using retained profit as a source of finance?
Answer
1. New businesses do not have retained profit. 2. Many small firms may have profits that are too low to finance needed expenses. 3. Keeping more profits in the business reduces payments to owners.
8
Question
What does the sale of existing assets entail?
Answer
The sale of existing assets involves selling items of value that are no longer required by the business to generate funds.
9
Question
What are the advantages of selling existing assets?
Answer
1. It makes better use of the capital. 2. It does not increase the business's debt burden.
10
Question
What is the significance of having sufficient working capital?
Answer
Sufficient working capital is essential for covering everyday operations, meeting short-term expenses, and ensuring the business can maintain liquidity.
11
Question
What financial options exist for expanding an existing business?
Answer
Options for expanding an existing business may include using retained profits, acquiring loans, attracting investors, or reinvesting profits from sales.
12
Question
What are some common sources of external finance?
Answer
Common sources of external finance include bank loans, issuing shares, crowdfunding, government grants, and venture capital.
13
Question
How can businesses assess their financial needs?
Answer
Businesses can assess their financial needs by evaluating their current cash flow, estimating future expenses and revenues, and determining their capital expenditure requirements.
14
Question
What risks are associated with relying on borrowed finance?
Answer
Risks include the obligation to repay the finance regardless of the business performance, potential for high interest rates, and increased financial vulnerability during economic downturns.
15
Question
What criteria can businesses use to choose a source of finance?
Answer
Criteria for choosing a source of finance include the cost of financing, flexibility of repayment, impact on ownership, and the urgency of funding needs.
16
Question
Why might a business choose to finance through issuing shares?
Answer
Issuing shares can allow a business to raise substantial capital without incurring debt, and it can also bring in new expertise through new shareholders.
17
Question
What are the disadvantages of using debt financing in a business?
Answer
1. It may take some time to sell the assets if the business needs to liquidate to repay the debt. 2. This source of finance is not available to new businesses, as lenders may view them as high-risk.
18
Question
What are the advantages of selling inventories to reduce inventory levels?
Answer
1. Selling inventories reduces the opportunity cost of holding excess stock. 2. It lowers storage costs associated with maintaining unsold goods.
19
Question
What are the disadvantages of selling inventories to reduce inventory levels?
Answer
1. The process of selling inventories must be done carefully to avoid disappointing customers. 2. There is a risk of not having enough goods kept in inventory to meet customer demand.
20
Question
How can owners use their savings in unincorporated businesses, and what are the advantages?
Answer
Owners can put more of their savings into their unincorporated businesses. Advantages include: 1. The funds should be readily available to the firm without any delay. 2. No interest needs to be paid on these savings, reducing liabilities.
21
Question
What are the disadvantages of owners using their personal savings for the business?
Answer
1. The owners’ savings may not be sufficient to meet the business's financial needs. 2. It increases the risk taken by owners, as they have unlimited liability, meaning their personal assets could be at risk.
22
Question
What is external finance in business?
Answer
External finance refers to funds obtained from sources outside of and separate from the business.
23
Question
What are the advantages of issuing shares as a source of finance?
Answer
1. Issuing shares provides a permanent source of capital that does not need to be repaid to shareholders. 2. There is no interest to be paid to shareholders, unlike debt financing.
24
Question
What are the disadvantages of issuing shares?
Answer
1. Dividends are paid after-tax, whereas interest on loans is paid before tax is deducted, potentially leading to increased tax burden. 2. Shareholders typically expect to receive dividends, which could affect the company's cash flow.
25
Question
What can lead to a change in company ownership among shareholders?
Answer
The ownership of the company could change hands if many shares are sold.
26
Question
What are the advantages of bank loans?
Answer
1. Quick to arrange. 2. Can be for varying lengths of time.
27
Question
What are the disadvantages of bank loans?
Answer
1. Interest and the loan must be paid. 2. Security or collateral is usually required.
28
Question
What is factoring in the context of business debts?
Answer
Factoring of debts involves a debtor, who is a customer that owes the business for goods bought. Debt factors are specialist agencies that buy the claims on these debts for immediate cash.
29
Question
What are the advantages of factoring debts?
Answer
1. Immediate cash is made available to the business. 2. The risk of collecting the debt shifts to the factor, not the business.
30
Question
What is a disadvantage of factoring debts?
Answer
The business does not receive 100 percent of the value of its debts.