Why do businesses need finance?

To get started , to grow , and to fund continuing activity .

Define capital expenditure .

Capital expenditure is spending on fixed assets such as equipment, buildings, IT and vehicles.

Define operating expenditure .

Operating expenditure is spending on raw materials or day-to-day expenses , such as wages or utilities.

What is start-up finance used for?

To pay for fixed and current assets (e.g. inventory) before the business can begin trading .

Why might a growing business need more finance?

To purchase capital equipment (machinery, buildings, vehicles) or fund research and development of new products.

Define working capital .

Working capital is the finance needed for day-to-day expenses — raw materials, wages and utilities.

Why is a steady flow of working capital essential?

Without it, a business can't cover day-to-day expenses , risking cash-flow problems and failure.

The amount of start-up finance a business needs is identified in the business .

The amount of start-up finance a business needs is identified in the business plan .

Apple's 2023 R&D spending of nearly $30bn is an example of finance needed for .

Apple's 2023 R&D spending of nearly $30bn is an example of finance needed for growth .

True or False? Finance is only needed when a business first starts up.

False. Finance is needed to start, grow AND fund continuing activity .

True or False? Capital expenditure is spending on fixed assets like machinery and buildings.

True. Capital expenditure is spending on fixed assets — equipment, buildings, IT and vehicles.

Give an example of a source of start-up finance.

The owner's own capital (savings), or a start-up loan .

Define an internal source of finance .

An internal source of finance is money that comes from within a business (e.g. owners' capital, retained profit, selling assets).

When are owners' personal savings a key source of finance?

When a business starts up , or if there's a specific need such as a short-term cash-flow problem .

Define retained profit .

Retained profit is profit from previous years not distributed to owners that is reinvested back into the business.

Why is retained profit a cheap source of finance?

It does not involve borrowing or associated interest and arrangement fees .

What is the opportunity cost of using retained profit?

Shareholders do not receive extra profit for their investment.

How can selling assets raise finance?

By selling fixed assets no longer required (e.g. machinery, land, buildings) to generate cash.

Define a sale and leaseback arrangement.

Sale and leaseback is where a business sells an asset (e.g. a building) for cash and then rents it back from the new owner.

In 2023, Sainsbury's planned to sell prime retail property for £500m and it back.

In 2023, Sainsbury's planned to sell prime retail property for £500m and lease it back.

Give one advantage of internal finance.

It is often free (no interest), involves no third parties , and can be organised quickly .

Give one disadvantage of internal finance.

It has an opportunity cost , may not be sufficient , and is rarely as tax-efficient as external methods.

Businesses can also raise finance by selling at reduced prices, e.g. a January sale.

Businesses can also raise finance by selling inventory at reduced prices, e.g. a January sale.

True or False? Retained profit involves paying interest and arrangement fees.

False. Retained profit is a cheap source — it involves no borrowing, interest or fees .

True or False? Internal finance can be accessed by businesses that might fail a bank's credit checks.

True. Businesses that may fail credit checks can still access internal finance more easily.

Name the three main internal sources of finance.

Owners' funds (capital) , retained profit , and the sale of assets .

Define an external source of finance .

An external source of finance is money introduced into the business from outside , such as a loan or share capital.

A loan is a sum of money borrowed from a bank and repaid in instalments, with interest , over a set period.

A mortgage is a long-term secured loan used to purchase buildings, land or large capital .

A mortgage is a long-term secured loan used to purchase buildings, land or large capital equipment .

Give one advantage of a loan.

Fixed interest rates , equal instalments (aiding budgeting), and control is retained within the business.

Define an overdraft .

An overdraft is an arrangement to spend more money than a business has in its account , up to an agreed limit.

Give one feature of an overdraft.

A short-term, flexible source that aids cash flow , but can be 'called in' by the bank.

Define debt factoring .

Debt factoring is selling accounts receivable (invoices) to a third party at a discount for immediate cash.

Give one disadvantage of debt factoring.

The factor keeps a percentage of the debts collected, so the business doesn't get the full value .

With debt factoring, cash is received in instead of waiting months for customers to pay.

With debt factoring, cash is received in days instead of waiting months for customers to pay.

Define share capital .

Share capital is finance raised from selling shares in a limited company (through flotation or a rights issue).

Give one advantage of raising share capital.

Large amounts can be raised (especially by PLCs), and no interest is payable.

True or False? Share capital requires the business to pay interest.

False. No interest is payable on share capital, unlike a loan.

Define venture capital .

Venture capital is funds from specialist investors in small-to-medium businesses with high growth potential .

What do venture capitalists usually require in return for investing?

A stake in the business and often some control over it.

Define crowdfunding .

Crowdfunding raises finance from a large number of small investors on online platforms such as Kickstarter.

Give one advantage of crowdfunding.

It creates an organic customer base and free marketing , and needs no good credit rating .

True or False? An overdraft is a long-term source of finance.

False. An overdraft is a short-term source of finance offering flexibility to aid cash flow.

Give one advantage of using external finance overall.

Fast access to larger amounts , it keeps day-to-day cash free , and brings extra know-how and contacts .

Give one disadvantage of using external finance overall.

It is expensive (interest/dividends), can mean repayments or loss of control , and involves less privacy/more rules .

A LevelBusinessAQAFlashcards5. Financial Management5.3 Sources of Finance

5.3 Sources of Finance (AQA A Level Business): Flashcards

Exam code: 7132

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FrontThe Need for Finance
Why do businesses need finance?

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Cards in this collection (45)

Why do businesses need finance?
To get started, to grow, and to fund continuing activity.
Define capital expenditure.
Capital expenditure is spending on fixed assets such as equipment, buildings, IT and vehicles.
Define operating expenditure.
Operating expenditure is spending on raw materials or day-to-day expenses, such as wages or utilities.
What is start-up finance used for?
To pay for fixed and current assets (e.g. inventory) before the business can begin trading.
Why might a growing business need more finance?
To purchase capital equipment (machinery, buildings, vehicles) or fund research and development of new products.
Define working capital.
Working capital is the finance needed for day-to-day expenses — raw materials, wages and utilities.
Why is a steady flow of working capital essential?
Without it, a business can't cover day-to-day expenses, risking cash-flow problems and failure.
The amount of start-up finance a business needs is identified in the business .
The amount of start-up finance a business needs is identified in the business plan.
Apple's 2023 R&D spending of nearly $30bn is an example of finance needed for .
Apple's 2023 R&D spending of nearly $30bn is an example of finance needed for growth.
True or False?
Finance is only needed when a business first starts up.
False.
Finance is needed to start, grow AND fund continuing activity.
True or False?
Capital expenditure is spending on fixed assets like machinery and buildings.
True.
Capital expenditure is spending on fixed assets — equipment, buildings, IT and vehicles.
Give an example of a source of start-up finance.
The owner's own capital (savings), or a start-up loan.
Define an internal source of finance.
An internal source of finance is money that comes from within a business (e.g. owners' capital, retained profit, selling assets).
When are owners' personal savings a key source of finance?
When a business starts up, or if there's a specific need such as a short-term cash-flow problem.
Define retained profit.
Retained profit is profit from previous years not distributed to owners that is reinvested back into the business.
Why is retained profit a cheap source of finance?
It does not involve borrowing or associated interest and arrangement fees.
What is the opportunity cost of using retained profit?
Shareholders do not receive extra profit for their investment.
How can selling assets raise finance?
By selling fixed assets no longer required (e.g. machinery, land, buildings) to generate cash.
Define a sale and leaseback arrangement.
Sale and leaseback is where a business sells an asset (e.g. a building) for cash and then rents it back from the new owner.
In 2023, Sainsbury's planned to sell prime retail property for £500m and it back.
In 2023, Sainsbury's planned to sell prime retail property for £500m and lease it back.
Give one advantage of internal finance.
It is often free (no interest), involves no third parties, and can be organised quickly.
Give one disadvantage of internal finance.
It has an opportunity cost, may not be sufficient, and is rarely as tax-efficient as external methods.
Businesses can also raise finance by selling at reduced prices, e.g. a January sale.
Businesses can also raise finance by selling inventory at reduced prices, e.g. a January sale.
True or False?
Retained profit involves paying interest and arrangement fees.
False.
Retained profit is a cheap source — it involves no borrowing, interest or fees.
True or False?
Internal finance can be accessed by businesses that might fail a bank's credit checks.
True.
Businesses that may fail credit checks can still access internal finance more easily.
Name the three main internal sources of finance.
Owners' funds (capital), retained profit, and the sale of assets.
Define an external source of finance.
An external source of finance is money introduced into the business from outside, such as a loan or share capital.
Define a loan.
A loan is a sum of money borrowed from a bank and repaid in instalments, with interest, over a set period.
A mortgage is a long-term secured loan used to purchase buildings, land or large capital .
A mortgage is a long-term secured loan used to purchase buildings, land or large capital equipment.
Give one advantage of a loan.
Fixed interest rates, equal instalments (aiding budgeting), and control is retained within the business.
Define an overdraft.
An overdraft is an arrangement to spend more money than a business has in its account, up to an agreed limit.
Give one feature of an overdraft.
A short-term, flexible source that aids cash flow, but can be 'called in' by the bank.
Define debt factoring.
Debt factoring is selling accounts receivable (invoices) to a third party at a discount for immediate cash.
Give one disadvantage of debt factoring.
The factor keeps a percentage of the debts collected, so the business doesn't get the full value.
With debt factoring, cash is received in instead of waiting months for customers to pay.
With debt factoring, cash is received in days instead of waiting months for customers to pay.
Define share capital.
Share capital is finance raised from selling shares in a limited company (through flotation or a rights issue).
Give one advantage of raising share capital.
Large amounts can be raised (especially by PLCs), and no interest is payable.
True or False?
Share capital requires the business to pay interest.
False.
No interest is payable on share capital, unlike a loan.
Define venture capital.
Venture capital is funds from specialist investors in small-to-medium businesses with high growth potential.
What do venture capitalists usually require in return for investing?
A stake in the business and often some control over it.
Define crowdfunding.
Crowdfunding raises finance from a large number of small investors on online platforms such as Kickstarter.
Give one advantage of crowdfunding.
It creates an organic customer base and free marketing, and needs no good credit rating.
True or False?
An overdraft is a long-term source of finance.
False.
An overdraft is a short-term source of finance offering flexibility to aid cash flow.
Give one advantage of using external finance overall.
Fast access to larger amounts, it keeps day-to-day cash free, and brings extra know-how and contacts.
Give one disadvantage of using external finance overall.
It is expensive (interest/dividends), can mean repayments or loss of control, and involves less privacy/more rules.

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