Business Finance (Cambridge (CIE) A Level Business): Flashcards
Exam code: 9609
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What are the three main reasons businesses need finance?
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What are the three main reasons businesses need finance?
Businesses need finance to get started, to grow and to fund continuing activity.
What is the difference between capital expenditure and operating expenditure?
Capital expenditure is spending on fixed assets such as equipment, buildings and vehicles. Operating expenditure is spending on raw materials and day-to-day expenses such as wages and utilities.
What does start-up finance pay for?
Start-up finance funds the fixed assets and current assets, such as inventory, that a business needs before it can begin trading.
Without a steady flow of _____ capital, a business would be unable to cover its regular expenses.
Without a steady flow of working capital, a business would be unable to cover its regular expenses.
True or False?
Short-term finance is usually needed for large sums over several years.
False.
Short-term finance meets regular costs such as utilities, suppliers and wages. These are usually relatively small amounts that are rarely needed beyond a year.
What are long-term finance needs usually for?
Long-term finance funds the purchase of non-current assets, such as buildings, or the acquisition of other businesses. These are usually large sums needed for a significant period of time.
Which sources of finance may a business use for long-term needs when retained profit is not enough?
It may take out long-term loans or mortgages, or raise share capital.
Define profit.
Profit is the difference between revenue generated and total business costs during a specific period of time.
What is cash used for in a business?
Cash is used to cover regular operating expenses, such as wages, supplier invoices and rent. It is also used to meet unexpected expenses, such as replacing broken equipment.
True or False?
A business that makes a profit can still run short of cash.
True.
Some customers may not have paid yet, or the business may have paid some large bills, so it can lack cash at times despite making a profit.
When a cash-poor business struggles to pay its suppliers, employees and operating expenses, this is called ________.
When a cash-poor business struggles to pay its suppliers, employees and operating expenses, this is called insolvency.
Define overtrading.
Overtrading happens when a business grows too quickly without enough capital to support its expansion.
How can too much borrowing lead to business failure?
Relying heavily on loans or overdrafts increases pressure to make regular repayments. High interest costs add to financial stress, especially if revenue falls.
How can poor financial planning lead to business failure?
If a business does not forecast cash flow accurately or budget properly, it may overspend or run out of money. This can lead to missed loan repayments or unpaid bills.
Define working capital.
Working capital is the money a business has available to fund its day-to-day activities.
Working capital = Current assets − Current liabilities
Why is working capital described as the lifeblood of a business?
A lack of working capital can quickly lead to business failure if the business cannot meet its immediate financial obligations.
A business has current assets of €11.2m and current liabilities of €11.5m. What is its working capital?
Working capital is €11.2m − €11.5m = −€0.3m, so the business has negative working capital.
True or False?
A business can never have too much working capital.
False.
Holding large amounts of cash means missing out on the benefits of investing it in fixed assets or investments. This is a significant opportunity cost, especially when interest rates are high.
Cash is the most ____ of a business's current assets because it can be used to settle debts immediately.
Cash is the most liquid of a business's current assets because it can be used to settle debts immediately.
Why can holding large amounts of inventory be a problem for a business?
It brings extra storage costs, such as security and insurance. The cash tied up in inventory could also be used for other purposes.
Define trade receivables.
Trade receivables is money owed to a business by its customers for goods or services already delivered but not yet paid for.
Define trade payables.
Trade payables is money a business owes to its suppliers for goods or services received but not yet paid for.
How can a business manage its trade receivables effectively?
It can set clear payment terms, send invoices promptly and chase late payments. It can also offer early payment incentives and check customers' creditworthiness before offering credit.
True or False?
Paying suppliers early is usually only worthwhile if it brings a benefit such as a discount.
True.
Businesses should take full advantage of credit periods to keep more cash on hand, so they avoid paying too early unless there is a benefit.
Define capital expenditure.
Capital expenditure is business spending on non-current assets, which are used many times and for more than one year.
Define revenue expenditure.
Revenue expenditure is spending on goods and services that a business uses in the short term as part of its normal trading activities.
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