3.5.3 Making financial decisions: sources of finance

• Sources of finance refer to the different ways a business can raise money to fund its operations and investments
• Retained earnings refer to the profits a business has accumulated and retained within the business
• Working capital is the difference between a business's current assets and current liabilities
• What is the difference between a business's current assets and current liabilities called?

  Working capital
• What is a disadvantage of minimizing inventory levels?

  Risk of stockouts
• Match the working capital management strategy with its advantage or disadvantage:

  Minimize Inventory ↔️ Frees up cash

  Collect A/R Quickly ↔️ Improves cash flow

  Delay Paying A/P ↔️ Holds onto cash longer
• Match the source of finance with its origin:

  Internal ↔️ Within the business

  External ↔️ Outside the business
• Internal sources of finance are limited by the business's financial health and profitability
• What do retained earnings refer to?

  Accumulated and retained profits
• What does working capital management aim to improve in a business?

  Liquidity and financial health
• External sources of finance allow a business to maintain full control.

  False
• Retained earnings are unlimited and always sufficient for a business's funding needs.

  False
• Steps involved in effective working capital management:

  1️⃣ Minimize inventory levels

  2️⃣ Collect accounts receivable quickly

  3️⃣ Delay paying accounts payable
• Steps involved in effective working capital management

  1️⃣ Minimize inventory levels

  2️⃣ Collect accounts receivable quickly

  3️⃣ Delay paying accounts payable
• Delaying payment of accounts payable improves short-term liquidity
• Sources of finance are broadly categorized into internal and external
• Internal sources of finance allow a business to maintain full control over its operations.


  True
• External sources of finance can provide larger amounts of capital compared to internal sources.

  True
• Using retained earnings may require sacrificing assets to generate funds.


  True
• Working capital management aims to improve a business's liquidity and financial health.


  True
• Collecting accounts receivable quickly reduces the risk of bad debts.


  True
• Match each financing type with its defining characteristic:

  Bank Loans ↔️ Require interest payments

  Equity Finance ↔️ Involves selling ownership stakes

  Retained Earnings ↔️ No interest or dividends to pay
• Why are internal sources of finance like retained earnings limited in availability?

  Dependent on profitability
• External sources of finance lead to some loss of control for the business owners.


  True
• Retained earnings allow the business to maintain full control over the use of funds.

  True
• What are retained earnings in a business context?

  Accumulated profits retained
• What is one disadvantage of using retained earnings as a source of finance?

  Limited availability
• Minimizing inventory levels reduces storage costs but may increase the risk of stockouts.


  True
• What is one advantage of using bank loans for financing?

  Access to larger capital
• What is equity finance in business terms?

  Selling ownership stakes
• Internal sources of finance allow businesses to maintain full control without incurring interest.


  True
• Internal sources of finance may be limited by the business's profitability.

  True
• Internal sources of finance may require sacrificing assets
• What is a key advantage of retained earnings as a source of finance?

  No interest to pay
• What strategy improves cash flow in working capital management?

  Collect accounts receivable
• Effective working capital management aims to minimize inventory
• Collecting accounts receivable quickly improves cash flow.


  True
• Using working capital management as an internal source of finance requires careful balancing of tradeoffs.


  True
• What is a disadvantage of external sources of finance?

  Some control is lost
• Where do internal sources of finance originate?

  Within the business