Unit 5

• Role of the finance function

  • prepare and create financial accounts
  • keep and maintain financial records
  • Make payments
  • Provide financial insights for future business planning and decision making
  • Analyse financial performance of the business
• what is an internal source of finance

  involves rising funds from within the business. are often limited however this means that a business van keep full control of its operations and does not need to pay high interest
• what are external sources of finance

  involves raising funds from outside a business. allows businesses to raise large amounts of funds compared to internal sources of finance
• what is owners capital

  • using own savings
  • short, medium and long term
  • sole traders and partnerships
  • used for day to day running expenses
  • new and established businesses
  • buying start up business or replacement of capital equipments
• advantages of owners capital

  • no need to repay
  • no interest
  • no cost to raise finance
• disadvantages of owners capital

  • if owner(s) do not have enough savings they will need another source of finance
• what is retained profit

  • profit made by business but not distributed
  • invested back into the business
  • used for buying, expansion or replacement of capital equipment
  • established businesses
  • medium and long term internal
• advantages of retained profit

  • no interest
  • no repayment
  • no cost to raise
• disadvantages of retained profit

  • only available to businesses that have raised profits
• what is sale of assets

  • internal
  • short, medium and long term
  • all businesses
  • established
  • for expansion, replacing capital equipment, development and day to day expenses
• advantages of sale of assets

  • good if asset is no longer in use
• disadvantages of sale of assets

  • can take time
  • may not find a buyer
• what is overdraft

  • external
  • short term
  • for all, new and established businesses
  • arrangement with bank to spend more than in account
  • day to day expenses (wages, stock bills)
• advantages of overdraft

  • meet short term cash flow problem
  • can continue trading in short term
  • size of overdraft can vary on a monthly basis
  • interest is only paid on amount borrowed
• disadvantages of overdraft

  • interest is charged daily
  • Expensive
• what is trade credit

  • short term
  • external
  • new and established
  • does not need to pay suppliers for a period of time (typically 30 days)
  • for buying stock/raw materials
• advantages of trade credit

  • sell goods before paying suppliers
  • helps businesses with temporary cash flow problems
  • usually interest free
• disadvantages of trade credit

  • goods must be paid for even if they don’t sell
  • interest is charged if not paid back in time
• what is taking on a new partner

  • external
  • long term
  • establishes partnerships and sole traders
  • fund expansion of business and development purposes
• advantages of a new partner

  • new skills
  • no cost to raise
• disadvantages of a new partner

  • will have a say in running
  • receive a share of profits
• what is a loan

  • external
  • medium and long term
  • new and established businesses
  • bank may want to take security asset
  • for buying, start ups, expansion or development activities
• advantages of loans

  • repayment spread over time
  • business knows the instalments - helps budgeting
• disadvantages of loans

  • interest
  • may risk an asset as security