Sources of finance are how businesses raise money to fund operations, investments, and expansion
What is the primary advantage of internal sources of finance?
No interest or dilution
External sources of finance can lead to a loss of control for the business.
Common internal sources of finance include retained profits, sale of assets, and reduced working capital
What are three key external sources of finance?
Bank loans, equity offerings, grants
Match the source of finance with its advantage:
Retained profits ↔️ No interest or dilution
Bank loans ↔️ Flexible terms
Equity offerings ↔️ Access to significant capital
Government grants ↔️ Supports specific projects
Order the steps to reduce working capital to free up cash:
1️⃣ Optimize inventory management
2️⃣ Collect accounts receivable promptly
3️⃣ Negotiate extended payment terms with suppliers
Reducing working capital involves optimizing current assets and current liabilities
What is a disadvantage of using retained profits for financing?
Limits dividend payouts
Selling assets can reduce a company's operational capacity.
What is a potential impact of reduced working capital on customer service?
Requires careful planning
Retained profits may not be sufficient for large projects
Why might selling assets be time-consuming?
Requires valuation and approval
Efficient management of working capital can improve operational efficiency.
Match the external source of finance with its disadvantage:
Bank loans ↔️ High interest costs
Equity offerings ↔️ Dilutes existing ownership
Government grants ↔️ Competitive application process
What is a major advantage of bank loans for businesses?
Flexible terms
Equity offerings improve financial stability but dilute existing ownership
Government grants always require repayment with interest.
False
What is a key advantage of bank overdrafts for businesses?
Flexible access to funds
Trade credit allows suppliers to defer payment
What is a disadvantage of factoring for businesses?
High fees
Sources of finance refer to how businesses raise money to fund operations, investments, and expansion
What are the two main categories of sources of finance for businesses?
Internal and external
Internal sources of finance include funds generated within the business
Internal sources of finance result in no interest payments or shareholder dilution.
What is a disadvantage of using internal sources of finance?
Limited amount
External sources of finance involve obtaining funds from outside investors
External sources of finance can fund major projects but may lead to higher costs and loss of control.
What are common examples of internal sources of finance?
Retained profits, sale of assets, reduced working capital
Key external sources of finance include bank loans, equity offerings, and government grants
Match the source of finance with its description:
Internal ↔️ Funds generated within the business
External ↔️ Funds obtained from outside sources
Retained profits ↔️ Profits kept by the business
Bank loans ↔️ Money borrowed from banks
What is the primary advantage of retained profits as a source of finance?
No interest or dilution
The sale of assets involves generating cash by selling underutilized or non-essential assets
Reduced working capital may improve operational efficiency but requires careful planning.
Order the following internal sources of finance from least to most risky:
1️⃣ Retained profits
2️⃣ Reduced working capital
3️⃣ Sale of assets
Why do businesses use external sources of finance when internal funds are insufficient?
For larger projects and growth
Bank loans offer flexible terms but require collateral and interest
What is a disadvantage of equity offerings as a source of finance?
Dilutes existing ownership
Government grants do not require repayment but have strict eligibility criteria.
External sources of finance are funds obtained from outside investors or lenders, essential for larger projects and growth when internal funds are insufficient