Finance Function and Sources of Business Finance

These flashcards cover key concepts related to the finance function in business, sources of finance, types of expenditure, and the significance of financial metrics.

Why might a business need finance?

To overcome cash flow problems, start up, expand, or take advantage of opportunities.

What are the two types of expenditure mentioned in the finance function?

Capital expenditure (for acquiring/improving non-current assets) and revenue expenditure (for day-to-day operations).

What is the difference between internal and external finance?

Internal finance comes from within the business, while external finance is borrowed from outside sources.

What are common internal sources of finance?

Retained profit, cash in bank, sale of assets, owner’s investment.

What is an overdraft?

An arrangement with a bank allowing a business to withdraw more money than is available in its account.

What is a major advantage of using retained profit as a source of finance?

No interest is paid, no repayment is required, and no security is necessary.

List two advantages of leasing.

No upfront cost required and repairs are covered by the leasing company.

What does the term 'financial budget' refer to?

A numerical plan showing future financial targets for a specific time period.

Why is profit important for a business?

It rewards risk-taking, is a source of funds for expansion, and is necessary for survival.

What does a profit and loss account show?

Whether the business has made a profit or a loss over a financial year.

Define ‘working capital’.

The funds available for day-to-day operations, necessary to purchase materials, pay wages, and settle invoices.

What is the significance of cash flow forecasting?

It helps a business predict cash movement to avoid cash flow problems and assists in financial planning.

What are dividends?

Payments to shareholders from the profits of a company.

Name two external sources of finance.

Bank loans and issuing shares.

What is 'capital employed'?

The money invested in the business on a long-term basis, often measured by long-term loans plus shareholders' funds.

What is 'gearing' in financial terms?

A measure of a company's debt level compared to its equity or capital, indicating financial risk.