Advantages and disadvantages - business finance

Advantages of internal sources of finance (e.g. owners capital or retained profit)

• No interest to pay

• Owner keeps control

• Quick access to funds

Disadvantages of internal sources of finance

• Limited amount available

• Using profits may slow growth

• Selling assets can reduce efficiency

Advantages of bank loans

• Large amounts available

• Fixed repayments help budgeting

Disadvantages of bank loans

• Flexible borrowing

• Interest only paid on amount used

Advantages of overdrafts

• Flexible borrowing

• Interest only paid on amount used

Disadvantages of overdrafts

• High interest rates

• Can be withdrawn by bank

• Easy to overspend

Advantages of share capital (selling shares to investor)

• No repayments needed

• Large amounts can be raised

Disadvantages of share capital

• Loss of control

• Profits shared as dividends

Advantages of trade credit

• Improves cash flow

• No immediate payment

Disadvantages of trade credit

• Risk of damaged supplier relationships

• Loss of early payment discounts

Advantage of revenue

Shows how much the business earns from sales.

Disadvantage of revenue

High revenue does not always mean high profit.

Advantage of fixed costs

Easy to plan and budget.

Disadvantage of fixed costs

Must be paid even when sales are low.

Advantage of variable costs

More flexible as they increase only when production increases.

Disadvantage of variable costs

Harder to predict and can reduce profit.

Advantage of profit

Can be reinvested to grow the business.

Disadvantage of profit

Not guaranteed and can be affected by costs and tax.

Advantage of cash flow forecasts

Helps prevent cash shortages.

Disadvantage of cash flow forecasts

Based on estimates, which may be inaccurate.

Advantage of budgets

Helps control spending and plan finances.

Disadvantage of budgets

Time-consuming and may be unrealistic.

Advantage of break-even analysis

Shows the minimum sales needed to avoid a loss.

Disadvantage of break-even analysis

Assumes costs stay the same, which is unrealistic.