The Need for Finance Flashcards

All 6 cards in this deck

What are start-up costs?

The costs of setting up a business before it begins trading, e.g. premises, equipment, stock and legal fees.

Why do businesses need short-term finance for day-to-day running?

To keep cash flow positive when paying wages, stock and bills during seasonal variations, late customer payments or unexpected changes in orders.

Give two reasons an established business (not a new one) needs finance.

To expand (new premises, machinery or new markets) and to replace worn-out or out-of-date assets.

What is the difference between an internal and an external source of finance?

Internal finance comes from inside the business itself; external finance comes from outside the business.
e.g. internal = retained profit; external = bank loan

True or false? A bank overdraft is an internal source of finance.

False. An overdraft is external — like bank loans and mortgages, the money comes from outside the business. Retained profit is internal.

Which source of finance is most suitable for a short-term cash shortage lasting a few weeks?

An overdraft (or trade credit) — short-term borrowing, not a long-term loan.