Study Notes
Businesses need finance for various reasons such as starting up, expanding, and managing daily operations. Finance can be sourced internally or externally, and can be short-term or long-term.
- Finance Department — responsible for managing financial transactions, preparing accounts, and forecasting cash flow. Example: Ensures accurate financial records for decision-making.
- Capital Expenditure — spending on long-term assets like buildings and machinery. Example: Buying new machinery for production.
- Revenue Expenditure — spending on daily operational costs like wages and bills. Example: Paying monthly electricity bills.
- Internal Sources of Finance — funds generated within the business, such as retained profits. Example: Using profits to reinvest in the business.
- External Sources of Finance — funds obtained from outside the business, like issuing shares. Example: Selling shares to raise capital.
- Micro-finance — small loans provided to low-income earners. Example: A small loan to start a local business.
- Crowd Funding — raising money from a large number of people, typically via the internet. Example: Funding a new product launch through online contributions.
Exam Tips
Key Definitions to Remember
- Finance Department
- Capital Expenditure
- Revenue Expenditure
- Internal Sources of Finance
- External Sources of Finance
Common Confusions
- Confusing capital expenditure with revenue expenditure
- Misunderstanding the difference between internal and external sources of finance
Typical Exam Questions
- What is the role of the finance department? To manage financial transactions and prepare financial statements.
- What are the benefits of using retained profits? No repayment or interest required.
- How does crowd funding work? By raising small amounts of money from a large number of people.
What Examiners Usually Test
- Understanding of different finance sources
- Ability to distinguish between short-term and long-term finance
- Factors influencing the choice of finance