Certificate Unit 1: Sources of Finance

A mortgage can be good for budgeting, cashflow and profit; which is NOT a reason for this?

• Mortgages are often at very competitive rates of interest

• Mortgages spread the cost of buildings over a long period of time

• The interest rate could change with a change in the base rate by the Bank of England

• Payments are made monthly and are known about in advance

In the event of an employee being continually late for work and therefore letting customers and colleagues down a Human Resource Department might use....

• Articles of Association

• A grievance procedure

• An audit

• A disciplinary procedure

This source of finance enables a business to use up to date equipment that it may not otherwise be able to afford. The payments are spread over years of use and when the final payment is made the business owns the asset; although there will be interest and charges which will hit profits through the term of the agreement.

A business may use this short-term source of finance to maintain cashflow where it is a seasonal business or a business which sells goods on credit.

• Loan

• Leasing

• Overdraft

• Venture Capital

Which is NOT a disadvantage of using a Venture Capitalist

• The VC is likely to want a significant share in the business

• With a share the VC will take some control and influence away from the owner

• They are unlikely to be able to provide specialist business advice

• The VC will be entitled to the same dividend per share as provided to the original owner

A business decides to use trade credit. Which is NOT something this business will need to concern itself with.

• The loss of early payment discounts

• Ensure it pays on time so as not to upset suppliers and incur late payment charges

• Interest charges if paid in agreed terms

• Ensure it choose suppliers who offer credit but also materials at good prices

This tends to be wide towards the bottom of flat organisations and can lead to bottle-necks in decision-making, slowing decisions down.

Which is a potential disadvantage of a decentralised organisational structure?

• People lower down the structure may feel demotivated since they have no impact on decisions

• The business may be less effective in meeting customer needs

• The business leaders may become over burdened with too many decisions

• Decision-making may not be consistent across the business giving conflicting messages to shareholders and customers

A potential drawback of using share capital as a source of finance is:

• A loss of control and dividends for the founding owner

• No interest has to be paid

• Dividends only have to be paid if the business is profitable and has cashflow.

• Interest charges are high

A key benefit of using retained profit as a source of finance is that:

• New businesses are unlikely to have reserves available

• Profit cannot be used for other things in future which may turn out more profitable

• There is no interest or third party to deal with

• It is a short-term source of finance