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business > 2.1 > Flashcards

2.1 Flashcards

paper 2

1
Q

what is internal finance

A

Internal finance comes from the owner’s capital, retained profit, or the sale of assets

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2
Q

internal sources of finance

what is retained profit

A

The profit that has been generated in previous years and not distributed to owners is reinvested back into the business

The opportunity cost of investing the money back into the business is that shareholders do not receive extra profit for their investment

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3
Q

internal sources of finance

what is the Sale of assets

A

Selling business assets which are no longer required (e.g. machinery, land, buildings) generates a source of finance
A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash

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4
Q

The Benefits & Drawbacks of Using Internal Finance

advantages

A

Internal finance is often free

It does not involve third parties who may want to influence business decisions

Internal finance can usually be organised very quickly and without significant paperwork

Businesses that may fail credit checks (necessary for a bank loan) can access internal finance sources more easily

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5
Q

The Benefits & Drawbacks of Using Internal Finance

drawbacks

A

There is a significant opportunity cost involved in the use of internal finance

Internal finance may not be sufficient to meet the needs of the business

Using an internal finance method is rarely as tax-efficient as many external methods

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6
Q

what is external finance

A

External finance is sourced from outside of the business

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7
Q

sources of finance: family

advantages

A

Usually a very cheap source of funds
May have ‘no strings attached and can be provided to the business on very flexible terms

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8
Q

sources of finance: family

disadvantages

A

Relationships may be damaged if the finance is not repaid

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9
Q

external sources of finance

Banks

A

Banks provide several different kinds of loans to businesses e.g. a small business loan

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10
Q

The Advantages & Disadvantages of Bank Loans

Advantages

A

May offer both short term finance and long term finance if a business qualifies
Banks are often keen to provide free advice and guidance to businesses that use their services
Small sums may be borrowed from unsecured

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11
Q

The Advantages & Disadvantages of Bank Loans

Disadvantages

A

A business plan is usually required to access bank finance
Banks can be cautious about lending to new, untested businesses
Interest is payable
Businesses must be customers of the bank to access some loans
For larger amounts,** businesses may need to provide security to be granted a loan**

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12
Q

external sources of funding defenition

Peer-to-peer funding

A

Individuals with available savings pool it with others in a peer investment scheme such as Funding Circle

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13
Q

The Advantages & Disadvantages of Peer to Peer Funding

Advantages

A

Loans can usually be made available to businesses very quickly
Usually has ‘no strings attached (e.g. a share of the business

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14
Q

The Advantages & Disadvantages of Peer to Peer Funding

Disadvantages

A

Borrowers are charged a small fee to access finance in this way and have to pay interest in the same way as a bank loan
The individuals who made the money available in the first place receive some of this interest as compensation

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15
Q

sources of external finance defenition

Business angels

A

Some individuals specialise in making investments in start-up or expanding businesses e.g. Dragons Den investors

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16
Q

The Advantages & Disadvantages of Business Angels

Advantages

A

Business angels tend to be more willing to take a risk than banks
Angels often offer advice and guidance to the businesses in which they invest
Investment is usually for a determined period of time so owners regain shares in the future

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17
Q

The Advantages & Disadvantages of Business Angels

Disadvantages

A

Finding the ‘right’ business angel (e.g. with appropriate experience, expertise or interest) can be challenging
Networking is vital when entrepreneurs seek this kind of investment
As business angels own a stake in the business, they may be involved in decision-making and will receive a share of business profits

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18
Q

external methods of finance

crowdunfing

A

Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter

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19
Q

The Advantages & Disadvantages of Crowdfunding

Advantages

A

Creates an organic customer base and the platform provides a form of free marketing
A good credit rating is not required so new businesses that lack a trading record can attract funding

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20
Q

The Advantages & Disadvantages of Crowdfunding

Disadvantages

A

Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online
The potential for negative publicity if the project is not successful in attracting enough crowdfunding capital

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21
Q

external sources of finance

Other businesses

A

It may be possible for a business to access finance via a joint venture with another business, such as a key customer or supplier

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22
Q

The Advantages & Disadvantages of Finance from Other Businesses

Advantages

A

May provide access to business processes and market knowledge alongside finance
Can access large amounts of finance

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23
Q

The Advantages & Disadvantages of Finance from Other Businesses

Disadvantages

A

Profits need to be shared between businesses
Decisions will usually need to be agreed by all of the businesses involved

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24
Q

Methods of Finance: loan

Explanation

A

A sum of money is borrowed and repaid (with interest) over a determined period of time

Bank loans are usually unsecured and are typically repaid over two to ten years

25
Q

Methods of Finance: loan

Benefits

A

Interest rates are fixed for the term of the loan

Repayments are made in equal instalments, helping budgeting

26
Q

Methods of Finance: Loan

Drawbacks

A

Interest rates depend on the businesses credit rating
Non-current liabilities are increased in the balance sheet

27
Q

Methods of Finance, Loans(mortages)

explanation

A

Mortgages are long-term secured loans
They are typically used by a business to purchase buildings, land or large items of capital equipment

28
Q

Methods of Finance, Loans(mortages)

advantages

A

Businesses can purchase expensive equipment or property without the need for large amounts of capital

29
Q

Methods of Finance, Loans(mortages)

drawbacks

A

Missed payments may lead to property being repossessed

Repayments are variable, and linked to the current interest rate, making budgeting difficult

30
Q

Methods of Finance, Loans(debentures)

explanation

A

Debentures are ** long-term agreements between a business and a lender to repay** a specified amount (with a fixed rate of interest) by a certain date

Debenture holders are creditors rather than owners of a business and do not hold voting rights

31
Q

Methods of Finance, Loans(debentures)

drawbacks

A

Control over decision-making is retained within the business

Interest is fixed, aiding budgeting

32
Q

Methods of Finance, Loans(debentures)

drawbacks

A

Interest is often higher than for other types of loan

Failure to repay debentures may deter investors in the future

33
Q

Methods of Finance (Overdraft)

explanation

A
  • An arrangement for business current account holders to spend more money than it has in their account
  • A limit is agreed and interest is charged only when a business ‘goes overdrawn’
34
Q

Methods of Finance (Overdraft)

Advantages

A
  • A short-term source of finance that offers significant flexibility and aids cash flow
35
Q

Methods of Finance (Overdraft)

drawbacks

A

Risk of Withdrawal: Banks can withdraw the overdraft at any time, with little notice if the bank is concerned about a business’s ability to repay what it owes. This unpredictability can leave a business or individual in a difficult financial position if the overdraft is suddenly no longer available.

36
Q

Methods of Finance (Share Capital)

Explanation

A
  • Share capital is finance raised from the sale of shares in a limited company
  • Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared
37
Q

Methods of Finance (Share Capital)

advantages

A

Large amounts of capital can be raised, especially by public limited companies
Interest is not payable on finance raised in this way

38
Q

Methods of Finance (Share Capital)

drawbacks

A

Shareholders usually have a vote at a company’s Annual General Meeting (AGM) where they can have a say in the composition of the Board of Directors

39
Q

Methods of Finance (venture capital)

explanation

A

Funds provided by specialist investors in small to medium-sized businesses that have significant potential for growth

40
Q

Methods of Finance (venture capital)

advantages

A

Businesses that may have been refused finance from other sources may be able to attract investment from less risk-averse venture capitalists

41
Q

Methods of Finance (venture capital)

drawbacks

A

Venture capitalists usually require a stake in the business in return for finance and often expect to exert some control over the business

42
Q

Methods of Finance (leasing)

explanation

A

renting out an asset such as a piece of machinery or a vehicle used by the business in return for regular payments

43
Q

Methods of Finance (leasing)

advantages

A

Regular Income Stream: Leasing provides a steady stream of income, which can improve cash flow and provide financial stability over the lease term.

44
Q

Methods of Finance (leasing)

drawbacks

A

Loss of Asset Control: When you lease out an asset, you give up control over how it is used. The lessee may not take care of the asset as well as you would, leading to potential damage or increased wear and tear.

45
Q

Methods of finance (Grants)

explanation

A

Governments and industry trusts may offer grants to businesses that meet specific criteria

46
Q

Methods of finance (Grants)

advantage

A

Grants do not need to be repaid

47
Q

Methods of finance (Grants)

drawback

A

The business must use the finance for its intended purpose

48
Q

what is unlimited liability

A

Sole proprietors and partnership owners are fully responsible for all debts owed by the business

Owners are also legally responsible for any unlawful acts committed by those connected to the business

49
Q

what are the implications of unlimited liability

A

There is no legal distinction between owners with unlimited liability and the business

As a result, these business owners may have to use their own personal assets to pay debts or legal fees

50
Q

what is limited liability

A

Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

Shareholders are not responsible for business debts

In most cases, the shareholders cannot be held responsible for unlawful acts committed by those connected with the business

51
Q

what are the implications of limited liability

A

Companies are incorporated and owners are considered a separate legal entity to the business

This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

52
Q

what is the aim of producing a business plan?

A

to reduce the risk associated with starting a new business

53
Q

what is a business plan?

A

a document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow

Producing a business plan forces the owner to think about every aspect of the business before they start which should reduce the risk of failure

i shows potential lenders or investors that the business has done their research

Producing a business plan allows lenders (e.g. banks) and other investors to analyse the plan and make an informed decision about providing a loan

54
Q

what is a cash flow forecast

A

a prediction of the anticipated cash inflows and cash outflows, typically for a six to twelve month period

55
Q

what is a net cash flow?

A

calculated by subtracting total outflows from total inflows

56
Q

what is a opening balance?

A

the previous month’s closing balance carried forward

57
Q

what is a closing balance?

A

net cash flow to + opening balance

58
Q

The Uses & Limitations of Cash Flow Forecasts

Advantages of Cash-flow Forecasts

A

Cash flow forecasts can support an application for a loan and are an integral part of the business plan

They can help identify where the business may experience cash shortfalls or cash surpluses so that plans can be made to manage these periods

Cash flow forecasts aid planning and help a business avoid costly mistakes

59
Q

The Uses & Limitations of Cash Flow Forecasts

Disadvantages of Cash Flow Forecasts

A

Forecasts are usually based on estimates and in reality inflows and outflows may differ significantly from the estimates

Cash flow forecasts require appropriate skills, insight, research and time to prepare and update adequately

External factors that can impact inflows and outflows may not be reflected in the cash flow forecast

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