2.1 Raising Finance Flashcards
Name 3 types of internal finance
- Owner’s capital: personal savings
- Retained profit
- Sale of assets
What is owner’s cpaital: personal savings
-money business owners/ shareholders have invested in their businesses
What is retained profit
-once all costs have been covered and divdiends paid to shareholders- any profit left is retained in business and used as source of finance
What is sale assets
-in established businesses assets that are no longer needed are sold- generates cash- used for other pdocuts
Name the 6 types of external finance
- family and friends
- banks
- peer-to-peer funding
- business angels
- crowd funding
- other businesses
How can fasmily and friends generate finance in a business
- provide extra start-up capital necessary for business start-ups
- also could provide loans
How can banks generate finance in a business
- provide bank loan
- banks insist on some collateral aa security, either a business asset or personal asset belonging to owner
How can peer-to-peer funding generate finance in a business
- allow individuals to lend directly to other people or businesses without using a bank
- generally higher rate of interest
- provide optiuon when banks are unwilling to lend
How can business angels generate finance in a business
- extremely rich individuals who provide capital to high risk small business ventures/ start ups
- they become involved in strategic management of business in hope of high returns
- e.g dragons in dragons den
How can crowdfunding generate finance in a business
use of small amounts of capital from large number of individuals to finance new business
How can external businesses generate finance in another busines
- large firms seek out small businesses starting up and help them out by providing finance
- in return for a shareholding
Name the 5 methods of finance
- loans
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
What are loans
- involves bank/ family providing large sum of cash
- repaid over an agreed period of time with added interest
What is share capital
- when private company is formed- ownership of business is split into shares
- these shares- sold to shareholders
What is venture capital
specialist investors who invest in private companies for a large share
What are overdrafts
a facility that will allow you to withdraw more money from your account than is available.
What is leasing
a way of renting an asset that the business requires, such as a coffee machine.
What are trade credits
when goods/ sevrices provided by supplier arent paid for immediately
What are grants
fixed amount of money awarded by the government, EU (European Union) or charitable organisations
given to a business when they meet certain criteria ( providing jobs in areas of high unemployment)
What is unlimited liability
owners of the business are personally responsible for all debts caused by the business
What is limited liability
the owners or other shareholders of a company are not responsible for all of its debts if the company fails
What is a business plan
document setting out a business idea how it will be financed, marketed & put into practise
Why is it important for a start-up business to have a business plan
- attracts finance through shareholders, business angels, bank
- ensures entrepenuer has carefully considered potential problems
- point to maintain clear sense of direction
- has quantitive targets to aim for
Name the main sections a business plan should include
- executive summary
- product/ service
- market
- marketing plan
- operational plan
- financial plan
- conclusion
What does cash inflow show
shows places and timings from which cash flows into business
What does cash outflows show
show how much cash leaves business each month
What does net cash flow/ monthly balance show
shows how much money the business makes per month
What does opening balance show
amount of cash business had at start of month
-this will be last months closing balance
What does closing balance show
amount of cash in business at end of month
What does it mean for a business if the closing balance is negative
business needs extra finance
What does the net cash flow tell the business
indicates how well each month is expected to go for the business
What is the use of cash flow forecasts
-spot cash problems in advance to prevent major crisis
Name 4 examples of actions that help to improve cash flow
- producing and distributing products as quixkly as possible- get money quick
- chasinf customers to pay asap
- keeping stocks to a minimum
- minimising soending on equipment- use leasing and rentint instead
What are the benefits of cash flow forecasts
- advanced warning of cash shortages
- ensure business can afford to pay suppliers, employees
- spots problems with customer payments
Name the formula for net cash flow
cash inflow - cash outflow
How do you calculate opening balance
= closing balance from last month
How fo you calculate closing balance
opening balance + net cash flow
How can you calculate cash outflows
wages + materials
What is an asset
property or equipment purchased y for business use
how are cash flow forecasts used for financial descision makig
- identify timing, significance of potential shortfalls
- give confidence about short term survuval
definition of equity
the value of ownership in something
Name 3 types of internal sources of finance
-owners capital- only relevant in start-up/ small businesses]
]
-retained profit- business must have made a profit & not spend it on anything else
-sale of assets-
Name 6 types of external sources of finance
- family and friends- limited to small businesses
- bank-
- peer-to-peer funding- rare- particularly risky for start ups
- business angels- rare- start-up/ recently started
- crowdfunding- start-ups
- other businesses- rare- start-ups
What is liquidation
when companys owners close down company
-sells assets to generate cash to pay off debts of business
Name the 4 types of finance likely to be used by sole traders and partnerships
- owners capacity
- trade credit
- leasing
- bank finance
Name the 6 types of finance likely to be used by private limited companies and public limited companies
- share capital
- trade credit
- leasing
- peer to peer/ crowdfunding
- angel/ venture capital
- bsnk finance
Why is doing business with a sole trader/ partnership less risky
- if business runs into problems
- customers/ suppliers can legally pursue owners for debts owed
Why is being a sole trader/ partnership more risky
- unlimited liability
- owners have no protection of personal assets if something goes wrong
What is inflation
% rate at which average prices rise during a year within the whole UK economy
What happens if prices are rising throughout an economy
costs for raw materials, property and labour ^
Name 3 circumstances when inflation has a major effect
- when rates of inflation are significantly above 2%
- when prices are rising faster than acerage earnings ->
- when UK inflation is higher than that in most other countries
Name 3 effects of inflation on businesses
-firm with a long-term fixed price contract ->
What are the advantages to a bank loan?
don’t need to give % of profit/ share in your company.
Banks do not take any ownership of the businesses
Quick and easy to organise
interest rates tend to be low
What are the disadvantages to a bank loan?
Have to pay off interest & original loan.
can be hard to apply for a loans -> must be able to repay
borrower’s personal assets can be seized if loan cant be repayed
What are the advantages to a Bank Overdraft?
quick and east to arrange –> provides a good cash flow backup
Short-term can be cheaper than a loan
good way to cover the period between money going out of and coming into a business.
What are the disadvantages to a bank Overdraft?
Interest is repayable on the amount overdrawn and can be expensive if used over a longer period of time
interest and fees on overdrafts are often at a higher rate than loans
face large charges if you go over the agreed overdraft limit
What are the advantages to a business angel?
-access to investors knowledge, contacts
-no repyment, interest
What are the disadvantages to a business angel?
-give up a share of ur business
-may take a long time to find suitable investor
What are the advantages to Share issue/Share Capital?
there is no need to mortgage property on these shares
- Have access to money you wouldn’t normally have access to for the business.
