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Business > 2.1 - Raising finance > Flashcards

2.1 - Raising finance Flashcards

1
Q

define owners capital

A

money invested by the owner in the business,, may have come from their personal savings

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2
Q

define retained profit

A

profit from a previous year that is saved and used to reinvest into the business

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3
Q

what is an asset

A

item that the business owns that could be sold to raise cash

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4
Q

what are some key financial concerns when starting a business

A
  • how much it will cost to become fully operational
  • how much it will cost to stay running (overheads, fixed and variable costs)
  • expected revenue
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5
Q

what are some short term sources of finance (include adv/disadv)

A

bank overdraft - flexible and easy to arrange, but high interest rates

trade credits - any problems whilst paying can cause issues with future orders

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6
Q

what are some medium term sources of finance (include adv/disadv)

A

bank loan - easy financial planning but interest rates can be high and usually require collateral

leasing/hire purchase - expesnive but avoid large cash outflows that can disrupt business

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7
Q

what are some long term sources of finance (adv/disadv)

A

owners savings - banks won’t provide a loan unless they are sharing some of the risk, can take awhile to accumulate, no repayment or interest

sale of shares - may lose some control of business, loss of some profits, easy way to raise finance

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8
Q

what are some reasons to raising finance

A
  • to pay off debts
  • to help a business with their cashflow = avoid overdraft
  • to expand
  • to buy stock
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9
Q

define gearing

A

the amount of funding in a business which is leant from a bank vs the funding which has been acquired from the shareholders

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10
Q

what are some external sources of finance

A
  • friends and family
  • peer to peer funding
  • banks
  • business angels
  • crowdfunding
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11
Q

explain bank loans as an external source of finance

A
  • quick to set up
  • affected by interest rates
  • will want to see a business plans with relevant financial information
  • will ask for security or collateral
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12
Q

explain share capital as an external source of finance

A
  • venture capitalists are willing to take financial risk

- PLC = sell shares to the public by floating their shares on a stock exchange

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13
Q

explain venture capital as an external source of finance

A

= private equity finance

  • invest large sums of money in a business in return for shares in the company
  • look for a high rate of return in a specific time period
  • strong business plan and proven track record
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14
Q

explain overdrafts as an external source of finance

A

= a facility that allows a company to spenf up to an agreed negative balance on its current account
- pay interest calculated on a daily basis

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15
Q

explain leasing as an external source of finance

A

may decide to lease equipment and machinery so that it can be updated regularly

  • business doesn’t own the equipment
  • paying a fixed payment monthly
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16
Q

explain government grants as an external source of finance

A
  • provide financial help to businesses in an effort to overcome problems associated with unemployment
  • do not normally have to be repaid
  • owners still keep full control
17
Q

what is limited liability

A

if the business has debts the owners are only liable for the amount of their original investment
- business and owner have separate legal identities

18
Q

what is unlimited liability

A

if the business has debts the owners are liable for the full amount and may need to sell assets/personal possessions in order to make the payments

19
Q

what is bankrupcy

A

when an individual is unable to meet personal liabilities which may be due to when a business is unable to meet its liabilites

20
Q

what are some of the implications of limited liability

A
  • separate legal identities
  • separate assets
  • protection of the owners personal savings and assers
  • must be registered with companies hous as an LTD or PLC
21
Q

what are some of the implications of unlimited liability

A
  • sole trader or partners may have to sell personal assets to pay the debts of the business
  • unable to sell shres in the business
22
Q

what sources of finance would be used for an unlimited liability business

A
  • business loan
  • private investors
  • credit cards
  • crowd funding
  • trade credit
  • owner savings
  • overdraft
23
Q

what sources of finance would be used for a limited liability business

A
  • retained profit
  • sale of assets
  • debentures = loan on a specific item
  • hire purchase and leasing
  • trade credit
  • government grants
  • venture capital
24
Q

define a cash flow forecast

A

a form of budget which enables a business to look at its potential revenue flow and its expenses - estimate of the money a business will spend and receive in a year

25
Q

why do businesses write business plans

A
  • to persuade lenders that the business will make enough profit to be able to pay back interest and loan capital
  • attract potential investors
  • to give owners or shareholders some direction
  • to set targets
  • to identify problems early on to resolve them sooner
  • to monitor effectiveness of aims
26
Q

what needs to be included on business plan

A
  • cash flow forecast
  • the product or service itself
  • the marketing plan or operational plan
  • 4ps of marketing
  • human resources
  • financial information - revenue, costs, profits
27
Q

what are some uses of cash flow forecasts

A
  • monitor cash flow within the business
  • can make comparisons between predicted and actual
  • may be an application for funding
28
Q

what are some limitations with cash flow forecasts

A
  • bias to business owner - may over inflate to make business appear better
  • predictions can be inaccurate - don’t account for events that can’t be predicted
  • updates - needs to be regularly updated
  • time - longer periods of time could be inaccuracte
29
Q

what are the 3 main ways to analyse a cash flow forecast

A
  • calculate the difference between closing balance and opening balance
  • use the monthly closing balance to assess trends in the data
  • analyse the timings of inflows and outflows

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