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Business Theme 2 > 2.1 Raising finance > Flashcards

2.1 Raising finance Flashcards

1
Q

When may a business need finance?

A

Starting up

Growing

Dealing with a cash flow problem

Financing extra materials needed when a large order is received

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2
Q

What are sources of finance?

A

Places from which businesses may gain finance.

Can be gained from internal or external sources

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3
Q

What are 3 sources of internal finance?

A

Personal savings

Retained profit

Sale of assets

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4
Q

What are personal savings?

A

Only relevant to start up/ small businesses

Can be provided in the form of share capital or a loan

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5
Q

Strengths of personal savings:

A

Entrepreneur keeps control of the business

No need to repay/ interest charge

Risking own savings can be motivational

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6
Q

Cons of personal savings:

A

May only be limited amounts available

Threat to personal finances/family

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7
Q

What is retained profit?

A

Any profit left once all costs have been paid/ dividends been paid to shareholders.

Safest/most common form of internal finance for established businesses

Not possible for start up businesses

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8
Q

Pros of retained profit:

A

Don’t have to pay any interest

Very flexible

Doesn’t dilute the ownership of the company

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9
Q

Cons of retained profit:

A

Profit is money that you are taking away from shareholders

Danger of hoarding cash

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10
Q

What is sale of assets?

A

When assets may no longer be needed and can be sold to generate cash for other projects

Only available for established businesses, especially when they want to change strategy

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11
Q

Pros of selling assets:

A

Can generate cash for other projects

No interest charge/repayments

Immediate lump sum cash injection

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12
Q

Cons of selling assets:

A

Only a one off option

Loss of the value of the asset/future value

May be expensive in the long run i.e asset needs to be leased back

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13
Q

What are 5 external sources of finance?

A

Family/friends

Banks

Peer-to-peer funding

Business angels

Crowdfunding

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14
Q

How can family/friends provide finance?

A

Extra start-up capital necessary for business start ups

Can provide loans when banks are unwilling

Shareholding/equity

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15
Q

Pros of family/friends:

A

Owner keeps control of the business

May be able to trust their business investors better

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16
Q

Cons of family/friends:

A

May cause tension/problems if the finance is not repaid or the business doesn’t flourish

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17
Q

How can banks provide finance?

A

Provide loans but insist on some collateral as security

Not common to start up businesses

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18
Q

What is collateral?

A

Something of value that is used as security so if unable to pay the loan back, the asset is sold to generate money for repayment

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19
Q

What is peer-to-peer funding?

A

Relies on websites that can match investors willing to lend to business start-ups needing finance

Loans will be at a high rate of interest but provide an option when banks are unwilling to lend

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20
Q

What are business angels?

A

Individuals who invest in the very early stages of a business taking a significant share.

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21
Q

Pros of business angels:

A

Offer support/expertise

Bring in large sums of money

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22
Q

Cons of business angels:

A

Can be seen as high risk as the business isn’t established

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23
Q

What is crowdfunding?

A

Obtaining external finance from many small investments, usually through a web based appeal for investors

Allows small investors to find business start ups in which they are willing to invest

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24
Q

How can other business provide finance?

A

Businesses may seek out small businesses that are either starting up/ or in early stages and help them out by providing finance

In return they will take a shareholding

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25
What are methods of finance?
The process through which a source of finance provides money to a business
26
List 7 methods of finance:
Loans Share capital Venture capital Overdrafts Leasing Trade credit Grants
27
What are loans?
Can be provided by banks/friends/family or directors of the business Involves providing a lump sum of cash which will be repaid over an agreed period of time
28
Pros of loans:
Can raise significant amounts of money Businesses can monitor how much they repay the bank Don't have to relinquish control of the organisation
29
Cons of loans:
Money will have to be repaid with interest on top
30
What is share capital?
Bringing are owners into the organisation in return for a share of the businesses ownership Can only be used by a limited company
31
Pros of share capital:
Can bring in larger sums of money/no interest repayments New shareholders may bring in some industry knowledge, expertise and new contacts to aid the business
32
Cons of share capital:
Have to relinquish some control of the business Complex/costly process of issuing shares
33
What is venture capital?
Method of providing finance in higher risk investments, generally through a combination of loans/shares
34
Pros of venture capital:
Share holders will being in expertise that the business can utilise Can borrow money when a bank has rejected it
35
Cons of venture capital:
Rate of repayment may be higher than bank loans to compensate that the organisation is risky to loan money too Have to relinquish some control in the organisation
36
What are overdrafts?
A facility offered by a bank to allow a customer to continue spending money even when their account becomes negative. There will be an agreed limit to the overdraft.
37
Pros of overdrafts:
Allows businesses to continue purchasing assets that they need when they don't have any cash Good safety net for organisations
38
Cons of overdrafts:
You have to pay to have an overdraft facility Interest fees are much higher than borrowing from the bank
39
What is leasing?
Renting an asset as an alternative to buying the asset outright. The asset will be rented for a monthly fee for a set period of time.
40
Pros of leasing:
Avoids large chunks of cash outflows each time a new asset is purchased Short term leasing is cheaper than buying an asset outright
41
Cons of leasing:
Long term leasing will be more expensive than purchasing an asset outright.
42
What is trade credit?
Goods/services provided by a supplier are not paid for immediately
43
Pros of trade credit:
Supplier won't charge interest Flexible as the business decides when to pay Commonly available
44
Cons of trade credit:
Supplier can charge if there is a delayed payment
45
What is a grant?
Handouts usually to small businesses from local or central government Only relevant to businesses creating jobs in areas of economic deprivation or hi-tech firms competing with foreign rivals
46
Pros of grants:
Don't have to be repaid
47
Cons of grants:
Not all businesses may be eligible for a grant
48
What does liability mean?
To be responsible for debts
49
What is limited liability?
When companies are not personally responsible for debts if the business goes wrong (less risky) E.g PLC / LTD
50
What are the implications of limited liability?
Owner/business have separate legal identities Owner/business have separate assets Business can sell shares to share holders (increases ability to grow/expand) Owners personal savings are protected Costly
51
What is unlimited liability?
If a business has debts the owner must pay even if this means selling their own possessions to find the money E.g sole trader/partnerships
52
What are the implications of unlimited liability?
May have to sell assets to pay debts Unable to sell shares May be able to secure finances as banks will think they're prepared to risk their own finances on the business.
53
What sources of finance are appropriate for limited liability companies?
Share capital Loans Overdraft Business angels Trade credit Leasing Peer to peer Crowdfunding Venture capital
54
What sources of finance are available for businesses with unlimited liability?
Owners capital Loans Overdraft Leasing Trade credit
55
What is a business plan?
A look into the future of the business both in the market/financially
56
Why does a business write a business plan?
To persuade lenders Attract potential investors To give the owners some direction To set target (SMART) To identify early on any problem areas To monitor their effectiveness
57
What is cash flow?
Needs to be able to pay day to day expenses
58
What is a cash flow forecast?
A prediction of cash inflows/outflows in the future
59
What is a cash flow statement?
A statement that shows what happened to cash inflows/outflows
60
How to calculate net cash flow:
Cash inflow - Cash outflow
61
How to calculate closing balance:
Net cash flow + Opening balance
62
What are the main causes of cash flow problems?
Low profits/losses Too much production capacity (spending) Excess inventories held (stock) Seasonal demand e.g Easter eggs in easter Allowing customers too much credit Overtrading (when a business expands too quickly)
63
How to improve cash flow problems:
Increase volume of cash inflow Reduce volume of cash outflow Use reliable cash flow forecasting Keep costs under control Manage working capital effectively Choose the right sources of finance
64
What are the consequences of cash flow problems:
Insufficient liquid cash funds may mean an inability to meet short term debts Limited cash may result in missed opportunities Business may go into debt/fail
65
What are the uses of cash flow forecasts?
Helps control/monitor cash in and out of the business Arrange suitable finance at times of year Minimise spending on equipment Keeping stocks to a minimum Producing/distributing products as quickly as possible
66
What are the limitations of cash flow forecasts:
Bias Prediction Mistakes Potential for a false sense of security May be too optimistic

Business Theme 2 (5 decks)

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