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Business Theme 2 Managing business activities > 2.1 Raising finance > Flashcards

2.1 Raising finance Flashcards

1
Q

Internal sources of finance

A

-Personal Savings eg redundancy payments
-Retained profit
-Sales of assets
-Managing working capital effectively

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2
Q

External sources of finance

A

-Family & friends
-Bank loans, overdraft, mortgage
-Peer to peer funding & crowdfunding
-Business Angels
-Venture Capitalist
-Share capital

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3
Q

Why are personal sources important to a start up?

A

-Cheap
-Entrepreneur keeps control
-Little red tape/delay
-Organised quickly

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4
Q

Sources of finance for a limited lability business

A

-Retained profit
-Debentures
-Share capital
-Venture capitalist & business angels

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5
Q

Sources of finance for an unlimited-liability business

A

-Personal savings & retained profit
-Loan, overdraft, mortgage
-Trade credit & leasing
-Crowd funding & peer to peer
-Grants

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6
Q

Benefits of Retained profits

A

-Cheap
-Very flexible
-Do not dilute the ownership of the company

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7
Q

Drawbacks of retained profits

A

-Danger of hoarding cash
-Shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
-High profits and cash flow suggest the business could afford debt

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8
Q

Equation of working capital

A

Working capital = Current assests - current liabilities

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9
Q

How to manage working capital effectively?

A

-Negotiate extended payment terms with suppliers
-Incentivise customers to pay more promptly

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10
Q

Sales of assets

A

-Selling assets no longer required (machinery, land)
-Not all businesses have spare assets

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11
Q

Describe bank overdrafts

A

-Short term finance
-Bank lets a business owe it money in return for charging high rate of interest
-Flexible
-Good for handling seasonal fluctuations in cash flow or when there’s short term cash flow problems

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12
Q

Describe bank loans

A

-Long term finance (loan provided over fixed period with interest)
-Good for financing investment in fixed assets
-Lower interest rate than bank overdraft
-Not very flexible

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13
Q

Advantages of a bank overdraft

A

-Relatively easy to arrange
-Flexible (use as cash flow requires)
-Interest only paid on amount borrowed
-Aids cash flow

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14
Q

Disadvantages of an overdraft

A

-Can be withdrawn at short notice
-Interest charge varies with changed in interest rate
-Higher interest rate than bank loan

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15
Q

Advantages of Bank loans

A

-Greater certainty of funding
-Lower interest rate than a bank overdraft
-Appropriate method of financing fixed assets

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16
Q

Disadvantages of a bank loan

A

-Requires security (collateral)
-Interest paid on full amount outstanding
-Harder to arrange

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17
Q

Benefits of issuing shares

A

-Able to raise substantial funds if the business has good prospects
-Broader base of shareholders
-Equity rather than debt
-Lower risk finance structure

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18
Q

Drawbacks of issuing shares

A

-Dilutes ownership
-Take a share of profit

19
Q

Define debentures

A

A form of long term loan which is issued by the company, usually with a fixed rate of interest

20
Q

Key features of debentures

A

-Long term often 10-20 years
-Issued by the company not bank
-Fixed rate of interest
-May be secured against the assets of the company
-Can be traded

21
Q

Describe Venture Capitalists

A

-Specialist investors in private companies
-Manage investment funds designed to achieve high rates of returns
-Will seek large share of share capital

22
Q

Benefits of Venture capital

A

-Raise substantial amounts
-Business benefits from specialist investor support
-Easier to attract finance, less risk adverse

23
Q

Drawbacks of Venture Capital

A

-Require high rate of return
-Loss of control

24
Q

Describe raising finance from suppliers

A

-Trade credit
-As a business expands, amount owed to suppliers at any one time also grows
-Strong relationship with suppliers = able to obtain better payment terms

25
Q

Describe peer to peer funding

A

-Connects businesses looking for finance with individuals willing to invest or loan
-Effectively cuts out role played by banks
-Increasingly popular for fast growing established businesses

26
Q

Describe crowd funding

A

-Connects businesses looking for equity investment with potential investors
-A form of peer to peer financing

27
Q

What is an incorporated business?

A

-An incorporated business is a separate legal entity
-Owners are not liable for any debts should that business go bankrupt

28
Q

What is an unincorporated business?

A

-The owners are liable for any debts and can have legal action taken against them
-Sole traders and partnerships are often unincorporated businesses

29
Q

Advantages of being a sole trader

A

-Cheap
-Owner gets all profits
-Make all decisions
-Don’t need to publish financial results

30
Q

Disadvantages of being a sole trader

A

-Unlimited liability
-Harder to access finance
-More risky if you operate as a sole trader or partnership

31
Q

Advantages of being a private limited company

A

-Limited liability
-More ways to raise finance

32
Q

Disadvantages of being a private limited company

A

-Difficult to sell shares
-Some administration
-Disclose finances online

33
Q

Advantages of being a public limited company

A

-Limited liability
-Greater access to finance
-Purchasing power

34
Q

Disadvantages of being a public limited company

A

-Shareholder influence
-Disclosure of information
-Regulation
-Administration costs

35
Q

What is the main aim when producing a business plan?

A

-Reduce risk associated with starting a business
-Provide a forecast of sales, costs and cash flows
-Allows lenders and investors to analyse plan and make informed decisions about providing a loan

36
Q

Key contents of s business plan designed to raise finance

A

-Business model
-Product & market positioning
-Management team
-Market assessment (competitors, market size & growth)
-Opportunities and threats

37
Q

What is cash needed for?

A

-Setting the business up
-Day to day trading
-Growth

38
Q

Examples of cash inflows

A

-Cash sales
-Sales of fixed assets
-Loans from bank
-Share capital invested
-Interest of bank balances

39
Q

Examples of cash outflows

A

-Payment to suppliers
-Wages and salaries
-Tax on profits
-Loans and over drafts

40
Q

Why produce a cash flow forecast?

A

-Advanced warning of cash shortages
-Makes sure business can afford to pay suppliers and employees
-Provides reassurance for investors

41
Q

What makes a good cash flow forecast?

A

-Updated regularly
-Makes sensible assumptions
-Allows for unexpected changes

42
Q

Define a cash flow problem?

A

When a business does not have enough cash to be able to pay its liabilities

43
Q

Problems with cash flow forecasts

A

-Based on estimates
-Requires appropriate skills, insights and research time to prepare
-Cant predict external shocks

Business Theme 2 Managing business activities (6 decks)

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