2.1 Raising Finance

Question 1

What is capital expenditure?

Answer 1

spending on items that can be used over and over

e.g. machinery, vehicle

Question 2

What is revenue expenditure?

Answer 2

payments of g/s that have been consumed or will be

e.g wages, raw materials

Question 3

What is capital in a business?

in terms of finance

Answer 3

money provided by the owners

Question 4

What is internal finance and the 3 types?

Answer 4

money generated by the business or its curret owners
- owners capital/personal saving
- retained profit
- sales of assets

Question 5

What is retained profit?

Answer 5

profit after tax
ploughed back into the business

Question 6

What is sale and leaseback?

Answer 6

selling assets, and leasing them back from the buyer

e.g. selling machinery

Question 7

What are the advantages of internal finance?

Answer 7

• immediate capital, assets sold quick
• cheap, no interest - not borrowing
• no need to involve third parties

Question 8

What are the disadvantages of internal finance?

Answer 8

Limited
- not profitable to use retained profits
- dont have assets to sell or need them

not tax-deductable, no inflationary benefits
Opportunity costs
- using retainted profits > reactions of shareholders (dividends)
- conflict between directors and shareholders

Question 9

What is external finance?

Answer 9

finance from sources outside the business

family, friends, banks, P2PL

Question 10

What is an Authorised share capital?

Answer 10

maximum amount of share capital that a company is authorised

Question 11

What is a captial gain?

Answer 11

profit made from selling a share

Question 12

What is crowd funding?

Answer 12

when a large number of individuals invest in a business or project

Question 13

What is a Debenture?

Answer 13

a long-term loan to a business

Question 14

What is an Issued Share Capital?

Answer 14

the total value of shares that a company has issued to its shareholders

Question 15

What is a lease?

Answer 15

contract to aquire use of resources such as property or equipment

Question 16

What is Share Capital?

Answer 16

money introduced to the business through the sale of shares

Question 17

What is the difference between a secured loan and an unsecured loan?

Answer 17

secured - lender has protection if borrower doesnt repay
unsecured - lender has no protection

Question 18

What is a Venture Capitalist?

Answer 18

provides funds for small businesses that may be too risky for other investors

Question 19

What are the advantages and disadvantages of a venture capitalist?

Answer 19

Advantage:
- specialists, can help grow business by providing info
- no interest - not borrowing any money
- Money introduced into the business

Disadvantages:
- will take a share of the company
- loss of control - decisions

Question 20

What is a trade-credit?

Answer 20

paying at a later date. interest free

Question 21

What is a limited liability?

Answer 21

legal status that means that shareholders can only loose the original amount they invested

Question 22

What is unlimited liability?

Answer 22

business owners are liable for all business debts

Question 23

What is collateral?

Answer 23

assets that can be sold to pay lender if loan is not repaid

Question 24

What are the implications of unlimited liability

Answer 24

Exposed financially to failure of business
- owing to banks, suppliers, tax
- pay debts through personal resources

Financially liable if sued
- need money to settle suits
- pay through personal assets

Question 25

What are the implications of limited liability?

Answer 25

if business fails, dont need to pay debts

Question 26

What does if mean if a business is undercapitalised?

Answer 26

not raising enough capital when setting up

Question 27

What are rights issue?

Answer 27

issuing new shares to shareholders at a discount

Question 28

What are some sources of finance an unlimited liability business can use?

Answer 28

• personal savings
• retained profits
• loan
• overdraft

Question 29

What are some sources of finance a limited liability business can use?

Answer 29

• share capital
• debentures
• retained profits
• venture capitalist
• business angels

Question 30

What is a business plan?

Answer 30

details about:
- products made
- resources needed
- forecasts
- revenues
- cashflow

Question 31

What are some contents of a business plan?

Answer 31

Business opportunity - product made, quantity, price
Buying + production - costs, suppliers
Financial forecast - sales, cashflow, profit-loss, breakeven
Objective - aims, structure
Market - customers, competition
Personell - who?, employees
Premises + equipment - machinery, property
Finance - to start-up

Question 32

What is a cashflow forecast?

Answer 32

prediction of all reciepts and expenses over a period of time

Question 33

What is a net-cashflow?

Answer 33

difference between cash flowing in and flowing out

Question 34

What are the advantages of a cashflow forecast?

Answer 34

Business plan
- more likely to succeed

Comparison with past figures
- identify problems, over payments

Businesses with seasonal demand
- inflow irregular, delay payments during low inflows

Question 35

What are the disadvantages of a cashflow forecast?

Answer 35

Estimated
- difficult to predict
- making net-cashflow unreliable

Time consuming > opportunity cost
- regular updates
- at the expense of other aspects

Only focuses on one business variable - cash
- other variables also important - profit, margins
- cannot be used on its own

Question 36

What is solvency?

Answer 36

the degree to which a business is able to meet its debts when they fall due