2.1 Raising Finance Flashcards
What is capital expenditure?
spending on items that can be used over and over
e.g. machinery, vehicle
What is revenue expenditure?
payments of g/s that have been consumed or will be
e.g wages, raw materials
What is capital in a business?
in terms of finance
money provided by the owners
What is internal finance and the 3 types?
money generated by the business or its curret owners
- owners capital/personal saving
- retained profit
- sales of assets
What is retained profit?
profit after tax
ploughed back into the business
What is sale and leaseback?
selling assets, and leasing them back from the buyer
e.g. selling machinery
What are the advantages of internal finance?
- immediate capital, assets sold quick
- cheap, no interest - not borrowing
- no need to involve third parties
What are the disadvantages of internal finance?
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
What is external finance?
finance from sources outside the business
family, friends, banks, P2PL
What is an Authorised share capital?
maximum amount of share capital that a company is authorised
What is a captial gain?
profit made from selling a share
What is crowd funding?
when a large number of individuals invest in a business or project
What is a Debenture?
a long-term loan to a business
What is an Issued Share Capital?
the total value of shares that a company has issued to its shareholders
What is a lease?
contract to aquire use of resources such as property or equipment
What is Share Capital?
money introduced to the business through the sale of shares
What is the difference between a secured loan and an unsecured loan?
secured - lender has protection if borrower doesnt repay
unsecured - lender has no protection
What is a Venture Capitalist?
provides funds for small businesses that may be too risky for other investors
What are the advantages and disadvantages of a venture capitalist?
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
What is a trade-credit?
paying at a later date. interest free
What is a limited liability?
legal status that means that shareholders can only loose the original amount they invested
What is unlimited liability?
business owners are liable for all business debts
What is collateral?
assets that can be sold to pay lender if loan is not repaid
What are the implications of unlimited liability
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
What are the implications of limited liability?
if business fails, dont need to pay debts
What does if mean if a business is undercapitalised?
not raising enough capital when setting up
What are rights issue?
issuing new shares to shareholders at a discount
What are some sources of finance an unlimited liability business can use?
- personal savings
- retained profits
- loan
- overdraft
What are some sources of finance a limited liability business can use?
- share capital
- debentures
- retained profits
- venture capitalist
- business angels
What is a business plan?
details about:
- products made
- resources needed
- forecasts
- revenues
- cashflow
What are some contents of a business plan?
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
What is a cashflow forecast?
prediction of all reciepts and expenses over a period of time
What is a net-cashflow?
difference between cash flowing in and flowing out
What are the advantages of a cashflow forecast?
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
What are the disadvantages of a cashflow forecast?
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
What is solvency?
the degree to which a business is able to meet its debts when they fall due
