2.1 - Raising Finance

Question 1

What are some examples of internal finance?

Answer 1

• owners capital - personal savings from the business owner
• retained profit - profit made from the porduct/service is re-invested into the business
• sale of assets

Question 2

What are some examples of external methods of finance?

Answer 2

• loans
• share capital
• venture capital
• overdrafts
• leasing
• trade credit
• grants

Question 3

Loans

Answer 3

• a loan is a fixed amount of money that is given to a business by the bank that has to be repaid overtime with interest
• advantages: gives access to large sums of money, helps with budgeting
• disadvantages: has to be payed with interest, banks may be cautious lending money to new businesses

Question 4

Share capital

Answer 4

• share capital is finances raised from the sale of shares in limited companies. Share holders are the owners of shares and are entitled to a companies profits when dividends are declared
• advantages: large amount of capital can be raised, no interest
• disadvantages: business owners may lose equity of their business if share holders gain a lot of shares

Question 5

Venture capital/ business angels

Answer 5

• Funds provided by specialist investors in small to businesses that have significant potential for growth
• advantages: often invest large sums of money, have specialist knowledge
• disadvantages: usually require a stake in the business in return for finance, often expect to exert some control over the business

Question 6

Overdrafts

Answer 6

• An arrangement for business current account holders to spend more money than it has in their account
• advantages: A short-term source of finance that offers significant flexibility, aids cash flow, fast access
• disadvantages: may be ‘called in’ if the bank is concerned about a business’s ability to repay what it owes, interest has to be payed

Question 7

Leasing

Answer 7

• An asset such as a piece of machinery or a vehicle used by the business in return for regular payments
• advantages: business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs
• disadvantages: usually more expensive in the long run than buying an asset

Question 8

Trade credit

Answer 8

• An agreement is made with suppliers to buy raw materials, components and stock which are paid for at a later date
• advantages: usually interest-free, gives the business chance to build profits
• disadvantages: can lose reliable suppliers if deadline for payment is not met

Question 9

Grants

Answer 9

• Governments and industry trusts may offer grants to businesses that meet specific criteria
• advantages: do not need to be repaid
• disadvantages: the business must use the finance for its intended purpose

Question 10

What is limited and unlimited liability?

Answer 10

• Limited liability - business owner is only responsible for business debts up to the value of their financial investment in the business
• Unlimited liabilty - the business owner or owners are personally responsible for all of the debts of the business, no matter what the value.

Question 11

What is the relevance of a business plan?

Answer 11

• shows how the business may develop overtime
• identifies key tasks that must be taken and goals that must be set
• helps plug up potential problems in advance so firms can find solutions

Question 12

What is a business plan?

Answer 12

A formal document that outlines the aims and objectives of a business, methods for attaining these goals and the time frame for the achievement of the goals.

Question 13

What is a cash flow forecast?

Answer 13

A prediction of the flow of money in and out of a business over a future time period of which shows the expected cash balance at the end of each month.

Question 14

What are the formulas in terms of cash flow forecasts?

Answer 14

• Net cash flow = total inflows - total outflows
• Opening balance = closing balance of previous month
• Closing balance = amount in the bank at the end of the month

Question 15

What are the uses of cash-flow forecasts?

Answer 15

• supporting applications for finance - lenders often insist that businesses support their applications with documents showing business performance, outlook and solvency
• enhancing the planning process - helps to clarify aims and improve performance
• monitoring cash flow - will help to identify where problems have arisen at the end of the financial year which helps to control cash flow effectively

Question 16

What are the limitations of cash-flow forecasts?

Answer 16

• may be based on estimates - difficult to estimate factors, such as future costs as they are dependent on future sales for example
• if the figures for cash inflows and outflow are not accurate, net cash flows and closing balance will be unreliable
• business activity is subject to external forces that tare beyond the control of owners and managers. E.g. changes in factors such as interest rates, economy, legislation.