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BM Business theme 2 > 2.1 Raising finance > Flashcards

2.1 Raising finance Flashcards

1
Q

What are the two sources of finance?

A

Internal and external

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2
Q

What is internal finance?

A

Money that comes from the business and its owners

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3
Q

Name 3 examples of internal finance

A

Retained profit
Owners capital (savings)
Sale of assets

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4
Q

What is retained profit?

A

Profit that has been generated in previous years and reinvested into the business

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5
Q

What is opportunity cost

A

Value of the benefit lost from the next best alternative when a business has to make a choice

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6
Q

What are assets

A

Resources owned by a business

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7
Q

What is working capital?

A

Money used in the day to day operations of a business

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8
Q

Benefits of internal finance

A

No interest or extra charges

No input from 3rd party companies

Less paperwork

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9
Q

Disadvantages of internal finance

A

Significant opportunity costs. e.g. once retained profits are used it is not available for other uses

May not be a sufficient amount

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10
Q

What is external finance

A

Money sourced from outside the business

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11
Q

Examples of external sources of finance

A

Family and friends
Banks
Business angels
Crowdfunding

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12
Q

Advantages of using friends and family as an external source of finance

A

A very cheap source of funds (Low interest, low extra charges)

Less strings attached

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13
Q

Disadvantages of using friends and family as an external source of finance

A

Relationships could be damaged if you are unable to repay the finance

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14
Q

Advantages of using banks as an external source of finance

A

Offer short term finance (overdrafts) and long term finance (loans)

Able to provide free advice and guidance

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15
Q

Disadvantages of using banks as an external source of finance

A

A business plan is usually required

Banks are cautious about lending to new businesses

Large amount of interest

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16
Q

What are business angels?

A

Individuals who specialise in making investments in start up businesses

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17
Q

Advantages of using business angels as an external source of finance

A

Business angels tend to be more willing to take a risk than banks

Able to offer advice and guidance to businesses they invest in

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18
Q

Disadvantages of using business angels

A

Finding a good business angel with appropriate experience can be challenging

They will receive a share of the profits

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19
Q

What is crowdfunding?

A

Raising small amounts of money from a large number of individuals to finance a business idea.

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20
Q

Advantages of using crowdfunding as an external source of finance

A

Organic customer base and the platform provides a form of free marketing.

A good credit rating isn’t required

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21
Q

Disadvantages of crowdfunding

A

Must have a persuasive business plan to convince individuals to invest into their product

Large amounts if competition, not guaranteed finance

Must meet your goals to receive the finance

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22
Q

What is a joint venture

A

Contractual agreement between two or more firms to combine their resources and expertise to achieve a common goal

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23
Q

What is a takeover

A

One firm acquiring control of another through purchasing a controlling stake

24
Q

What are 5 examples of methods of finance for a business

A

Loans
Gov Grants
Overdrafts
Venture capital
Share capital

25
What is a loan
It is where a sum of money is borrowed and repaid with interest over a period of time
26
What is capital equipment
Fixed assets such as machinery usually a long term investment
27
What are the three common types of loans
Bank loan Mortgage loans - long term to purchase buildings or land Debentures - long term agreements
28
What are the benefits of loans
Interest rates are fixed for the term of the loan Repayments are made in equal instalments Businesses can purchase expensive equipment or property Control over decision making is kept in the business
29
Drawbacks of loans
Interest rates depend on the business credit rating Non - current liabilities are increased on the balance sheet Missed payments on a mortgage may lead to property being repossessed
30
What is an overdraft
Arrangement for current account holders to spend more money than is in their account
31
What are the benefits to overdrafts
A short term source of finance significant flexibility Aids cash flow
32
What is share capital
Finance raised by selling shares of a limited company. shareholders are owners of shares
33
What are the benefits to using share capital as a source of finance
Large amounts of capital is able to be raised interest is not paid on finance raised through shares
34
What are the negatives to using share capital as a source of finance
Shareholders are able to vote on who is on the board of directors hostile takeover is possible for PLCs
35
What is venture capital
Capital provided by specialist experienced investors. Usually in small to medium businesses that are in need of experience and have high growth potential.
36
What are the benefits of venture capital
Experienced investor, skills the current shareholders may not have Large amounts of capital are possible
37
What are the negatives to venture capital
Usually requires a stake in the business in return for their finance Usually expect a high level of control over the business
38
What is leasing
An asset in return for regular ongoing payments
39
Benefits of leasing
Business is not responsible for maintenance or repair costs
40
Negatives of leasing
The business doesn't own the asset Usually more expensive in the long run Usually required to lease for a minimum amount of time (contract)
41
What is trade credit
Agreement with suppliers to buy materials and pay at a later date
42
What are grants ?
Government and industry trusts may offer grants to specific businesses e.g. electric car businesses
43
What is meant by unlimited liability
Sole owners and partnerships are fully responsible for all debts owed by the business also legally responsible for any unlawful acts committed by those connected to the business
44
What is meant by limited liability
Owners of LTDs and PLCs are only able to lose the original amount they invested if the business fails Shareholders are not responsible for business debt
45
Why do businesses require sources of finance?
Capital expenditure such as buildings and expensive equipment. Increase operations? Purchase stock or raw materials
46
What is a business plan
Document produced by the owner of a start up which provides forecasts such as sales costs and cash flow.
47
What is the main aim of a business plan
reduce the risk associated with starting a new business
48
What are the benefits of a business plan for the owner
make sure they think about every aspect of the business before they start hopefully reduce the risk of failure shows potential investors the business has done their research
49
What are the benefits of a business plan to investors
Helps investors to make an informed decision Investors able to analyse if their is opportunity to increase the value of their investment
50
What is the calculation for net cash flow
Total inflows- Total outflows
51
What is a cash flow forecast
Prediction of the expected cash inflows and outflows over a period of time
52
What is the opening balance in a cash flow forecast
the previous months closing balance carried forward
53
What is the closing balance in a cash flow forecast
Net cash flow + opening balance
54
Advantages of using cash flow forecasts
support applications for loans and an integral part of a business plan Identify where the business may experience cash shortfalls or surpluses. means plans can be made aids planning and help to avoid mistakes
55
Disadvantages of using cash flow forecasts
Usually based on estimates and inflows and outflows usually differ significantly An accurate cash flow forecast requires skill and large amounts of research and time
56

BM Business theme 2 (5 decks)

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