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Business Theme 2 > 2.1 Raising Finance > Flashcards

2.1 Raising Finance Flashcards

1
Q

What are the external sources of finance

A
  • family and friends
  • banks
  • peer to peer funding (p2pl)
  • business angels (like dragons den)
  • crowd funding
  • other businesses
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2
Q

Methods of external finance

A
  • Loans
  • share capital
  • venture capital
  • overdrafts
  • leasing
  • trade credit
  • grants
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3
Q

Source of external finance - Family and friends

A
  • Private limited companies can raise finance by selling shares to family and friends
  • a sole trader or partnership may also find that their family wants to contribute to the business maybe for interest, share of the profits or an interest tree loan
  • a benefit is the owner may still keep control of the business and be able to trust investors
  • downside is that it may cause tension it the finance is not repaid.
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4
Q

Source of external finance- Banks

A
  • May lend a loan to a business to start up or grow
  • may also provide a business with an overdraft to help when they have cash flow problems
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5
Q

Sources of external finance- Peer to peer funding ( P2PL)

A
  • Unsecured loans without going through a bank for example: student loans, payday loans, debt factoring, lease agreements
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6
Q

Sources of external finance- Business angels

A
  • Invest in equity finance
  • an angel makes use of their own personal disposable finance and makes their own decision about making the investment
  • investor would normally take shares in your business in return for providing equity finance
  • they can also bring their experience and knowledge to help your company achieve success
  • they seek to have a return on their investment over a period of 3-8 years
  • they can either actively taking a role on the board or actively supporting the business or may act passively
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7
Q

Sources of external finance- Crowd funding

A
  • A large number of people fund a project over the internet making small investments each, 3 ways to fund:
    • donate - no money back but rewards like tickets etc.
    • lend - get money back with interest
    • invest - invest in a business in exchange for equity or shares which may increase in value
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8
Q

Methods of external finance - bank loan

A
  • Banks will lend to a small business but may not lend when they first start -up as there is no track record or history of them making money
  • quick to set up
  • affected by interest rales - it they go up cost of borrowing will too and businesses may have to pay more interest back
  • they will want to see a business plan so they know how their money will be paid back
  • a bank will ask for security or collateral on a loan that can be seized it the loan is not paid back
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9
Q

Methods of external finance - overdraft

A
  • Short term lending of smaller amounts or money
  • very high charges and interest rates
  • a business can dip into it or pay it back as they see het
  • it a business goes over the overdraft they will be charged a lot
  • very expensive
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10
Q

Methods of external finance - ordinary share capital

A
  • In a public limited company they can raise more finance by having an ordinary share issue
  • external and long term method of finance but would only apply to a public limited company
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11
Q

Method of external finance - venture capital

A
  • Also known as private equity finance
  • venture capitalists will invest large sums of money in a business in return for shares
  • they will look for a high rate of return in a specific time period
  • they cook for a strong business plan and a proven track record making it difficult for
    Start up firms
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12
Q

Method of external finance - lease

A
  • As a business grows it may decide that it needs some more vehicles or equipment
  • they may lease as it can be updated regularly
  • NEVER own the equipment but will get the option to change it when it wears out
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13
Q

Methods of external finance - trade credit

A
  • one business trades with another and they will sometimes need to buy goods with trade credit
  • seller gives the buyer 30, 60, 90 days to pay
  • buyer has time to sell goods in their own shop before they have to pay for them
  • wholesaler may give the buyer discounts when they use cash
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14
Q

Methods of external finance - government grant

A
  • the government provides financial help to businesses in some areas of the country in an effort to overcome problems of unemployment
  • do not normally have to be repaid and owners keep full control of their business
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15
Q

Advantages of sales of assets

A
  • Depending on the asset a lot could be raised
  • finance does not have to be paid back
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16
Q

Disadvantages of sales of assets.

A
  • Not all businesses have surplus assets
  • may take time for asset to sell
  • business lose use of that asset
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17
Q

Advantages of retained profit

A
  • Don’t dilute the ownership of the company
  • very flexible as management have control over now its reinvested
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18
Q

Disadvantages or retained profit

A
  • Dangers of hoarding cash
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19
Q

Advantages of owners capital

A
  • Keep 100 % of the business
  • no interest to pay
  • quick and easy
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20
Q

Disadvantages of owners capital

A
  • Owner loses it all it the business fails
  • owners capital could be earning a return elsewhere
  • owner can get into a significant amount of personal debt
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21
Q

Advantages of bank loans

A
  • Lower interest than an overdraft
  • greater certainty of funding given terms of loan are complied with
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22
Q

Disadvantages of bank loans

A
  • Hard to arrange
  • requires security (collateral)
  • interest paid on full amount outstanding
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23
Q

Advantages of friends and family loans

A
  • Quick and flexible
  • more likely to have low interest
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24
Q

Disadvantages of family and friends loan

A
  • Amounts raised tend to be quite small
  • can damage relationships
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25
Q

Advantages of overdrafts

A
  • Relatively easy to arrange
  • flexible - use as cash flow requires
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26
Q

Disadvantages of overdrafts

A
  • High interest rates
  • can be withdrawn at short notice
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27
Q

Advantages of crowd funding

A
  • Quick and easy to set up
  • can raise finance and generate publicity
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28
Q

Disadvantages of crowd funding

A
  • Lots of competition
    -Fees
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29
Q

Advantages of angel investors

A
  • Can offer advice and guidance
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30
Q

Disadvantages of angel investors

A
  • Can be challenging to find a suitable angel
  • lots or competition
  • involved in decision making
  • receive share of profits
31
Q

Advantages of venture capital

A
  • Business may be able to attract investment from less risk averse venture capitalists
32
Q

Disadvantages of venture capital

A
  • Require a stake in the profits
  • will take some of the profits
33
Q

Advantages of trade credit

A
  • Usually interest free
  • better cash flow management
  • improved supplier relationships
34
Q

Disadvantages of trade credit

A
  • Relationship will be ruined if not repaid
35
Q

Advantages of leasing

A
  • Business is not responsible for maintenance
36
Q

Disadvantages of leasing

A
  • More expensive in the long run
37
Q

Advantages of share capital

A
  • Investors offer advice
  • no interest
38
Q

Disadvantages of share capital

A
  • Give away control
  • can have business taken over is too many are sold
39
Q

Reasons for raising finance

A
  • To pay debts
  • to help a business over a slow trading period
  • to expand
  • to start up a business
  • to buy stock
40
Q

What are the three types of internal finance

A
  • Personal savings: appropriate for a sole trader /partnership. Amount raised dependent on personal savings of the owner
  • retained profit: available to all businesses as long as they are profitable, more often than not it is insufficient on its own to allow a business to expand
  • asset sales: can be used by all businesses as long as they have assets. However this may not generate enough for the business to pursue its objectives
41
Q

Owners savings/ capital

A
  • sometimes called owners equity
  • shows the stake the owner has in the business
  • represents the net assets of the company - if all the debts of the business were paid Off how much would be owed to the owner
  • the owner may have used savings or a redundancy pay-out to start up the business, this in theory is still owed back to the owner, although they may never take it back out in the lifetime of the business
42
Q

Retained profit

A
  • After a year or more of trading a business may have some profits that they are able to re-invest into the business to help it grow
  • a well run business should continually re-invest in new staff or equipment etc.
  • it a business is in its first year of trading it will not have any retained profits- as it will not have made any to retain
  • advantage is that there is no interest to pay
  • disadvantage is once it is used it has gone
43
Q

Sale of assets

A
  • Can raise some finance by selling items that they already own
  • this could be: machinery, land, premises, vehicles
  • the business that sells the assets will no longer have the benefit of that asset and it will not appear on the balance sheet of the company meaning the business will look less attractive to investors.
44
Q

Sale of assets

A
  • Can raise some finance by selling items that they already own
  • this could be: machinery, land, premises, vehicles
  • the business that sells the assets will no longer have the benefit of that asset and it will not appear on the balance sheet of the company meaning the business will look less attractive to investors.
45
Q

What is liability

A

The extent to which an owner is liable to repay the debts of a business should they go bankrupt

46
Q

Unlimited liability

A
  • A characteristic or an unincorporated business
  • the finances of the business, and the finances of the owner are treated as inseparable
  • business owners personally responsible for the debts and liability of the business for example their own house or car can be served to repay the debts
  • it they cannot do this then they will have to personally declare bankruptcy
47
Q

What are the two types of businesses that have unlimited liability

A

Sole traders and partnerships

48
Q

Limited liability

A
  • An important protection for share holders in a company
  • shareholders can only lose the value of their investment
  • should the business find its let unable to pay their debts, the courts can force them to sell their assets. If there is still not enough to pay their debts the business will be shut down
49
Q

What two things does limited liability not protect against

A
  • Wrongful or fraudulent trading
  • when personal guarantees have been given by the director
50
Q

Implications of limited liability

A
  • the owner and the business have separare legal identities so can sue or be sued
Separately
  • the owner and the business can own separate assets
  • the busines can now sell parts of the business called shares to shareholders
  • There is protection of the owners personal savings and assets in the event of debts or business collapse, the ouners cannot be made to sell their personal possessions to pay the debts of the business off. Owners would only lose their original investment in the business and no more
  • to quality for protection a business must be registered with companies house as an Itd or plc.
51
Q

Implications of unlimited liability

A
  • sole trader or partners may have to sell their own assets (like a family car) to pay the debts of the business
  • they are unable to sell shares in the business
  • however they may be able to secure finance due to the pact that they are demonstrating to a bank that they are prepared to risk their own finances on the business
52
Q

Finance methods for an unlimited liability business

A
  • bank finance (loan / over draft)
  • leasing
  • credit cards
  • crowd funding
  • trade credit
  • owners capital
  • retained profit
53
Q

finance methods for a limited liability business

A
  • share capital
  • bank finance (loan or over drat)
  • retained profit
  • sale of assets
  • hire purchase and leasing
  • trade credit
  • government grant
  • angel / venture capital investmen
  • peer to peer and crowd funding
54
Q

What are the different elements of cash flow forecasting

A
  • Budgeting
  • sales forecasting
  • inventory management
  • financial objectives
    -Working capital
55
Q

Cash definition

A

The money available to spend now

56
Q

Cash inflow definition

A

Any money entering a business

57
Q

Cash outflow definition

A

Any money leaving the business

58
Q

Cash outflow main examples

A
  • Payments to suppliers
  • wages and salaries
  • payments for fixed assets
  • tax on profits
  • interest on loans / overdraft
  • dividends paid to shareholders
  • repayment of loan
59
Q

Cash inflow main examples

A
  • Cash sales
  • receipts from trade debtors
  • sale of fixed asset
  • interest on bank balances
  • grants
  • loans
  • share capital investment
60
Q

Why produce a forecast

A
  • Advanced warning of cash shortages
  • make sure that the business can afford to pay suppliers and employees
  • spot problems with customer payments
  • important part of financial control
  • provide reassurance to investors and lenders that the business is being managed properly
61
Q

Net cash flow formula

A

Total inflow - total outflows

62
Q

What makes an effective cashflow forecast

A
  • having good information
  • updated regularly
  • makes sensible assumptions = allow for unexpected changes.
63
Q

Cash flow problem definition

A

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

64
Q

Common problems with cashflow forecasts

A

Sales prove lower than expecied
→ can be over-optimistic abour sales potential
→ market research may have gaps
- customers don’t pay on time
→ a notorious problem for businesses, particularly small ones
- costs prove higher than expected
→ purchase prices turn out higher
→ may also be because business is inefficient
- imprudent cost assumptions common problem for a start up
→ unexpected costs arise

65
Q

Uses of cashflow forecasts

A

a business will prepare a CFF to help control and monitor cash in and out of a busines → at the end of the year the business can make comparisons between the predicted inflows and outflows and what actually happened
→ shows the business owner where likely cash surplus and shortages are so they can arrange suitable finanace

66
Q

Causes of cash flow problems.

A
  • Low profts or losses
  • too much production capacity
  • excess inventories held
  • allowing customer too much credit
  • seasonal demand
67
Q

Uses of cashflow forecasts

A

A business will prepare a CFF to help control and monitor cash in and out of a business
–At year’s end the business can make comparisons between the predicted inflows and outflows and what actually happened
–An important part of the financial planning process which may support an application for funding
–Shows the business owner where likely cash surplus and shortages are so they can arrange suitable finance

68
Q

how to manage cash flow problems

A
  • use reliable cash flow forecasting
  • keep costs under control
  • manage waning capital effectively
  • choose the right sources of finance
69
Q

Managing stocks

A
  • take the form of raw materials, work-in - progress and finished goods
  • stockholding is costly and therefore it is sound business to
    → Keep smaller balances (just in time stocks) → computerise ordering to improve efficiency improve stock control
    with cut spending on stocks but could leave the business vulnerable to stock out
70
Q

Managing amounts owed by customers

A
  • credit control
    → policies on now much credit to give and repayment terms and conditions
    → measures to control douptful debtors
    → credit checkong
    -selling off debt to debt factors cash docounts for prompt payment
  • improved record keepong
71
Q

Debt factoring

A
  • the selling of debtors (money owed to the business to a third party)
  • this generates cash
  • guarantees lhe firm a percentage of money owed to it
  • will reduce income and profit margin made on sales
  • costs involed can be high
72
Q

Managing cash paid to suppliers

A
  • trade credit - amounts owed to supplies for goods supplied on credit and not yet paid for
  • delayed payment means that the firm retains casn longer
  • have to be career not to damage firm’s credit reputation
73
Q

Evaluation - improving a poor cash position

A

short term
→ cut costs
→ reduce current assets
→ increase current liabilities
→ sell surplus fixed assets

long term
→ increase equity finance
→ increase long term liabilities
→ reduce net outflow on fixed assets

74
Q

Limitations of cash flow forecasts

A
  • bias: a business may over inflate the inflows to make the business look better on paper to attract finance or impress a supplier
  • predictions: a cash flow forecast cannot take into account weather problems, a supplier closing, any other event cannot be foreseen
  • updates: a forecast is a document that needs regular updating or the data becomes inaccurate and style, business is dynamic, this is a static document
  • only a 12 month snapshot which is very short-term to make any concrete decisions about the business it may need longer term finance
  • only a forecast – actual sales or expenses might be higher
  • Owner may have overstated expenditure or understated income

Business Theme 2 (2 decks)

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