2.1 Raising Finance Flashcards
Internal Finance
PROS / CONS
Finance that comes from inside the business
- Internal finance comes from the owner’s capital, retained profit, or the sale of assets
PROS:
- No Loss Of Control
- No Intrest Paid
CONS:
- Opportunity Cost e.g. Dividends
- Internal finance may not be sufficient to meet the needs of the business
External Finance
Finance that comes from outside the business
- Source of External Finance can be Family & Friends, Banks,
Crowd Funding, Other Businesses
PROS:
- Usually greater sums of finance can be generated
CONS:
- Lose Control ( Shares )
- Pay Interest ( Debt )
Personal Savings For Source Of Finance
PROS / CONS
When an entrepreneur uses personal finance such as cash in bank accounts or less liquid assets such as stocks and shares to finance the business
- Long Term Finance, Internal Finance, New / start up Business
PROS:
- No Financial Cost
Loan = Pay Intrest
Shares = Lose Control
- Easiest + Quickest type of finance
CONS:
- Likely to be limited
- If business doesn’t initially make profit using savings = financial pressure
- Loss of wellbeing
Retained Profits For Source Of Finance
PROS / CONS
When a business uses historical profits from previous years to invest
- Long Term, Internal Finance, usually established business
PROS:
- No financial Cost = No Interest
- No Control / Share Given Up
- Safe Low Risk Approach
CONS:
- May create conflicts with shareholders because RP = Lower Dividends
- Usually Finite Retained Profits = Slow Growth
- No Expertise Added ( Debt = Banks / Equity = Shareholders )
Selling Fixed Assets For Source Of Finance
PROS / CONS
Raising cash via the sale of Surplus Fixed assets
- Long term finance, internal finance, usually established business
PROS:
- Not a form of debt ∴ No interest paid
- Not a form of equity ∴ No Control given up
- Providing you can find a buyer is a quick form of cash
CONS:
- Only finite amount of times you do it as likely you have few surplus assets
- Risk
( cannot find buyer )
(Do not receive fair value for fixed asset )
( very likely it has depreciated )
Banks For Source Of Finance
PROS / CONS
When a business borrows a sum of money and pays it back with interest over an agreed period of time
- Long term finance, external finance, used by startup businesses
PROS:
- No share in business needs to be given up ∴ Keep Control
- ↓ Interest rates vs overdraft … ↓ cost overall
- Banks are often keen to provide free advice and guidance to businesses that use their services
- Frequent repayment may improve credit score
- ↑ Net assets ∴ ↑ net worth of business
CONS:
- Assets will be taken if you fail to repay 🠮 Limited Liability
- No Flexibility
- Fail to pay will worsen credit score
- Increase gearing of business as long term debt finance
Calculate Intrest
Equation
Calculating interest on a bank loan rate ( % )
Total Repayment - Borrowed amount / Borrowed amount ×100
Crowd Funding For Source Of Finance
PROS / CONS
Crowdfunding is finance provided by a large number of small investors on online platforms. ( usually for startup businesses )
PROS:
- Creates an organic customer base and the platform provides a form of free marketing
- A good credit rating is not required so new businesses that lack a
trading records can attract funding
CONS:
- Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online
- Funding goal may not be reached
Business Angels For Source Of Finance
PROS / CONS
Wealthy individuals who provide capital to startups and early stage businesses in exchange of liquidity
PROS:
- Angels often offer advice and guidance to the businesses in which
they invest
- Essential for early stage businesses to access capital
- More flexible vs. venture capital
- Investments usually for a determined period of time so owners
regain shares in the future
CONS:
- Finding the right business angel (e.g. with appropriate experience, expertise or interest) can be challenging
- Selling % of business ∴ lose equity
- Too dependent & how much finance do they have?
New Share Issues For Source Of Finance
PROS / CONS
When a Limited company issues shares in exchange for a payment
- Long term finance, external finance, established business
Pros:
- No Interest
- If public limited company 🠮 will be on Stock Exchange ( opportunity for large amount of cash )
- ↑ Opportunity to raise huge amount of finance
- Exit / Cash in method?
CONS:
- Give up shares of business ( if sold too much might lose control
eg. if you give up 51% you have given up control )
- pay shareholders dividends ∴ ↓ retained profits
- If public limited company. Flotation will cost a lot to be on stock exchange.
Venture Capital For Source Of Finance
PROS / CONS
Type of finance offered by V.C fund to high risk high reward firms in exchange for a share of the business
- Long term finance, external finance, start up business
PROS:
- Makes expansion possible
- No repayment ( type of equity finance )
- Reduce personal risk ( V.C has taken the % risk )
- V.C has expertise
CONS:
- Given up shares of business ∴ profits are shared
- May lose control if more than 50% of shares given up ∴ lost decision making power
- V.C ultimately is looking to exit as they want to make profit
Overdrafts For Source Of Finance
PROS / CONS
When a business withdraws more cash from a bank account than it holds
- Short term finance, external finance, start up business
PROS:
- Quick and simple to organise
- Can be bespoke to the needs of each business
- No control of the business given up
- Short term debt so not included in gearing ratio
CONS:
- Higher interest rates
- Bank could cancel overdraft at any time
- Persistent use of overdrafts will ↓ credit rating
low credit rating = ↓ likely to get loan
low credit rating = ↑ interest rates offered
Grants For Source Of Finance
PROS / CONS
Financial awards given by the government, local council or charity
- External finance, long term finance, startup business
PROS:
- Non Repayable ( Free Money )
- No Control Given Up
CONS:
- Time Consuming Process 🠮 application forms ∴ risk of rejection
- Grant tied to certain conditions ( Match Funded ) = must match the size of grant
Unlimited Liability
( More Detailed )
Owner and business is the same legal entity ∴ owner is responsible for all debt the business incurs
Unincorporated business = Unlimited Liability
🠮 Sole Traders
🠮 Partnerships
Limited Liability
( More Detailed )
Owner and business are different legal entities ∴ Shareholders personal assets are not at risk in the event of the business incurring debts
incorporated Business = Limited Liability
🠮 Private Limited Company ( Ltd )
🠮 Public Limited Company ( PLC )
Budgeting
PROS / CONS
Budgeting: Planning income and expenses.
PROS:
- Gives senior + functional managers spending guidance
∴ encourages spending discipline
- Helps support a business plan if profit budget ∴ increases chance for obtaining finance
CONS:
- Who set the budget? If senior management sets budget but lacks expertise in a specific area =
( Over Ambitious Targets? ) ( Which can be demotivating )
- Historical budgets are based on previous years
- How frequently are budgets reviewed?
Budget ( Variance Analysis )
Adverse / Favourable
Difference between a figure budgeted and the actual figure achieved by the end of the budgetary period
Adverse:
- Bad
- Profits = Lower than expected
- Revenue = Lower than expected
- Costs = Higher than expected
Favourable:
- Good
- Profits = Higher than expected
- Revenue = Higher than expected
- Costs = Lower than expected
Business Plans
PROS / CONS
A document explaining what a business intends to do
- Executive Summary ( summary of what business intends to do )
- Business Name, Idea, Usp
- Aims + Objectives
- Market Research
- Market Overview = Create Awareness
- Operations = Production
- HR Staffing Needs
- Finances = Budgets, Income Statement
- Entrepreneur Details
PROS:
- Help Understand Finances ( Budget Forecast, Expected
Costs / Revenue, Break Even Output, Manage Risk, Cash Flow Forecast )
- Increase chances of obtaining external finance
- Allows closer inspection of the various business areas 🠮 Check Gaps
CONS:
- Only a plan, reality likely to be different
- Who did the plan & if they have business experience?
- Dangers of inflating revenue and deflating costs 🠮 Liquidity issues
Cash Flow Forecast
Why & Issues
Cash Flow Forecast = Helps predict when you may have a liquidity problem
Not Enough Cash = Outflows > Inflows 🠮 Liquidity Issues
Too Much Cash = Outflows < Inflows 🠮 Opportunity Cost
- Put cash in ↑ IR
- Use To Expand
Why Poor cashflow happens:
- Poor Sales ∴ ↓ Revenue ∴ ↓ Cashflow
- Over Trading = spend too much stock = ↓ cash
- Poor debtor / Creditor Management
- No Cash Flow Forecasting ∴ Poor business management
Why is it an issue?
- Not enough cash for day 2 day expenses = lack of working capital
- Cannot pay workers = poor motivation = ↓ productivity
- Indicates need for sources of finance
Cash Flow Forecast
Solutions
Rescheduling payments
- Increase speed of cash inflows ( May lose sales due to rescheduling )
- decrease speed of cash outflows ( may damage relationship with supplier )
Increase Cash Inflows
- Run marketing campaign to ↑ sales … ↑ Costs
- Increase selling price … ↓ Sales
Decrease cash outflows
- Destock = hold less stock ∴ ↓ Storage Costs
- ↓ Sales … ↓ Revenue
Sources Of Finance … Overdraft
- Quick + Easy
- Interest Rates / worse than bank loan / ↓ Credit Rating
