2.1 - Raising Finance Flashcards
What two things are finance needed for?
Capital expenditure and revenue expenditure.
What is capital expenditure?
Spending on fixed assets such as equipment, buildings.
What is revenue expenditure?
Spending on raw materials or day-to-day expenses such as wages.
Internal vs external sources of finance.
Internal comes from inside the business, external comes from outside the business.
3 sources of internal finance?
Owners capital, retained profit, sale of assets
Owners capital
Personal savings
Retained profit
The profit that has been generated in previous years is reinvested into the business.
Opportunity cost
The value of the benefit lost from the alternative foregone when a business makes a decision.
Interest
Sum charged for borrowing money, or reward for saving money.
Sale of assets
Selling business assets which are no longer required.
Working capital
Money used in the day-to-day running of the business.
Advantages of internal finance?
Doesn’t involve third-parties who may influence business decisions.
Disadvantages of internal finance?
Not tax efficient, as loan repayments for example are treated as a business cost so offset against tax.
5 examples of external sources of finance?
Family and friends, banks, peer-to-peer funding, business angels and crowdfunding.
Family and friends
May be a cheap source, but relationships may be damaged if finance is not repaid.
Banks
Can be short term (e.g. overdrafts), or long term (e.g. mortgages), also provide financial advice,
But banks are cautious lending to new businesses and a business plan is required to access bank funding.
Peer-to-peer funding?
Individuals pool funding with others in an investment scheme.
Has no strings attached (e.g. business share) and can be made quickly.
But borrowers pay interest.
Business angels
Individuals specialised in making investments to start-ups.
Tend to take more risk, but needs to be the right angel for business type (e.g. market knowledge)
Crowdfunding
Finance provided by a large number of small investors.
Creates organic customer base and form of free marketing.
But, need to provide a persuasive business plan.
Sole traders and partnerships
Offer no legal protection to the owners, so the business’s assets and owners assets are seen as the same (unlimited liability)
Can loose personal assets to pay debt or legal fees.
Limited liability (PLC’s and LTD’s)
Assets of the owners are considered to be separate from those of the business.
Main aim of a business plan?
To reduce the risk associated with starting a new business.
Production of a business plan allows…
Lenders (e.g. banks) and other investors to analyse the plan and make an informed decision about providing a loan.
Cash flow forecast
A prediction of the anticipated cash inflows and cash outflows, over typically a 6-12 month period.
Net cash flow
Total outflows - total inflows.
Opening balance
The previous month’s closing balance carried foreword.
Closing balance
Calculated by adding the net cash flow to the opening balance.
