2.1 - Raising Finance

Question 1

What two things are finance needed for?

Answer 1

Capital expenditure and revenue expenditure.

Question 2

What is capital expenditure?

Answer 2

Spending on fixed assets such as equipment, buildings.

Question 3

What is revenue expenditure?

Answer 3

Spending on raw materials or day-to-day expenses such as wages.

Question 4

Internal vs external sources of finance.

Answer 4

Internal comes from inside the business, external comes from outside the business.

Question 5

3 sources of internal finance?

Answer 5

Owners capital, retained profit, sale of assets

Question 6

Owners capital

Answer 6

Personal savings

Question 7

Retained profit

Answer 7

The profit that has been generated in previous years is reinvested into the business.

Question 8

Opportunity cost

Answer 8

The value of the benefit lost from the alternative foregone when a business makes a decision.

Question 9

Interest

Answer 9

Sum charged for borrowing money, or reward for saving money.

Question 10

Sale of assets

Answer 10

Selling business assets which are no longer required.

Question 11

Working capital

Answer 11

Money used in the day-to-day running of the business.

Question 12

Advantages of internal finance?

Answer 12

Doesn’t involve third-parties who may influence business decisions.

Question 13

Disadvantages of internal finance?

Answer 13

Not tax efficient, as loan repayments for example are treated as a business cost so offset against tax.

Question 14

5 examples of external sources of finance?

Answer 14

Family and friends, banks, peer-to-peer funding, business angels and crowdfunding.

Question 15

Family and friends

Answer 15

May be a cheap source, but relationships may be damaged if finance is not repaid.

Question 16

Banks

Answer 16

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.

Question 17

Peer-to-peer funding?

Answer 17

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.

Question 18

Business angels

Answer 18

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)

Question 19

Crowdfunding

Answer 19

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.

Question 20

Sole traders and partnerships

Answer 20

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.

Question 21

Limited liability (PLC’s and LTD’s)

Answer 21

Assets of the owners are considered to be separate from those of the business.

Question 22

Main aim of a business plan?

Answer 22

To reduce the risk associated with starting a new business.

Question 23

Production of a business plan allows…

Answer 23

Lenders (e.g. banks) and other investors to analyse the plan and make an informed decision about providing a loan.

Question 24

Cash flow forecast

Answer 24

A prediction of the anticipated cash inflows and cash outflows, over typically a 6-12 month period.

Question 25

Net cash flow

Answer 25

Total outflows - total inflows.

Question 26

Opening balance

Answer 26

The previous month’s closing balance carried foreword.

Question 27

Closing balance

Answer 27

Calculated by adding the net cash flow to the opening balance.