2.1 - raising finance Flashcards
What does source of finance mean?
A source of finance is a provider of finance.
The way in which a provider gives finance is a method of finance.
What are the factors a business needs to consider when choosing a source of finance?
- Amount of money required
- Level of risk involved
- Cost of the finance
What are the 2 types of source of finance?
Sources of finance can be:
- Internal - the finance comes from within the business
- External - finance comes from outside of the business.
What are some internal sources of finance?
- Owners capital
- Selling assets
- Retained profit
What are some external sources of finance?
- Family and friends
- Banks
- Peer-to-peer lenders
- Crowd funding
- Other businesses
What are all the sources of finance a business could use?
- Overdrafts - where a bank lets a business have a negative amount of money in its bank account
- Leasing - when a business pays to use another firms asset
- Grants - a fixed sum of money given to a business usually from the government
- Trade credit - when a business buys a good or service and doesn’t have to pay straight away
- Loans - where a fixed amount of money is borrowed and paid back over a fixed period of time with interest
- Share capital - where a business sells some of its shares to gain revenue
- Venture capital - money that can be used as a method of finance for a business that is high risk
What are short or medium term sources of finance?
How long a business need finance for will affect the method of finance it chooses. If a business only needs short or medium term finance then it might choose one of these methods:
- Overdrafts from banks
- Leasing (paying to use another firms assets)
- Grants
- Trade credit
What long term sources of finance might businesses use?
- Loans to finance long term projects
- Share capital
- Venture capital
What are the two types of liabilities to pay off debts?
- Unlimited liability - the business and owner are seen as one under the law, any business debts become the personal debts of the owner
- Limited liability - the owners are not legally responsible for the debts of the business
How does liability affect sources and methods of finance?
- Businesses with limited liability usually find it much easier to encourage people to invest in their business
- Sole traders and partnerships that have unlimited liavility are likely to rely on internal sources of finance
What is a business plan?
A business plan is a document that outlines what a business plans to achieve, and how it plans to achieve it.
A business plan is really important for a new business, but its also important for an established business to keep on track.
What does a business plan help a business to obtain?
A business plan helps a business to obtain external finance.
It helps convince potential investors that everything has been well thought through and there are low risks of the business failing.
What are cash flow forecasts?
Cash flow forecasts show a businesses cash inflows and cash outflows.
What are cash inflows and cash outflows?
Cash inflows are sums of money recieved by a business.
Cash outflows are sums of money paid out by a business.
Working capital - the amount of cash that a business has available for day to day spending.
Why do businesses create and analyse cash flow forecasts?
- Cash flow forecasts show the amount of money that managers expect to flow into the business and flow out of the business over a period of time in the future.
- Managers use cash flow forecasts to make sure they always have enough cash around to pay suppliers and employees. They can predict when they’ll be short of cash, and arrange a loan or overdraft in time.
What are the negatives of cash flow forecasting?
- Cash flow forecasting isnt always accurate, and it needs lots of experience and research into the market
- Since businesses exist in dynamic changing markets, costs can suddenly go up or down which affects a firms cash outflows.
