2.1 raising finance Flashcards
what is a business plan?
- a plan for the developments of a business giving details such as the products to be made, resources needed and forecasts such as costs, revenue, cash flow
what does a business plan contain?
- an executive summary
- buying and production
- financial forecasts
- market
- personal
- finance
what are the 2 types of expenditure?
- capital expenditure
- revenue expenditure
what is capital expenditure?
- spending on business resources that can be used repeatedly over a period of time
what is revenue expenditure?
- spending on business resources that have already been consumed or will be very shortly
what are types of internal finance?
- owners capital
- retained profit
- sale of assets
what is owners capital?
- personal savings
what can owners capital be used for?
- start up, expansion, replacement capital
what are advantages of using owners capital?
- no need to repay the money
- no interest
- no cost
what are disadvantages of using owners capital?
- might not have much funds, will need to find another way
what are advantages of using sale of assets to raise finance?`
- good if the asset is no longer of use
what is a disadvantage of using sale of assets to raise finance?
- can take time to sell
- may affect production
- may not find a buyer
what are examples of external finance?
- family and friends
- banks
- peer to peer funding
- business angles
- crowd funding
- loans
- share capital
- venture capital
- overdraft
- leasing
- trade credit
- grants
what are advantages of using family and friends to raise finance?
- may be more flexible lenders
- longer repayment time
what is a disadvantage of using family and friends to raise finance?
- may damage relationship if there’s any misunderstandings
what are business angles?
- individuals who invest smaller amounts of money into a business in return for a stake
what are advantages of using business angles to raise finance?
- they bring their knowledge to the business
- they are wealthy
- no repayment or interest
what are disadvantages of using business angles to raise finance?
- can take long to find a suitable investor
- have to give up a share of the business
- not suitable for investments over £500,000 or below £10,000
what is share capital?
- shares are sold on the stock market
- raising money
- buyers become shareholders and part owners
what are advantages of using share capital to raise finance?
- lots of finance can be raised
- money doesn’t have to be payed back
- no interest is payable
what are disadvantages of using share capital to raise finance?
- shareholders are entitled to have a say in running the business
- the business may be taken over and existing shareholders no longer own the business
what is venture capital?
- an external investor looking for fast growth and return on their investments
what are advantages of using venture capitalists to raise finance?
- business expenditure
- additional resources
- connections
what are disadvantages of using venture capitalists to raise finance?
- loss of control
- loss of management could happen
what is an overdraft?
- allows a business to spend more than it has in its accounts
what are advantages of using an overdraft?
- its flexible
- quick to arrange
- interest is only payed to amount borrowed
what are disadvantages of using an overdraft?
- cannot be used for large borrowing
- rates of interest higher than loans
- bank can change limit at any time or ask for money sooner than expected
what is leasing?
- ‘renting’ vehicles or machinery over a period of time
what are advantages of using leasing?
- can spread the cost
- access to higher standard equipment
- cash flow management is easier
what are disadvantages of using leasing?
- can work out to be more expensive
- you don’t own the equipment
- can get locked into inflexible, medium or long term agreements
what is trade credit?
- ‘buy now, pay later agreement’
what is a grant?
- a sum of money provided by the government
what is an advantage of using a grant?
- doesn’t have to be payed back
what is an opportunity cost?
- the cost of the next best alternative foregone
what is retained profit?
- profit after tax reinvested back into the business
what are advantages of using retained profit?
- the capital is available immediately
- internal finance is cheap
- no interest
- no need to involve third parties
what are disadvantages of using retained profit?
- can be limited, may not be sufficiently profitable
- opportunity cost of internal finance can be high
what is inflation?
- average general increases in price
what is sale and lease back?
- when a business sells an asset and then rents it back to gain finance
