2.1 raising finance

Question 1

What are the internal sources of finance

Explain them

Answer 1

Owners capital - owner uses own funds
Retained profit - most common form
Selling assets - sell assets it no longer needs

Question 2

What are the external sources finance

Explain

Answer 2

Family and friends - provide start up capital
Banks - provide loans and overdrafts
Peer to peer funding
Business angels- rich individuals who invest in risky start ups
Crowdfunding

Question 3

What are the methods of finance

Explain

Answer 3

Loans
Share capital 
Venture capital
Overdraft
Leasing
Trade credit
Grants

Question 4

What is a loan

Answer 4

Where money is borrowed by a business and paid back over a period of time with interest

Question 5

What is share capital

Answer 5

Where shares of the business are sold to the public or privatised

Question 6

What is venture capital

Answer 6

Where capital is provided to high risk businesses with high interest rates

Question 7

What is an overdraft

Answer 7

Where the bank allows a business to continue spending , even when in minus. Paid back with interest.

Question 8

What is leasing

Answer 8

Where an asset can be used whilst maintaining a balanced cash flow.

Question 9

What is trade credit

Answer 9

Goods provided by a supplier which are not paid for immediately

Question 10

What is a grant

Answer 10

Money provided by the government to operate in an area to boost the economy. Are extremely rare and the business has to follow strict regulations

Question 11

Define liability

Answer 11

What a business owes

Question 12

What is unlimited liability

Answer 12

Happens in a sole trader or partnership business where the owners funds are at risk if the business fails to pay its debts.

Question 13

What is limited liability

Answer 13

Happens in a LTD or PLC where the liability is limited to the amount of capital invested in the business

Question 14

Define cash flow forecasts

Answer 14

A projection of the likely cash inflows and outflows in a business

Question 15

What is opening balance

Answer 15

The money a business has available at the start of the month

Question 16

Define cash inflows

Answer 16

Money coming in to the business, can be through sales or investment

Question 17

Define cash outflows

Answer 17

Expenses for the business, like stock, fixed costs and variable costs

Question 18

Define closing balance

Answer 18

The amount of money a business is left with at the end of the month.

Question 19

What is the use of cash flow forecasts

Answer 19

To spot cash flow problems in advance

Question 20

How can a business improve cash flow

Answer 20

Produce and distribute products as quickly as possible
Chasing debtors who owe money
Keeping stock to a minimum

Question 21

Why may cash flow forecasts not be entirely accurate

Answer 21

Conditions in the market can change

Business may not sell all output

Question 22

What is a business plan

Answer 22

A document setting out a business idea and how it will be financed, marketed and put into practice

Question 23

What will a business plan help the business with

Answer 23

Consider potential future risks
Maintain a clear sense of direction
Have objectives to aim for

Question 24

What should a business plan include

Answer 24

Executive summary
The product /service 
The market 
Marketing plan
Operational plan
Financial plan
Conclusion

Question 25

What should the main part of the business plan be

Answer 25

The cash flow forecasts

Question 26

What Finance would be appropriate for a unlimited liability business

Answer 26

Owners capital
Bank finance (loans and overdrafts)
Leasing
Trade credit

Question 27

What finance would be appropriate for a limited liability business

Answer 27

Loans and overdrafts
Share capital
Angel or venture capital investment

Question 28

Explain the advantages and disadvantages of internal finance

Answer 28

A
The capital becomes available immediately
Is cheap due to no interest payments or administration costs
Not subject to external checks
No involvements of external businesses

D
Can be limited in the amount
Not tax deductible, external finance methods of interest payments can be offset against tax
Less variety of internal options than external
Opportunity cost is high