2.1 raising finance Flashcards
What are the internal sources of finance
Explain them
Owners capital - owner uses own funds
Retained profit - most common form
Selling assets - sell assets it no longer needs
What are the external sources finance
Explain
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
What are the methods of finance
Explain
Loans Share capital Venture capital Overdraft Leasing Trade credit Grants
What is a loan
Where money is borrowed by a business and paid back over a period of time with interest
What is share capital
Where shares of the business are sold to the public or privatised
What is venture capital
Where capital is provided to high risk businesses with high interest rates
What is an overdraft
Where the bank allows a business to continue spending , even when in minus. Paid back with interest.
What is leasing
Where an asset can be used whilst maintaining a balanced cash flow.
What is trade credit
Goods provided by a supplier which are not paid for immediately
What is a grant
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
Define liability
What a business owes
What is unlimited liability
Happens in a sole trader or partnership business where the owners funds are at risk if the business fails to pay its debts.
What is limited liability
Happens in a LTD or PLC where the liability is limited to the amount of capital invested in the business
Define cash flow forecasts
A projection of the likely cash inflows and outflows in a business
What is opening balance
The money a business has available at the start of the month
Define cash inflows
Money coming in to the business, can be through sales or investment
Define cash outflows
Expenses for the business, like stock, fixed costs and variable costs
Define closing balance
The amount of money a business is left with at the end of the month.
What is the use of cash flow forecasts
To spot cash flow problems in advance
How can a business improve cash flow
Produce and distribute products as quickly as possible
Chasing debtors who owe money
Keeping stock to a minimum
Why may cash flow forecasts not be entirely accurate
Conditions in the market can change
Business may not sell all output
What is a business plan
A document setting out a business idea and how it will be financed, marketed and put into practice
What will a business plan help the business with
Consider potential future risks
Maintain a clear sense of direction
Have objectives to aim for
What should a business plan include
Executive summary The product /service The market Marketing plan Operational plan Financial plan Conclusion
What should the main part of the business plan be
The cash flow forecasts
What Finance would be appropriate for a unlimited liability business
Owners capital
Bank finance (loans and overdrafts)
Leasing
Trade credit
What finance would be appropriate for a limited liability business
Loans and overdrafts
Share capital
Angel or venture capital investment
Explain the advantages and disadvantages of internal finance
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
