2.1 - Raising Finance Flashcards
Internal sources of finance (3)
• Retained profits (short and medium term) • Selling assets (short term) • Owner’s own capital (long term)
What is Owner’s capital: personal savings ? (2)
- Most likely to be used as a source of start-up finance
- This money could be provided in the form of share capital or lent to the business as a loan
What are retained profits? (2)
- Any remaining profits left after all costs are covered and dividends paid to shareholders
- Probably the safest and most common form of internal finance for established businesses
What are sales of assets?
A firm may sell their assists that they no longer need to fund other projects
External sources of finance (6)
- Family and friends
- Banks
- Peer-to-Peter funding
- Business angels
- Crows funding
- Other Businesses
Consequences of using family and friends as a source of finance
The owner starts to lose independence in decision making and retaining profits as they may want a stake or day in the business
Banks as a source of finance
They can provide a fixed-term bank loan in return for repayment of the amount plus interest
Peer-to-Peer funding as a source of finance (2)
- Relies on websites that can match investors willing to lend the business start-ups with start-ups needing finance
- Loans will generally be at a fairly high rate of interest - however they provide an option where banks are unwilling to lend
What are business angels as a source of finance
These are wealthy entrepreneurial individuals who provide capital in return for a share in the business e.g Dragon’s den encourage this finance
What is crowd funding as a source of finance? (3)
- This is where firms gain funds by raising many small amounts of money from a large number of people
- Benefit is smaller investors are more likely to take risks on the business
- Drawback is this source of finance is more dependant on the ability of the business to market its ideas
Other businesses as a source of finance
Same benefits and problems as with business angels
Methods of finance (6)
- Loans
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
Loans as a method finance (3)
• Provided by banks • Involves providing a lump sum of cash which will be repaid over an agreed period of time • This includes an interest rate which represent the ‘cost’ of the loan
Share capital as a method of finance (3)
- Consists of funds raised by issuing shares in return for cash
- Benefit - accessible to limited companies
- Drawback - Not accessible to sole traders or partnerships
Venture capital as a method of finance
- Is money invested in a business in which there is a substantial element of risk
- Benefit - Accessible for high risk businesses
- Drawback - Not accessible to most other businesses
Overdraft as a method of finance (3)
• Is where a bank allows a firm to take out more money than it has in its bank account • Benefit - Helpful to resolve short term cash flow problems • Drawback - interest charges
Leasing as a method of finance (3)
- Is a financial facility allowing a business to use an asset such as an industrial robot over a fixed period in return for regular payments
- Benefit - easily accessible for firms with a major assets
- Drawback - can only be used for major assets
Trade credit as a method of finance (3)
- Means that goods or services provided by a supplier are not paid for immediately
- Benefit - access to materials without any material costs
- Drawbacks - not easily accessible for start up businesses
Grant as a method of finance (3)
- A sum of money given by a government or other organisation for a particular purpose
- Benefit - no interest charge
- Drawback - strict laws must be followed
What is a business plan?
Is a forecast of business operations, including a statement of business objectives, a cash flow forecast, a plan of staffing needs and marketing methods
What does a business plan include? (3)
- A marketing plan
- An operational plan
- A financial plan
What a business plan includes: marketing plan (2)
- Covers market research such as market mapping of key competitors and their products
- Medium-long term plan for achieving objectives such as higher market share or a stronger product portfolio
What a business plan includes: Operational plan
Showing how the product will be produced and delivered to customers in their target market
What a business plan includes: financial plan
Prediction of the business’s income from sales and expenditure from costs over a period of time - helps the business assess its short-, medium and long term needs in terms of finance
Importance of a business plan (2)
- potential investors and lenders of finance will want to see detailed forecasts of how the business will perform over time
- Plans reduce risks to investors meaning that they could pay lower interest rates on loans or give smaller share of the business to venture capitalists - keeping costs to a minimum whilst retaining as much ownership and control of the business as possible
What is cash flow?
The movement of cash into and out a business
What is a cash flow forecast?
A prediction of cash flowing into and out of the business over a period of time
Interpret a simple cash flow forecast (5)
- Cash inflows shows the places and timings from which cash flows into the business
- Cash outflow shows how much cash leaves the business in each month
- Monthly balance (or net cash flow) shows the net effect of the month on cash flow
- Opening balance shows amount of cash the business has at the start of each month = to last months closing balance
- Closing balance shows the amount of cash in the business at the end of the month
How to calculate monthly balance?
Cash inflow - cash outflow
How to calculate closing balance?
Monthly balance (net cash flow) + opening balance
Uses of cash flow forecasts
To spot cash flow problems so that action can be taken in time to prevent a major crisis
Limitations of a cash flow forecast (2)
- Is not always reliable - due to assumptions being made about the future
- For a new business there may be unexpected costs in promotion and distribution
Implications of unlimited liability (3)
- Fully responsible for the debts of the business
- May result in the owners having to sell their own possessions to raise the money
- Means that businesses will pay all its profits to its owners and they have full control over decision making
Implications of limited liability (3)
- the business can lose only the money they have paid for a share of the business
- It encourages investors to risk their money in new and growing businesses
- A certain amount of profits will have to be sacrificed (dividends) proportionate to the shares it has issued to shareholders
Finance that is appropriate for unlimited (liability) businesses (4)
- owner’s capital
- Bank loan or overdraft
- Trade credit
- Loan from family or friends
Finance that is appropriate for limited (liability) businesses (5)
- Issuing shares - attract large numbers as only investment is lost
- Bank loans
- Overdrafts
- Leasing
- Trade credit
