2.1 Raising Finance Flashcards
Internal sources- what is retained profit and what are the advantages/disadvantages?
+ free source of finance that doesn’t incur interest
- shareholders may wish to receive it back in the form of a dividend
Internal sources- what is sale of assets and what are the advantages/disadvantages?
+ frees up value in unwanted assets to be invested in other areas of the business
- business loses the benefit of the asset eg. no longer owning a delivery van
Internal sources- what is owners capital and what are the advantages/disadvantages?
Personal savings
+ free source of finance that doesn’t incur interest
- owners could lose their personal investment
External sources- what is an overdraft and what are the advantages/disadvantages?
+ flexible way to fund working capital- acts as a buffer for day to day expenses
- bank may ask for repayment, at any time and interest rates are high
External sources- what is trade credit and what are the advantages/disadvantages?
+ suitable for buying raw materials from suppliers as it gives the business opportunity to generate revenue before having to pay
- delays in payment can damage relationships with suppliers
External sources- what is a grant and what are the advantages/disadvantages?
+ gov. schemes may be available for some small businesses
- generally given for social, environmental or economic benefits
External sources- what is leasing and what are the advantages/disadvantages?
+ assets can be acquired without large capital spending to acquire them
- long term its more expensive than outright purchasing the asset
External sources- what is are bank loans and what are the advantages/disadvantages?
+ can be negotiated to meet business requirements
- have to pay interest and may have to offer collateral to secure it
External sources- what is venture capital and what are the advantages/disadvantages?
+ can bring expertise into the business
- owner may not want input from elsewhere into the running of the business
External sources- what is share capital and what are the advantages/disadvantages?
+ can access large amounts of capital and no interest
- only available to Plc and Ltd
External sources- what is crowd funding and what are the advantages/disadvantages?
+ cheap and easy to set up
- not suitable for raising large amounts
What is limited liability?
The liability of a companys shareholders is detached from the company, they can lose their investment but their personal belongings are safe in the event of financial difficulty
What businesses have limited liability?
Private limited companies
What is unlimited liability?
There is no distinction between the owner and the business
What businesses have unlimited liability?
Sole traders and partnerships
What are the implications of limited liability?
Separate legal entity so personal assets are protected. May find it easier to raise large amounts of capital through the sources available to them
What are the implications of unlimited liability?
Owners are exposed to financial obligations of the business, if they’re unable to pay debts to banks and suppliers they could lose personal assets
What is the role of shareholders?
In a limited company the role of shareholders is to have a significant impact on decision making
They gain from shares through profits returned in the form of dividends and in the rise of the shares held when they come to sell them
What finance is appropriate for limited liability business?
share capital retained profit venture capital business angels bank loans
What finance is appropriate for unlimited liability business?
personal savings retained profit mortgages unsecured bank loans peer to peer lending crowd funding grants bank overdrafts
What can be found in a business plan?
Executive summary- overview of the business purpose and opportunity
Business ideas and opportunity- so stakeholders can understand the owners intentions
Aims and objectives- measured by SMART targets
Market research- target market, competitors etc.
Financial forecast- costs, revenues, profits, cash flow
Sources of finance- how it will be financed and how borrowings will be repaid
Premises and equipment- location, how it will be financed
Personnel- areas of responsibility, skills, qualifications
Buying and Production- how the products produced, suppliers
Who uses a business plan?
Owners as a guide and working document
Lenders eg.banks to investigate the likely success and risk
Investors to assess the risks and rewards
Partners and employees
Explain risk in relation to planning?
Owners can never be 100% certain of their decisions when starting a business but the depth and detail of business planning reduces risk associated with unforeseen problems and poor decision making and increases the likelihood of success
What is a cash flow forecast?
Prediction of cash inflows (receipts) for a business and the cash outflows (expenditure) which determines the cash funds a businesses has at a time
