2.1 Raising Finance

Question 1

Internal sources- what is retained profit and what are the advantages/disadvantages?

Answer 1

+ free source of finance that doesn’t incur interest

- shareholders may wish to receive it back in the form of a dividend

Question 2

Internal sources- what is sale of assets and what are the advantages/disadvantages?

Answer 2

+ 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

Question 3

Internal sources- what is owners capital and what are the advantages/disadvantages?

Answer 3

Personal savings
+ free source of finance that doesn’t incur interest
- owners could lose their personal investment

Question 4

External sources- what is an overdraft and what are the advantages/disadvantages?

Answer 4

+ 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

Question 5

External sources- what is trade credit and what are the advantages/disadvantages?

Answer 5

+ 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

Question 6

External sources- what is a grant and what are the advantages/disadvantages?

Answer 6

+ gov. schemes may be available for some small businesses

- generally given for social, environmental or economic benefits

Question 7

External sources- what is leasing and what are the advantages/disadvantages?

Answer 7

+ assets can be acquired without large capital spending to acquire them
- long term its more expensive than outright purchasing the asset

Question 8

External sources- what is are bank loans and what are the advantages/disadvantages?

Answer 8

+ can be negotiated to meet business requirements

- have to pay interest and may have to offer collateral to secure it

Question 9

External sources- what is venture capital and what are the advantages/disadvantages?

Answer 9

+ can bring expertise into the business

- owner may not want input from elsewhere into the running of the business

Question 10

External sources- what is share capital and what are the advantages/disadvantages?

Answer 10

+ can access large amounts of capital and no interest

- only available to Plc and Ltd

Question 11

External sources- what is crowd funding and what are the advantages/disadvantages?

Answer 11

+ cheap and easy to set up

- not suitable for raising large amounts

Question 12

What is limited liability?

Answer 12

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

Question 13

What businesses have limited liability?

Answer 13

Private limited companies

Question 14

What is unlimited liability?

Answer 14

There is no distinction between the owner and the business

Question 15

What businesses have unlimited liability?

Answer 15

Sole traders and partnerships

Question 16

What are the implications of limited liability?

Answer 16

Separate legal entity so personal assets are protected. May find it easier to raise large amounts of capital through the sources available to them

Question 17

What are the implications of unlimited liability?

Answer 17

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

Question 18

What is the role of shareholders?

Answer 18

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

Question 19

What finance is appropriate for limited liability business?

Answer 19

share capital
retained profit
venture capital
business angels
bank loans

Question 20

What finance is appropriate for unlimited liability business?

Answer 20

personal savings
retained profit
mortgages
unsecured bank loans
peer to peer lending
crowd funding
grants
bank overdrafts

Question 21

What can be found in a business plan?

Answer 21

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

Question 22

Who uses a business plan?

Answer 22

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

Question 23

Explain risk in relation to planning?

Answer 23

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

Question 24

What is a cash flow forecast?

Answer 24

Prediction of cash inflows (receipts) for a business and the cash outflows (expenditure) which determines the cash funds a businesses has at a time

Question 25

What 3 sections make up a cash flow forecast?

Answer 25

cash in
cash out
net cash flow

Question 26

What are 5 things to consider when interpreting cash flow forecasts?

Answer 26

1) are monthly inflows greater than outflows
2) what are the forecast periods of high expenditure
3) are inflows increasing over time
4) is there seasonal trends
5) do we have enough cash reserves to cover unexpected costs

Question 27

What are 5 causes of cash flow problems?

Answer 27

1) overtrading
2) allowing too much trade credit to customers
3) poor credit control
4) inaccurate cash flow management
5) unforeseen costs

Question 28

What are 4 ways to speed up inflows?

Answer 28

1) incentivise early repayment by giving customers a discount for paying early
2) reduce trade credit given to customers
3) sell off stock at a discounted price to free up cash
4) inject fresh capital into the business

Question 29

What are 3 ways to slow down outflows?

Answer 29

1) delay payments to suppliers
2) increase trade credit agreements with suppliers
3) cut costs eg. cheaper alternatives, postpone training/advertising

Question 30

What are 3 benefits of cash flow forecasting?

Answer 30

1) support an application for lending
2) support the budgeting process
3) identify any potential cash flow crisis

Question 31

What are 3 limitations of cash flow forecasting?

Answer 31

1) some figures will be based on estimates
2) variables are constantly changing so forecasts need updating to be valid
3) they focus on one variable so don’t consider other important variables eg. profitability, productivity