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Business > 2.1 Raising Finance > Flashcards

2.1 Raising Finance Flashcards

1
Q

What are the internal sources of finance

A

Retained profit
Sale of assets
Owners capital

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2
Q

Benefits and drawbacks of retained profit

A

+ a free source of finance that doesn’t incur interest so low cost

  • shareholders may wish to receive it back in the form of a dividend
  • only applicable to an established business whose been trading over a year as it is any profit left over from previous years
  • may not be enough
  • takes a long time to save depending on business
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3
Q

Benefits and drawbacks of sale of assets

A

+ frees up value in unwanted assets to be invested in other areas of the business

+ no interest so low cost

  • the business loses the benefit of the asset (opportunity cost) e.g. no longer owning a delivery vehicle
  • takes a long time to save depending on business
  • might not be enough
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4
Q

Benefits and drawbacks of owners capital

A

+ a free source of finance that doesn’t incur interest

  • owners could lose their personal investment
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5
Q

What are the external sources of finance

A 
Overdrafts
Trade credit
Grants
Leasing
Bank loans
Venture capital
Share capital
Crowd funding
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6
Q

+ and - of overdrafts

A

+ flexible way to find working capital- acts as a buffer for day to day expenses

+ flexible on repayment

+ good for emergencies and cash flow

  • bank may ask for repayment at any time
  • interest rates are high
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7
Q

+ and - of trade credit

A

+ suitable for buying raw materials from suppliers as it gives the business opportunity to generate revenues before having to pay

+ helps with cash flow as you keep cash in your organisation for longer

  • delays in payment can damage relationships with suppliers
  • dependent on relationship with supplier
  • not good for new businesses
  • can be removed at any time
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8
Q

+ and - of grants

A

+ government schemes might be available for some small businesses

+ helps to manufacture products

+ not in debt

+ don’t have to repay

+ no interest

  • generally given for social, environmental or economic benefits
  • long application process
  • few and far between
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9
Q

+ and - of leasing

A

+ assets can be acquired without large capital spending to acquire them

+ you still own assets

  • can’t use it while it’s rented
  • in the long term a leased asset is more expensive than purchasing outright
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10
Q

+ and - of bank loans

A

+ can be negotiated to meet business requirements

+ can get a large sum of money

  • have to pay interest
  • have to go through credit checks
  • business has to pay interest and may have to offer collateral to secure it
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11
Q

+ and - of venture capital

A

+ can bring expertise into the business

+ have contacts in the industry

+ can raise large sums of money

  • owner may not want input from elsewhere into the running of the business
  • diluting ownership and may be too involved
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12
Q

+ and - of share capital

A

+ it can access very large amounts of capital

+ no interest

+ doesn’t get paid back

  • only available to ltd (people you know) and plc (public)
  • have to pay dividends
  • diluting ownership
  • easy to be taken over
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13
Q

+ and - of crowd funding

A

+ cheap and easy to set up

+ can get rewards

+ flexible

+ interest free so low costs

+ doesn’t have to be paid back

+ large number of investors

  • not suitable for raising large amounts of money
  • may not get enough funding
  • can take a long time
  • not immediate
  • have to satisfy requirements of investors
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14
Q

Factors to consider in finance sourcing?

A

Legal structure- some sources such as share capital are only available to companies

Cost- some sources have very high interest repayments

Risk- sources that require collateral can be high risk

Flexibility- some sources are highly adaptable to meet the business’s precise needs

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15
Q

What is limited liability

A

When the owner is only responsible for what they invest. Owner is separate entity to business. Personal possessions can’t be taken

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16
Q

What’s unlimited liability

A

Owners fully responsible for debts of business

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17
Q

Implications of unlimited liability

A

Owners of unlimited businesses are exposed to the financial obligations of the business

If they’re unable to pay business debts to banks and suppliers they could lose personal assets. The same obligations apply to any unlawful employees.

Unlimited liability companies sometimes find it easier to raise finance from lenders as the lenders can seem to regain any borrowings directly from the owners of the business

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18
Q

Implications of limited liability

A

Businesses with limited liability are owned by shareholders.

As a limited liability company is a separate legal entity the personal assets of shareholders are protected. Limited liability companies may also find it easier to raise large amounts of capital through the sources available to them

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19
Q

What’s a shareholder

A

An individual or institution that owns a percentage of a company

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20
Q

How do shareholders gain from shares

A
  1. Through profits returned in the form of dividends

2. In the rise of the price of the shared held when they come to sell them

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21
Q

What finance is appropriate for limited liability businesses

A 
Share capital
Retained profit
Venture capital
Business angels
Bank loans
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22
Q

What finance is appropriate for unlimited liability businesses?

A 
Personal savings
Retained profit
Mortgages
Unsecured bank loans
Peer to peer funding
Crowd funding
Grants
Bank overdrafts
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23
Q

What should a good business plan include

A 
Executive summary
Business idea and opportunity
Aims and objectives
Market research
Financial forecasts
Sources of finance
Premises and equipment
Personnel
Buying and production
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24
Q

What’s an executive summary in a business plan

A

A one page overview of the business outlining its purpose and the opportunity

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25
Q

What’s the business idea and opportunity in a business plan

A

An outline of the business idea and concept so that all stakeholders can understand the owners intentions

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26
Q

What are the aims and objectives in a business plan

A

Aims and objectives should be SMART. The owner will measure their success against these targets

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27
Q

What’s market research in a business plan

A

Market research into the target market, the market and other competitors

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28
Q

What’s financial forecasts in a business plan

A

These will include forecasts in costs, revenue, profit and cash flow ( cash flow forecast, budgets and break even analysis)

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29
Q

What are sources of finance in a business plan

A

A plan on how the business will be financed and how any borrowings will be repaid

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30
Q

What are premises and equipment in a business plan

A

The location of the business and its rationale. How this will be financed and any other equipment the business will need

31
Q

What is personnel in a business plan

A

An organisation chart outlining the personnel in the business, their areas of responsibility, skills and qualifications

32
Q

What is buying and production in the business plan

A

Details of how the products will be produces including details of suppliers

33
Q

Who uses a business plan

A

Owners as a guide and working document

Lenders - e.g. banks will want to investigate the likely success and risk of lending to a new business

Investors- to assess the risk and reward of investing in the business

Parents and employees- anyone wanting to work with/ for the business

34
Q

What is a cash flow forecast

A

The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of month

35
Q

How to Calculate cash flow forecast

A

(Inflows- outflows = net cash flow) + opening balance = closing balance

36
Q

When analysing cash flow forecasts what should managers consider

A

Are the monthly inflows greater than monthly outflows?

What are the forecast periods of high expenditure

Are inflows increasing over time

Is there a seasonal trend

Is there enough cash reserves to cover unexpected costs

37
Q

What are the causes of cash flow problems

A

Over trading

Allowing too much trade credit to customers

Poor credit control

Inaccurate cash flow management

Unforeseen costs

38
Q

How to speed up inflows

A

Incentivise early repayment by giving customers a discount for paying early

Reduce trade credit given to customers

Sell off stock at a discounted price to free up cash

Inject fresh capital into the business

39
Q

How to slow down outflows

A

Delay payments to suppliers-> keeps cash in business for longer but may develop poor relationship

Increase trade credit agreements with suppliers-> dependent on relationship, not likely if you’re a new business

Cut costs, such as finding cheaper alternatives or postponing spending in areas such as training or advertising

40
Q

What’s the best way to ensure the business has a positive cash flow

A

Invest time and effort into researching and planning effective cash flow forecasts

41
Q

What is internal finance?

A

Money generated within the business or its current owners

Cash raised for a business’ own activities

42
Q

What’s external finance

A

Money raised from outside the business such as through family and friends, banks and peer to peer funding

43
Q

What are the sources of external Finance

A 
Family and friends
Peer to peer funding
Banks
Business angels
Crowdfunding
Other businesses
44
Q

What are the methods of external finance

A 
Loans
Share capital
Venture capital
Bank overdraft
Leasing
Grants
Trade credit
45
Q

Benefits and drawbacks of sourcing finance from family and friends

A

+ likely to give you it

+ lenient of payback

+ flexible

  • may not provide enough finance
46
Q

Benefits and drawbacks of sourcing finance from peer to peer funding

A

+ more negotiable on payback

  • may not provide enough finance
47
Q

Benefits and drawbacks of sourcing finance from business angels

A

+ have knowledge and expertise

+ have contacts in the industry

+ can raise large sums of money

  • may be too involved
  • diluting ownership
48
Q

+ and - of internal finance

A 
\+
Capital available immediately 
Cheap
Not subject to credit checks
No need to involve third parties

-
Can be limited
Inflexible
Opportunity costs can be high

49
Q

+ and - of limited liability

A

+ less risk for owners -> more willing to invest

  • may mean it’s harder to access external finance
50
Q

+ and - of unlimited liability

A

+ easier to raise external finance

  • High risk for owners
51
Q

What is risk

A

The possibility of a negative outcome ‘conscious choice’

Eg business failure, financial loss, lack of security

52
Q

How to minimise risk

A

Planning
Market research
Raising sufficient start up capital
Being competitive

53
Q

What’s a business plan

A

A plan for the development of a business, giving details such as the products to be made, resources needed and forecasts such as costs, revenues and cash flows

A business plan is a physical document

54
Q

Influences On a business plan

A

Entrepreneur

Business experience

55
Q

Benefits of producing a business plan

A
  1. Force owners to take an objective, critical and unemotional look at the whole business idea. Can see if it’s do-able. Won’t waste time of something that can’t happen and can think of a better idea
  2. Helps show lenders and investors that the owner is cautious, responsible, serious and credible
  3. Flags up potential problems
  4. Provide a road map that shows a clear direction for the development of the business
  5. Provide an action plan that identifies key tasks that must be undertaken because it won’t show any risks or problems that the business may face. This means you may not get start up funds because banks and investors want to know you’ve panned for potential risks therefore you may not be able to start your business
56
Q

Disadvantages of a business plan

A

Time consuming -> opportunity costs-> could be doing other important start up tasks

Expose flaws in business -> doesn’t secure you finance

57
Q

+ and - of loans

A

+ can borrow large amounts

+ fixed instalments make it easier to plan cash flow

  • interest to pay, business in debt
58
Q

What’s venture capital

A

Where a business borrows a sum of money usually for a share in ownership

59
Q

What’s an overdraft

A

An extension of a current account

Can go into minus figure

60
Q

What’s leasing

A

When business rents out assets. Usually non current assets eg land

61
Q

What’s trade credit

A

Where business has extended period to pay for supplies, usually 30, 60, 90 days

62
Q

What’s a grant

A

A free sum of money given by government

63
Q

What are the benefits of cash flow forecasting / why should a business do it

A

Support an application for lending and can secure Lower interest rate

Support the budgeting process -> allowing business to plan how much each department has to spend

Identify any potential cash flow crisis -> can plan for other sources of finance and cutting costs

64
Q

What must a business consider in order to manage cash flow effectively

A

Payables- amount of time (days) taken for the business to pay creditors

Receivables - amount of time taken for debtors to pay the business

65
Q

What’s cash

A

Physical money a business has which is available to spend

66
Q

What’s a receipt

A

Cash coming into the business (inflows, receivables)

67
Q

What are expenses

A

Cash going out of the business (outflows, payables)

68
Q

What financial document is used to the future?
Which for the present?
Which for the past?

A

Cash flow forecast

Balance sheet ( statement of financial position)

Profit and loss ( statement of comprehensive income)

69
Q

How to calculate total receipts

A

All inflows added together

70
Q

How to calculate net cash flow

A

Inflows- outflow

71
Q

How to calculate opening balance

A

Previous month’s closing balance

72
Q

How to calculate closing balance

A

Net cash flow + opening balance

73
Q

Limitations of cash flow forecasting

A

Some figure based on estimates, depends of reliability

Variables are constantly changing so needs to be updated -> demand changes, makes it more inaccurate

Cash flow focus on only cash-> don’t consider profit or profitability -> has to use in conjunction

74
Q

Why do we need cash

A

Pay wages

Emergencies

Supplies

Purchase resources

Without cash you have business failure

Business (18 decks)

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