2.1.1 and 2.1.2 Raising finance

Question 1

what are fixed costs?

Answer 1

cost which do not change as production changes

Question 2

What are variable costs?

Answer 2

costs which change when the level of production changes E.G cost of raw materials

Question 3

What is working capital?

Answer 3

the finance available from the day-to-day running of the business

Question 4

define angel investors

Answer 4

investors who take the risk of investing before it has opened taking an equity risk

Question 5

what is collateral

Answer 5

something of value offered when a loan is taken out, to make sure the loan is repayed. E.G a house

Question 6

what is croudfunding

Answer 6

obtaining external finance from many small investments, usually from a web based appeal

Question 7

define method of finance

Answer 7

process through which a source of finance provides money to a business

Question 8

define venture capital

Answer 8

a method of providing higher risk investments through a mix of loans, shares often in return for equity

Question 9

what is overdraft

Answer 9

facility offered by a bank to allow customers to have a negative balance

Question 10

what is leasing

Answer 10

instead of buying an asset outright, leasing it is where monthly payments arre made to be allowed access to the asset

Question 11

what is trade credit

Answer 11

where the supplier provides goods and does not expect immediate payment

Question 12

why might a business need finance?

Answer 12

start up
working capital
growth

Question 13

name 3 internal sources of finance

Answer 13

founder finance
retained profit
sale of assets
working capital

Question 14

name 3 external sources of finance

Answer 14

family and friends
banks
peer to peer funding
business angels
venture capitalists
crowd funding
suppliers

Question 15

benefits of retained profit

Answer 15

it cheap
very flexible
does not dilute the ownership of the company

Question 16

benefits of selling shares

Answer 16

substantial funds - magnitude
broader base of shareholders
equity risk rather than debt

Question 17

drawbacks of selling shares

Answer 17

costly and time consuming
existing shareholders holdings might be diluted
equity has a cost of capital that is higher than debt

Question 18

benefits of bank loan

Answer 18

greater certainty of funding
lower interest rate than bank draft
appropriate method of financing fixed assets

Question 19

drawbacks of bank loan

Answer 19

requires collateral
interest paid on full amount outstanding
harder to arrange

Question 20

benefits of overdraft

Answer 20

relatively easy to arrange
flexible
interest only paid on amount under the facility
no secured assets of the business

Question 21

drawbacks of overdraft

Answer 21

can be withdrawn at short notice
interest charge varies with changes in the interest rate
higher interest rate than a bank loan

Question 22

benefits of venture capital

Answer 22

can raise substantial amounts
business benefits from substantial specialist investor support - dragons den
brings better discipline and management strategy

Question 23

drawbacks of venture capital

Answer 23

requires a high rate of return
often supported by high levels of bank debt in business
not a long-term investment-venture capitalist will likely aim to sell in 5-7 years
loss of control - venture capitalist will take majority share in the company

Question 24

Define collateral

Answer 24

Something of value used as security when a loan is offered. If the loan is not paid, the item is sold to pay for the loan

Question 25

Define venture capital

Answer 25

Higher risk finance through a combination of loans and shares

Question 26

Define overdraft

Answer 26

Facility offered by the bank which allows their account to become negative

Question 27

define leasing

Answer 27

Asset which Is used at a monthly fee i nstead of buying outright

Question 28

define trade credit

Answer 28

Good and services offered by a supplier which are paid for at a later date

Question 29

Business angels

Answer 29

Early investors- take Significant equity Shere

Question 30

define crowdfunding

Answer 30

ofleaving external finance
from a group of investors

Question 31

define liquidation

Answer 31

When a company closes and the assets are sold
off to pay debts

Question 32

define business plan

Answer 32

a document detailing a business’ idea , finance and how it will run)

Question 33

define share capital

Answer 33

Business finance which has no guarantee of repayment or annual income, but gains control of the business and its potential profits

Question 34

define creditors

Answer 34

Those orred money by the business eg banks and suppliers

Question 35

define bankrupt

Answer 35

When an individual is not able to meet personal liabilities

Question 36

limited liability

Answer 36

owners are not liable forthedebts of the business, they can loose no more than They invest

Question 37

define unlimited liability

Answer 37

The owners’ personal assets and business assets are as one. Personal assets can be taken to cover debts of the business

Question 38

define public limited Company

Answer 38

A company with limited liability and shares available on the stock market

Question 39

define contingency plans

Answer 39

a backup Plan incase things go wrong

Question 40

define real incomes

Answer 40

changes in household incomes adjusting for price Changes/ inflation

Question 41

define Sales forecast

Answer 41

A prediction of Sales for the near
future.

Question 42

define trend

Answer 42

A general Path which follows a series of values over time

Question 43

define fixed Costs

Answer 43

Costs which are Static. They don’t change
with the volume of sales

Question 44

define variable costs

Answer 44

costs whin Change depending
on the volume of production

Question 45

define Sales revenue

Answer 45

nurse of units Sold X average Selling price

Question 46

define Sales volume

Answer 46

number of units Sold in a
time period

Question 47

Total costs

Answer 47

The cost of Producing at an output
level E.G fixed costs + variable cost

Question 48

Define Break even Chart

Answer 48

a line graph showing total revenue, total costs, fixed and variable costs

Question 49

Define contribution

Answer 49

Total revenue - variable costs)

Question 50

define break even level of output

Answer 50

Fixed Costs/ Contribution per unit

Question 51

define contribution per unit

Answer 51

selling price - Variable Cost per unit

Question 52

define margin of Safety

Answer 52

Sales volume - break even output

Question 53

Define Total contribution

Answer 53

Contribution per unit x Unit sales

Question 54

Define Adverse variance

Answer 54

A difference between budget and
actual Sales, damaging the firms profit

Question 55

Define favourable variance

Answer 55

difference between budgets and actual figures which boost a firms profit

Question 56

define income budget

Answer 56

setting a minimum figure for the revenue to be generated by a product, department or manager

Question 57

Define zero budgeting

Answer 57

Setting all future budgets to zero forcing managers to justify their spending levels

Question 58

Historical budgeting

Answer 58

Basing future budgets on Historical figures