2.1.1 and 2.1.2 Raising finance Flashcards
what are fixed costs?
cost which do not change as production changes
What are variable costs?
costs which change when the level of production changes E.G cost of raw materials
What is working capital?
the finance available from the day-to-day running of the business
define angel investors
investors who take the risk of investing before it has opened taking an equity risk
what is collateral
something of value offered when a loan is taken out, to make sure the loan is repayed. E.G a house
what is croudfunding
obtaining external finance from many small investments, usually from a web based appeal
define method of finance
process through which a source of finance provides money to a business
define venture capital
a method of providing higher risk investments through a mix of loans, shares often in return for equity
what is overdraft
facility offered by a bank to allow customers to have a negative balance
what is leasing
instead of buying an asset outright, leasing it is where monthly payments arre made to be allowed access to the asset
what is trade credit
where the supplier provides goods and does not expect immediate payment
why might a business need finance?
start up
working capital
growth
name 3 internal sources of finance
founder finance
retained profit
sale of assets
working capital
name 3 external sources of finance
family and friends
banks
peer to peer funding
business angels
venture capitalists
crowd funding
suppliers
benefits of retained profit
it cheap
very flexible
does not dilute the ownership of the company
benefits of selling shares
substantial funds - magnitude
broader base of shareholders
equity risk rather than debt
drawbacks of selling shares
costly and time consuming
existing shareholders holdings might be diluted
equity has a cost of capital that is higher than debt
benefits of bank loan
greater certainty of funding
lower interest rate than bank draft
appropriate method of financing fixed assets
drawbacks of bank loan
requires collateral
interest paid on full amount outstanding
harder to arrange
benefits of overdraft
relatively easy to arrange
flexible
interest only paid on amount under the facility
no secured assets of the business
drawbacks of overdraft
can be withdrawn at short notice
interest charge varies with changes in the interest rate
higher interest rate than a bank loan
benefits of venture capital
can raise substantial amounts
business benefits from substantial specialist investor support - dragons den
brings better discipline and management strategy
drawbacks of venture capital
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
Define collateral
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
Define venture capital
Higher risk finance through a combination of loans and shares
Define overdraft
Facility offered by the bank which allows their account to become negative
define leasing
Asset which Is used at a monthly fee i nstead of buying outright
define trade credit
Good and services offered by a supplier which are paid for at a later date
Business angels
Early investors- take Significant equity Shere
define crowdfunding
ofleaving external finance
from a group of investors
define liquidation
When a company closes and the assets are sold
off to pay debts
define business plan
a document detailing a business’ idea , finance and how it will run)
define share capital
Business finance which has no guarantee of repayment or annual income, but gains control of the business and its potential profits
define creditors
Those orred money by the business eg banks and suppliers
define bankrupt
When an individual is not able to meet personal liabilities
limited liability
owners are not liable forthedebts of the business, they can loose no more than They invest
define unlimited liability
The owners’ personal assets and business assets are as one. Personal assets can be taken to cover debts of the business
define public limited Company
A company with limited liability and shares available on the stock market
define contingency plans
a backup Plan incase things go wrong
define real incomes
changes in household incomes adjusting for price Changes/ inflation
define Sales forecast
A prediction of Sales for the near
future.
define trend
A general Path which follows a series of values over time
define fixed Costs
Costs which are Static. They don’t change
with the volume of sales
define variable costs
costs whin Change depending
on the volume of production
define Sales revenue
nurse of units Sold X average Selling price
define Sales volume
number of units Sold in a
time period
Total costs
The cost of Producing at an output
level E.G fixed costs + variable cost
Define Break even Chart
a line graph showing total revenue, total costs, fixed and variable costs
Define contribution
Total revenue - variable costs)
define break even level of output
Fixed Costs/ Contribution per unit
define contribution per unit
selling price - Variable Cost per unit
define margin of Safety
Sales volume - break even output
Define Total contribution
Contribution per unit x Unit sales
Define Adverse variance
A difference between budget and
actual Sales, damaging the firms profit
Define favourable variance
difference between budgets and actual figures which boost a firms profit
define income budget
setting a minimum figure for the revenue to be generated by a product, department or manager
Define zero budgeting
Setting all future budgets to zero forcing managers to justify their spending levels
Historical budgeting
Basing future budgets on Historical figures
