(2.3 in Booklets) Raising Finances 2.1 Flashcards
Finance in business
Finance is the money used to fund the business
Why do businesses raise finance
To expand
To Start up
Pay debts
Help the business over a slow training period/ recession
Buy stock
Sources of internal finance: Owners Capital Pros and Cons
Pros: Not have to pay it back at the time
No interest
Immediately available
Cons: May not get it all back from business failure
Limited funding
Sources of internal finance: Retained profit
When a business reinvests his profits back into the business
Pros and Cons of Retained Profit
Pros: Don’t have to pay it back
Immediately available
Cons: Not good for a business to start up
Would have to be an established business
Limited funding depending on the size of the business
Sources of internal finance: Sales of Assets
Business can raise finance by selling capital that the own e.g machinery Selling an asset that no longer benefits them
Pros and Cons of Sales of Assets
Pros: No paying it back
Getting rid of waste
Can raise large amounts of money
Cons: No longer have the asset
Need to replace the asset likely
Not immediately available
New businesses will not have any to sell
The implications of limited liability on access to sources of finance
Owner and business have separate legal identity so can be sued separately
If its a medium plc, banks may be reluctant to lend money because if the business fails, they’ll not get their money back.
The implications of unlimited liability on access to sources of finance
Sole trader or partners can lose own assets to pay debts
Can’t sell shares in the business
Easier to secure finance due to that they are risking their own assets to pay it back to banks.
Gross Profit
Sales revenue - Cost of sales
Gross Profit Margin (GPM)
Gross Profit/ Sales Revenue x100
Operating Profit
Gross Profit - Expenses
Operating Profit Margin (OPM)
Operating Profit/ Sales Revenue x100
Net Profit
Operating Profit- Interest
Net Profit Margin (NPM)
Net Profit/ Sales Revenue x100
Business Plan
Looks into the future of the business
Not a look back at how things have been for the business
Doesn’t include a bank statement
Why do businesses need a business plan?
To secure a loan from banks and persuade lenders
Attract potential investors
Give owners a sense of direction
To set targets and objectives that can be followed
Cash Inflow
Money that comes into the business/ receipts
Cash Outflow
Money that goes out of the business/ payments
Examples of Cash Inflows
Revenue from sales
Bank Loans
Angel investors
Selling shares
Owners Capital
Grants
Examples of Cash Outflows
Bills e.g. rent
Buying Stock
Advertising/ Marketing
Factors that influence Cash flows
Consumer trends
Economic variables- growth or decline in the economy
Competitors actions- New products, innovations or reputation growth
How to fix cash flow problems
A short term loan
Reducing an expense e.g. staff wages
Delaying Paying bills
Limitations to cash flow forecasting
Bias, a business may over-inflate to attract finance or impress a supplier
Predictions, A Cash flow forecast cannot take into account weather problems etc.
Updates, Needs regular updating to stay accurate
Mistakes, A tricky document to complete and mistakes can be made
Time, The longer time it is based for the more inaccurate it will be
