Finance and bussiness structure Flashcards
What are the 4 types of business structures
sole trader
partnership
limited company
public limited company
what is the difference between the business strucutres
have different sources of funding available to them
What is a sole trader
tend to be smaller businesses, operated by an individual on a part time basis, not a separate legal entity - no company law requirements, but they are a separate business entity should be clear seperation of finances
why is it important for a sole trader to keep accurate financial records
for VAT (tax), obtaining finance, monitoring customer payments and safeguarding assets.
if a sole trader cannot pay creditors then
the creditors have recourse to the owners, (owner puts all private assets at risk when they start a business)
what is the legal risk of being a sole trader
not separate legal entity, breach of employment, environmental legislation, owner or partners will be sued and have to pay compensation
initial funding for a sole trader or small partnership
capital of the business
what is the capital of sole trader or small partnership
initial money contributed by the owners, or partners
what are the retained earning
best source of finance, when business makes profits increase in capital belongs to the owners, these retained profits provide additional funds for a growing business
what is the working capital funding
once business is ongoing and in static day to day operations should be self funded, cash from customers should fund purchase of new materials, owner needs to manage cash effectively
what is the working capital funding circle
stage 1 cash
stage 2 business inputs
stage 3 sales
stage 4 accounts receivables
four steps of managing cash effectively
trade receivables actively chased with penalties for late payments
trade receivables may be sold to a financial intermediary - less cash but faster receipt
trade payables have payment period equal to trade receivables
inventory management should be efficient (not stored for long periods of time nor run short of stock)
What is an overdaft
additional funding in short term to cover working capital required, not good as it often has charges and high rates of interest
what should an overdraft never be used for to
fund a non current asset growth or any other long term project, even with working capital should be prearranged (may be cheaper and ensure good relationship with bank)
what is a loan used for
to fund expansion of the business
what does a loan require from a bank
a workable business plan with forecasted cash flows
what is the security for a loan
incase the loan fall through often a personal asset is required for a loan
what is leasing vs hiring
if a business needs a new plant or motor vehicle my be able to fund through these, regular charges but at the end of the hire contract business will own the asset
why is leasing a good option for a objects subject to technological changes
as the leasing company may update the asset and provide servicing and maintenance agreement
additional sources of funding
a business angel or dragon and grants
what is a grant
provided by the government for companies that hire certain people are in certain areas etc, have to be repaid but unlikely to carry any interest charge
advantage of making a business a limited company
becomes legal entity in its own right and can be sued or sue, if it goes into financial difficult the creditors do not have recourse to the owners assets, owners liability is limited to what they have invested
what is given in return for funds for owners of a limited company
shares/equity in the company,
how are shares treated in a limited company
shares cannot be bough or sold on the stock exchange but there can be a private transfer (allows someone to leave company and sell shares to other owners)
