Finance and bussiness structure

Question 1

What are the 4 types of business structures

Answer 1

sole trader
partnership
limited company
public limited company

Question 2

what is the difference between the business strucutres

Answer 2

have different sources of funding available to them

Question 3

What is a sole trader

Answer 3

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

Question 4

why is it important for a sole trader to keep accurate financial records

Answer 4

for VAT (tax), obtaining finance, monitoring customer payments and safeguarding assets.

Question 5

if a sole trader cannot pay creditors then

Answer 5

the creditors have recourse to the owners, (owner puts all private assets at risk when they start a business)

Question 6

what is the legal risk of being a sole trader

Answer 6

not separate legal entity, breach of employment, environmental legislation, owner or partners will be sued and have to pay compensation

Question 7

initial funding for a sole trader or small partnership

Answer 7

capital of the business

Question 8

what is the capital of sole trader or small partnership

Answer 8

initial money contributed by the owners, or partners

Question 9

what are the retained earning

Answer 9

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

Question 10

what is the working capital funding

Answer 10

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

Question 11

what is the working capital funding circle

Answer 11

stage 1 cash
stage 2 business inputs
stage 3 sales
stage 4 accounts receivables

Question 12

four steps of managing cash effectively

Answer 12

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)

Question 13

What is an overdaft

Answer 13

additional funding in short term to cover working capital required, not good as it often has charges and high rates of interest

Question 14

what should an overdraft never be used for to

Answer 14

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)

Question 15

what is a loan used for

Answer 15

to fund expansion of the business

Question 16

what does a loan require from a bank

Answer 16

a workable business plan with forecasted cash flows

Question 17

what is the security for a loan

Answer 17

incase the loan fall through often a personal asset is required for a loan

Question 18

what is leasing vs hiring

Answer 18

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

Question 19

why is leasing a good option for a objects subject to technological changes

Answer 19

as the leasing company may update the asset and provide servicing and maintenance agreement

Question 20

additional sources of funding

Answer 20

a business angel or dragon and grants

Question 21

what is a grant

Answer 21

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

Question 22

advantage of making a business a limited company

Answer 22

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

Question 23

what is given in return for funds for owners of a limited company

Answer 23

shares/equity in the company,

Question 24

how are shares treated in a limited company

Answer 24

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)

Question 25

disadvantage of making a business a limited company (incorporating)

Answer 25

registration and complying with company law, req annual published accounts.

Question 26

What additional finance does a limited company have

Answer 26

venture capital finance

Question 27

what is venture capital finance

Answer 27

obtained from finance company - lend money in return for shares, may not even want to invest long term and sell back. will also provide expert guidance in areas such as finance marketing and human resources

Question 28

taxation of a business operated by soul trader or partnership

Answer 28

tax purposes the profits belong to the person, profits added to other sources of income and assessed to income tax can be upto 45% tax + 12% national insurance

Question 29

for a company how does tax work

Answer 29

profits belong to the company, and are charged corporation tax (20% and no national insurance), if distributed to owners or through dividends will be tax on that

Question 30

whats the difference between plc and limited company

Answer 30

plc needs to be floated on the stock exchange - can be very expensive and wll have to comply with stock exchange requirements

Question 31

once registered on stock exchange what can a plc do

Answer 31

to gain more funding can either issue more share on the stock exchange - expensive or make a rights issue

Question 32

what is a rights issue

Answer 32

company issues shares to existing shareholder at price below market price, cheaper than a full issue and for shareholders no dilution of interest

Question 33

what is a sole trader

Answer 33

self employed an individual operate a business on their own

Question 34

what is a partnership

Answer 34

two or more people come together under a partnership agreement to run a business

Question 35

limited company

Answer 35

a legal arrangement what a small business is incorporated, owners acquire shares in the company

Question 36

public limited company

Answer 36

an incorporated business where the shares can be made available to the public

Question 37

debt vs equity

Answer 37

if higher risk equity holders want a high return

debt is more risky as interest payments must be made in high and low profit years

Question 38

what is the advantage of interest paymetns

Answer 38

are before tax whereas dividend payments are after tax, loans shield from taxation