lo7 Flashcards
why do businesses fail
- poor financial control
- lack of knowledge of the market
- loack of knowledge of competitor behaviour
- lack of a clear and unique selling point
- concentration risk (relying on a major supplier)
- flawed business plan
what can businesses raise funds from?
internal source / external source
what are the two financial terms
short-term / long-term
what do the choices of finance depend on?
- the availability of finance
- the cost of finance
- the reason finance is required
what is the availability of finance for a new business
- in its first year of trading does not reserves
what is the availability of finance for a sole trader and partnership
cannont share issuing shares
what is the availability of finance for a mortgage
only available to businesses borrowing against property
what is the availability of financial for a financial record
unlikely to be able to borrow money from a bank
what is the difference between internal and external sources of finance
internal sources of finance are usually cheaper than external sources of finance
what are reason finance is required
- start-up
- replace outdated machinery
- buy out a competitors business
- purchase a new building
- deal with a cash flow crisis
- buy raw materials
what are internal sources of finance
- owners savings
- reserves
owners savings advantages
advantages - no need to repay the money - low costs, no interest to be paid
owners savings
- short / long term finance
- sole traders and partnerships
reserves
- long term of finance
- all businesses
reserves advantages
advantages - no need to repay the money - low costs, no interest paid
owners savings disadvantages
disadvantages - owners may not have enough savings - may leave the owners with insufficient savings for personal use
reserves disadvantages
disadvantages - not available to new businesses in their first year to trading - not available to businesses that have made losses
external sources of finances
- trade credit
- hire purchase
- credit card
- overdraft
- loan
- mortgage
- venture capital
- share issue
- crowd funding
trade credit
- short term of finance
- all businesses
trade credit advantages
advantages - improves cash flow by buying now and paying later - no interest charged if paid within agreed timescale
hire purchase
- short term source of finance
- all businesses
credit card disadvantages
disadvantages - interest charged if not repaid within the interest-free period - high interest rates, leading to spiralling debt
overdraft
- short term source of finance
- all businesses
loan
- long term source of finance
- all businesses
mortgage advantages
advantages - can obtain premises that could not be afforded otherwise - repayments are spread over a long period of time
venture capital
- long term source of finance
- all businesses
share issue
- long term source of finance
- companies only
crowdfunding
- long term source of finance
- all businesses
crowdfunding advantages
advantages - financial coupled with promotion of the businesses - available to businesses struggling to secure funding by conventional methods
share issue advantages
advantages - no need to repay the money - no interest to be paid
venture capital advantages
advantages - finance coupled with advice and expertise - business connections which can help the business grow
mortgage
- long term source of finance
- all businesses
loan advantages
advantages - repayments are spread over a period of time - fixed instalments help with cash flow management
overdraft disadvantages
disadvantages - interest rates are usually high - prolonged use makes it expensive
-if you regularly go over the overdraft limit it will affect your credit score
credit card advantages
advantages - if repaid within the time payment period, the borrowing is free - payment protection (money can be claimed back if there is a problem with a purchase
-can help you build a positive credit score
- be prepared for emergencies
- borrow money withought paying interest
trade credit disadvantages
disadvantages - bag debt if not paid on time - any discounts available for cash / early payment will be lost
-need for credit management
- suppliers may refuse credit
- if not paid on time - reduce of amount to spend on costs - less products
hire purchase advantages
advantages - payments are spread over a period of time - can obtain equipment that could not be able to afford otherwise
credit card
- short term source of finance
- all businesses
hire purchase disadvantages
disadvantages - interest and additional charges make it expensive - can only be used to obtain equipment and machinery
overdraft advantages
advantages - flexible - can help with short-term cash flow problems - interest is only charged on the daily amount overdrawn (not the overdraft limit)
loan disadvantages
disadvantages - the length of the loan and the interest rate can make it expensive - the lender may require security on the loan
-interest can be higher than alternatives
-increased debt load
- additinal monthly payments
mortgage disadvantages
disadvantages - can only be used to purchase a property - if repayments are not kept up then the property will be repossessed
venture capital disadvantages
disadvantages - equity funded. the venture capitalist becomes an owner - reduced control over decision making for current owners
-can be expensive
- requires setting up a board of directors
share issue disadavntages
disadvantages - shareholders need to be paid dividends out of profit - issuing more shares may dilute the control of existing shareholders
crowdfunding disadvantages
disadvantages - cost of providing appropriate reward to investors - businesses intentions made public, so may be copied if not fully protected
how can a business plan help a business
- clarify the details of a proposal to business owners
- judge the viability of a business venture for business owners
- attract potential investors
- obtain grant funding from charities and government sources
- support a loan application to a bank or other lender
- share business objectives with employees
what should a business plan contain?
- Executive summary - overview of the contents of the business plan
- intended product / services - e.g. new products / service / extension
- unique selling point - i.e. what makes the business stand out
- protection of the product / services - e.g. need to confidentiality during planning stage
- prioritisation of business objectives - e.g. profit, market share, reputation
- market research - e.g. competitor analysis
- resource requirements - e.g. finance, number of employees and skills of employees
- financial plan - e.g. the sources of finance, cash flow forecast, break-even point
what is trade credit
a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.
what is hire purchase
an arrangement for buying machinery or equipment, where the buyer makes an initial down payment and pays the balance plus interest in instalments.
what is a loan
a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.
what is a credit card
a line of credit that can be used to make purchases, balance transfers and/or cash advances and requiring that you pay back the loan amount in the future.
what is an overdraft
occurs when an account lacks the funds to cover a withdrawal, but the bank allows the transaction to go through anyway
what is crowdfunding
the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet.
what is share issue
the procedure in which enterprises allocate new shares to the shareholders
what is venture capital
a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
what is a mortgage
an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest
