Paper 2- Theme 2.1- Raising finance

Question 1

Internal finance sources

Answer 1

Retained profit

Sale of assets

Personal savings

Improved management of working capital- existing capital made to stretch further (pay bills later,

Question 2

define improved management of working capital

pros and cons

Answer 2

existing capital made to stretch further through:

• negotiating to pay bills later
• receiving payment earlier

pros: boost cash flow,
increase efficiency as get rid of waste

cons: may be hard to negotiate

Question 3

when does a business need to raise finance

Answer 3

growth- after begin making profit, business wants to expand and may need additional finance

start up- need to invest in long term, pay for current bills and materials. every £1000 required to establish, £1000 used for day to day running

other situations
-e.g. need to pay for large order, cashflow problems

Question 4

define retained profit

pros ands cons

Answer 4

profit saved by business while it has been operating.

Pros: no interest (cheap)
owners in control
flexible

Cons: limited funds
danger of hoarding profits
shareholders may be less satisfied as profit isn’t going to dividends

Question 5

define personal savings

pros and cons

Answer 5

personal money invested by owner of business

pros: no interest
maintain control

cons: risky putting own capital as if business fails you lose it
many owners can’t afford

Question 6

define sale of assets

pros and cons

Answer 6

sale of non core businesses or properties that are surplus to requirements in order to generate capital

pros: quick way to generate capital, cheap as no interest

cons: may harm operations
value of business decreases

Question 7

define current liabilities

Answer 7

something you owe

short term bills (to suppliers- debtor) that need to payed within a year

Question 8

define current asset

Answer 8

something owned

e.g. stock, cash, creditors

Question 9

define working capital

Answer 9

money available to fund a company’s day-to-day operations

Question 10

external sources of finance

Answer 10

family and friends
banks
peer to peer funding
business angels
crowdfunding
other businesses

Question 11

define family and friends as an external source of finance

pros and cons as a source of finance

Answer 11

share capital or lent money from family and friends in return for equity stake in the business and profits

pros: trustworthy, flexible terms and conditions

cons: possible pressure on relationships
possibly insufficient amount

Question 12

define loans and overdrafts

Answer 12

loans (borrow set amount with fixed repayment, interest with collateral necessary)

overdrafts (pre arranged with bank that it can spend more than they own up to an agreed amount, high interest, for emergencies)

Question 13

define banks as an external source of finance

pros and cons as a source of finance

Answer 13

pros: specialist employees offer advice on finance and business planning
take out large amounts
long time given to repay

cons: interest is high (especially overdraft) and must be paid back even if a loss is made
very hard to be accepted

Question 14

define peer to peer funding

pros and cons as a source of finance

Answer 14

other business owners lend money in return for interest or equity

pros: develop business relationships and support network
other business owner interested in making the
business succeed and make profit

cons: not very large amounts (max £50,000)
repay is quite short term

Question 15

define business angels

pros and cons as a source of finance

Answer 15

wealthy individuals who give start up businesses investment in return for equity

pros: advice & help decision making, useful contacts
cons: not large amounts, less control and less share of profits

Question 16

define crowdfunding

pros and cons as a source of finance

Answer 16

ordinary people investing into your business with an incentive of sample product or small share

pros: crowdfund easily
cons: the whole investment must be reached otherwise investors are given their money back, rewards may not be financially viable

Question 17

pros and cons of using other businesses

Answer 17

pros less bureaucracy so easier to raise and access

cons: lose control and equity

Question 18

define debt finance

examples

Answer 18

when a business raises money by borrowing

loans, overdraft, trade credit

Question 19

define trade credit as a method of external finance

pros and cons

Answer 19

not paying for goods and services from a supplier straight away (usually given two months)

pros: can receive sales so they can pay suppliers
cons: hard for start ups as no credit history or relationships

Question 20

define equity finance

Answer 20

raise finance through selling shares or control of your business

share capital, venture capital

Question 21

pros and cons of share capital

Answer 21

pros: bring wisdom to board, cheap- no repay cost, easy
cons: cant control who buys shares (hostile takeover), lose equity and control

Question 22

define venture capital

Answer 22

venture capitalists invest in small risky companies

pros: bring experience, they want bus to succeed so will do all they can

dilute control, lose lots of equity

Question 23

define leasing

pros and cons

Answer 23

renting equipment such as machines or vehicles so no upfront cost or maintenance cost

pros: better cash flow, avoid depreciation, can update to new machinery easily
cons: don’t own asset but paying for it (company worth less)

Question 24

define grants

Answer 24

money given to business from government when banks refuse loan

pros: free to get, encourage start ups as a safety method of finance
cons: rarely used, not very large amounts

Question 25

define unlimited liability

Answer 25

there is no distinction between the finances of business and the finances of the owner

if collapses, owner’s investment and personal assets lost

Question 26

define limited liability

Answer 26

business and owner are different legal entities

if collapses, they only lose what they put into it

Question 27

finance used for unlimited liability

Answer 27

• loans and overdrafts: easier for unlimited liability business as banks can recoup debts from personal assets if business fails
• owners capital
• leasing
• trade credit- can recoup debts from personal debts if business fails

Question 28

Finance used for limited liability business

Answer 28

• share capital
• loans and overdrafts -need to be backed up with collateral as difficult to recoup debts if business collapses
• business angels
• venture capitalist
• peer to peer funding
• leasing
• trade credit

Question 29

define creditor/ payables

Answer 29

someone a business owes money to (e.g bankers and suppliers)

Question 30

factors influencing choice of source of finance

Answer 30

amount needed
how established business is
nature of business
if they need expertise and advice
how quickly you need it

Question 31

Define debtor/ receivable

Answer 31

someone who owes money to a business

Question 32

importance of a business plan

Answer 32

• test feasibility of business idea
• to secure and attract funding from investors
• monitor progress and align objectives against
• decide future direction, motivates staff as a result (clear plan)
• shows the allocation of resources

Question 33

What’s included in a business plan

Answer 33

• workforce plan (skills and experience of your workforce)
• marketing plan
• financial forecasts (profit and cashflow)
• break even analysis
• financing proposals (where your finance is coming from)

Question 34

limitations of business plan

Answer 34

• start up may not have any past data to base financial forecasts off of
• doesn’t account for external influences
• dependent on management ability to implement the business plan
• hard to forecast and gather info in dynamic markets

Question 35

define a business plan

Answer 35

a written document that sets out the businesses objectives, strategies for achieving them and its financial forecasts