Paper 2- Theme 2.1- Raising finance Flashcards
Internal finance sources
Retained profit
Sale of assets
Personal savings
Improved management of working capital- existing capital made to stretch further (pay bills later,
define improved management of working capital
pros and cons
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
when does a business need to raise finance
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
define retained profit
pros ands cons
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
define personal savings
pros and cons
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
define sale of assets
pros and cons
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
define current liabilities
something you owe
short term bills (to suppliers- debtor) that need to payed within a year
define current asset
something owned
e.g. stock, cash, creditors
define working capital
money available to fund a company’s day-to-day operations
external sources of finance
family and friends banks peer to peer funding business angels crowdfunding other businesses
define family and friends as an external source of finance
pros and cons as a source of finance
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
define loans and overdrafts
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)
define banks as an external source of finance
pros and cons as a source of finance
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
define peer to peer funding
pros and cons as a source of finance
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
define business angels
pros and cons as a source of finance
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
define crowdfunding
pros and cons as a source of finance
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
pros and cons of using other businesses
pros less bureaucracy so easier to raise and access
cons: lose control and equity
define debt finance
examples
when a business raises money by borrowing
loans, overdraft, trade credit
define trade credit as a method of external finance
pros and cons
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
define equity finance
raise finance through selling shares or control of your business
share capital, venture capital
pros and cons of share capital
pros: bring wisdom to board, cheap- no repay cost, easy
cons: cant control who buys shares (hostile takeover), lose equity and control
define venture capital
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
define leasing
pros and cons
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)
define grants
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
define unlimited liability
there is no distinction between the finances of business and the finances of the owner
if collapses, owner’s investment and personal assets lost
define limited liability
business and owner are different legal entities
if collapses, they only lose what they put into it
finance used for unlimited liability
- 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
Finance used for limited liability business
- 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
define creditor/ payables
someone a business owes money to (e.g bankers and suppliers)
factors influencing choice of source of finance
amount needed how established business is nature of business if they need expertise and advice how quickly you need it
Define debtor/ receivable
someone who owes money to a business
importance of a business plan
- 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
What’s included in a business plan
- 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)
limitations of business plan
- 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
define a business plan
a written document that sets out the businesses objectives, strategies for achieving them and its financial forecasts
