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Business Theme 2 > raising finance > Flashcards

raising finance Flashcards

1
Q

what is finance needed for?

A

-business set up
-day to day trading
-growth and development

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2
Q

what factors affect the type and amount of finance required?

A

-what the finance is required for
-the cost of the finance
-flexibility of finance
-the businesses organisational structure

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3
Q

what are the sources of finance for a new start up

A

Internal sources:
-founder finance
-retained profits
-friends and family

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4
Q

two examples of founder finance

A

-cash and investments
-inheritances

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5
Q

why are personal sources of finance important

A

-cheap - no repayments or interests
-entrepreneur keeps more control over business

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6
Q

examples of short term finance (4)

A

-bank overdraft
-trade creditors
-short term bank loans
-factoring

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7
Q

4 examples of medium term finance sources

A

-bank loans
-leasing
-hire purchase
-government grants

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8
Q

5 examples of long term finance sources

A

-share capital
-retained profits
-venture capital
-mortgages
-long term bank loans

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9
Q

what is the most important source of finance for a profitable business?

A

retained profits

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10
Q

what is profit?

A

revenue - cost

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11
Q

what are the positives of retained profits?

A

-cheap (not free)
-very flexible as management control how they invested and shareholders, control the proportion retained
-Do not dilute the ownership of the company

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12
Q

What are the negatives of retained profits?

A

-danger of hoarding cash-upsets SHs
-SHs may prefer dividends if the business is not achieving sufficiently high returns on investments
-High profits and cash flows would suggest the business could afford debt

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13
Q

what are asset disposals?

A

-A one off, boost to finance
-Sell their assets
-E.g. spare land
-Not all businesses have spare assets
-Often occurs after acquisitions(two businesses come together)

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14
Q

what are four sources of external finance?

A

-Share capital
-Bank loan
-Venture capital
-Trade credit

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15
Q

what is share capital

A

Public company sell shares or ownership in the business to the public
-receive large cash inflow

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16
Q

what is a negative of share capital

A

Dilutes ownership, so the company loses control of its assets
-Risk

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17
Q

advantages of share capital

A

lots of money
other ideas
cheaper

18
Q

what is a lease

A

A contract agreed between a leasing company and the customer
-lessee pays rental income to hire the assets from the lessor who is the legal owner of the assets

19
Q

what are the advantages of a lease

A

-flexibility-aids cash flow management and there’s no large outfit of cash at the start
-Protection
— against technological obsolescence
— enables access to best tech
— remains competitive

20
Q

What are the disadvantages of leasing?

A

-expensive
— can cost more than purchasing the product
— never own the asset

21
Q

What are the advantages of a bank overdraft?

A

flexible source of finance
-Use when needed and it doesn’t cost unless used
-Helps handle seasonal fluctuations in cash flow
-Or if there’s short term cash flow

22
Q

what are the disadvantages of a bank overdraft?

A

-Short-term
-Charge high interest

23
Q

What is a bank overdraft?

A

overdraft lets you borrow money through your current account by taking out more money than you have in the account

24
Q

why do we need a business plan?

A
  1. Helps finance providers assess the business model.
    -Provides a structured assessment of the opportunities and risks
    -Analysis of competitive position and market attractiveness
    -Benchmark which can be measured
    -Helps determine amount/type of finance required
25
Q

seven Examples of cash inflows.

A

-Cash sales
-Receipts from traders debtors
-sales of fixed assets
-interest on bank balances
-Grants
-Loans
-Share capital invested

26
Q

Seven Examples of cash outflows.

A

-payment to suppliers
- Wages and salaries
-Payments for fixed assets
-Tax on profits
-Interest on loans/overdraft
-Dividends paid to shareholders
-Repayment of loans

27
Q

what is trade credit?

A

A source of finance that allows a business to buy now and pay later, usually when purchasing inventory
-It allows businesses to pay back supplies up to 90 days within credit terms after receiving the products from suppliers

28
Q

Advantages of trade credit

A

-allows great management of cash flow
-build loyalty to supplier
-Provides time to make sale
-Use revenue to pay for goods
-No interest

29
Q

What are the disadvantages of trade credit?

A

-might not sell inventory, so have to fund with other cash
-Doesn’t work for some types of businesses
-Maybe limited

30
Q

what is venture capital

A

When specialist investors invest in private companies
-They manage investment funds designed to achieve high rates of return
-The venture will seek a large share of the share capital and look to sell their investment in the medium term

31
Q

What are the advantages of venture capital?

A

-venture capitalists require high rates of return
-Not a long-term investment 5-7yrs
-Loss of control as venture capitalist may take a majority share in the company

32
Q

What can businesses do to ensure they meet demand efficiently?

A

-get enough in inventory from suppliers
-Right amount of staff
-Align marketing and advertising with some demand

33
Q

What can businesses do to adjust to changes in sales?

A

-Cut down unnecessary expenses
-Change hours of employees
-Up selling or cross selling
-Find new ways to attract customers

34
Q

why forecast sales

A

-vital for planning :
-HR-plan how many people needed
-Production/capacity plans
- Cash flow forecast
-Profit forecast and budget
-Very useful part of regular competitor analysis and help to focus mark research

35
Q

how do you consumer trends affect sales forecast?

A

-demanding many markets change as consumer taste and fashion change
-Affects both overall market demand and market shares of existing competitors

36
Q

what causes products to fall out of fashion?

A

-another better, cooler and slicker product comes out
-When products become mass market, and too many people use it

37
Q

How do economic variables affect sales forecasting?

A

-demand often sensitive to changes and variable, such as exchange rate, interest, and taxation
-Overall strength of the economy(GDP growth) also important

38
Q

how do competitors, actions affect sales forecasting?

A

-Hard to predict:
-Change in product
-change in place they provide to
-New advertising campaign
-Improved production service
-Decreased price

39
Q

why are sales forecasts likely to be inaccurate for a start up ?

A

-hard to forecast sales as no consumer information
-No loyal customers
-inexperienced

40
Q

what factors make sales forecasts inaccurate

A

-Demand is highly sensitive to change in price and income elasticity
-Product in fashion item- trends change
-Significant changes in market share
-Management have demonstrated poor sales forecasting in the past

Business Theme 2 (2 decks)

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