real Theme 2 Flashcards
What is Internal finance
Internal finance comes from the owner’s capital, retained profit, or the sale of assets
Sources of internal finance
Owner’s capital: personal savings
Retained profit
Sale of assets
Benefits for internal finance
+ Often free,does not involve payment of interest or charges
+ doesnt involve third parties
+ quick
+ access no matter credit check
Drawbacks for internal finance
- Significant opportunity cost
- May not be sufficient
- Rarely tax-efficient
Sources of external finance
Family and friends
Banks
Peer-to-peer funding
business angels
Crowd funding
Other businesses
The Advantages & Disadvantages of Family and Friends as a Source of Finance
+ Cheap
+ No strings attached
- Damage relationships
The Advantages of Bank Loans
+ Offer short and long therm finance
+ Provide advice
+ Small sums borrowed from unsecured
Disadvantages of Bank Loans
- Requires business plan
-Banks are cautious - interest
- businesses must be customers of the bank
- for large amount; provide security to be granted loan
Peer-to-peer funding
Individuals with available savings pool it with others in a peer investment scheme such as Funding Circle
+ and - of Peer-to-peer funding
+ Quick
+ No strings attached
- Borrowers charged small fee, pay interest same way as a bank loan
+ and - of Business angels
+ WIlling to take risk
+ Advice
+ For determined period of time
- Finding right ones -> networking
- Own stake in business, make decisions
+ and - of Crowdfunding
+ organic customer base
+ no credit rating required
- provide persuasive business plan
- negative publicity if not successful
+ and - of using Other businesses
+ access to processes and market knowledge
+ large amount of finance
- profits shared
- decision making handed over
Methods of external finance
Loans
Leasing
Share capital
Trade credit
Venture Capital
Grants
Overdrafts
Method of Finance - Bank loans
Bank loans are usually unsecured
+ interest fixed
+ repayments made equally
- interest rates depend on business
- non-current liabilities increase
Method of Finance - Mortgages
Mortgages are long-term secured loans
+ Purchase expensive property without large amount of capital
- missed payments lead to repossession
- Repayments variable, linked to current interest rates
Debentures
Debentures are long-term agreements between a business and a lender
+ control retained
+ interest fixed
- high interest
- deter investors if fail
Overdrafts
An arrangement for business current account holders to spend more money than it has in their account
+ short term
- Called in
Share Capital
Share capital is finance raised from the sale of shares in a limited company
+ Large amount of shares
+ interest is not payable
- Shareholders have power
Venture Capital
Funds provided by specialist investors
+ Allows for another option if refused from other sources
- requires a stake in the business
Leasing
An asset such as a piece of machinery or a vehicle used by the business in return for regular payments|
+doesnt own so not responsible for maintenance
- leasing more expensive in long run
Trade Credit
An agreement is made with suppliers to buy stock which is paid for at a later date
+ usually interest free
- discounts for early payment not available
Grants
Governments and industry trusts may offer grants to businesses that meet specific criteria
+ Don’t need to be repaid
- May be used not for intended purpose
Appropriate internal Finance for Limited Businesses
Retained profit
Debentures
Share capital
Appropriate external Finance for Limited Businesses
Venture capitalists
Business angels
Unlimited liability business sources of finance
Personal savings
Retained profit
Unsecured loan
Overdraft
Mortgage
Trade credit
Leasing
Peer-to-peer
Crowd funding
Grants
Business Plan
document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow
Sales Forecasts
predict future revenues based on past sales figures
Factors Affecting Sales Forecasts
Seasonal
Fashion
Long term trends
Economic growth
Inflation
Unemployment
Interest rates
Exchange rates
Actions of competitors
Difficulties of Sales Forecasting
Skill
Time
Bias
Ignore stakeholders
Reasons for Using Budgets
Planning & monitoring
Control
Coordination and communication
Motivation and efficiency
Historical figure budgets
Budgets are usually based on historical data (e.g sales and costs data from previous years) and allow for factors such as Inflation and other relevant economic indicators
Zero based budgeting
requires all spending to be justified which means that many unnecessary costs can be eliminated
+ Cut costs
- Time consuming
-requires skill
Variance Analysis
difference between a figure budgeted and the actual figure achieved by the end of the budgetary period
Favourable variance
actual figure achieved is better than the budgeted figure
adverse variance
actual figure achieved is worse than the budgeted figure
difficulties of budgeting
Data must be up to date, accurate and free of bias
Skills required - > specialist staff
How to improve profitabily
Increase prices
Reduce one-off costs & interest (zero budgeting)
Reduce variable costs (purchase in bulk)
Reduce expenses (replace inefficient fixed assets)
Profit
the difference between revenue generated and business costs
Cash
measured by taking into account the full range of money flowing in and out of a business
Statement of Financial Position (Balance Sheet)
the financial structure of a business at a specific point in time, draw conclusions about the liquidity of the business
Ways to Improve Liquidity
Reduce the credit period offered to customers
Ask suppliers for an extended repayment period
Make use of Overdraft facilities or short-term loans
Sell off excess stock
Sell assets and lease fixed assets instead
Introduce new capital and reduce drawings from the business
Working capital
the money that a business has to fund its day to day activities
Internal Causes of Business Failure
Poor planning
Lack of leadership
Ineffective marketing
Cash flow problems
Lack of funds
External Causes of Business Failure
Economic failure
Changes in consumer tastes
Legal factors
Market challenges
Technological change
Methods of production
Job production
Flow production
Batch production
Cell production
Job production
Manufacturers produce one product at a time as ordered by the customer
+ High quality
+ motivated skilled workers
+ tailored
- slow
- labour costs high
Flow Production
Continuous manufacturing of standardised products, usually on a production line
+ low unit costs, economies of scale
+ rapid
+ automated, capital intensive
- not tailored
- expensive
Batch Production
Groups of the same product are produced as a batch
+ workers can specialise
+ takes place when previous batch runs out
- coordination
- products need to be stored
Cell Production
workers being organised into multi-skilled teams, with each team responsible for a particular part of the production process
+ efficient
+ motivation, team
- logistics
- dependant on workers
Factors that Influence Productivity
Employee motivation
Training staff
Business organisation
Investment in capital equipment
The Link Between Productivity & Competitiveness
Businesses that are competitive are likely to have the financial resources required to continue investing in improvements to their productivity
Factors that Influence Efficiency
Standardisation of the production process
Relocation or downsizing
Investment in capital equipment
Organisational restructuring
Outsourcing
Adoption of lean production techniques, Kaizen, just in time
Capital Intensive
uses machinery and technology in the production of goods/services
+ low cost, out put high
+ consistent and precise
+ run without breaks
- maintence
- breakdowsns
- lack of flexibility
Labour Intensive
uses physical labour in the production of goods/services
+ low cost
+ workers are creative
+ flexible
- unreliable, need breaks
- incentives
- training costs
Ways of Improving Capacity Utilisation
Increase usage
Outsourcing
Reduce capacity
Redeployment
Increase sales
Buffer Stocks
quantity of goods/raw materials kept in case of stock shortages
+ stability
+ avoid shortages
+ security
+ competitive
- cost
- obsolete
- ties up capital
Implications of too much Stock
Storage costs
Spoilage, stock shrinkage
Implications of too little Stock
Run out of stock
Demand may not be met
Just in time
raw materials are not stored onsite but ordered as required and delivered by suppliers ‘just in time’ for production
+ cost minimsation
+ cash flow improved
+ teamwork
- bulk buying increases costs, eos not possible
- respond to demand
- logistics
Ways to minimise waste
Storage
Planning
Sales tactics
Competitive Advantage from Lean Production
Less time required to produce
Fewer materials
Less labour
reduced space
low unit costs achieved
Lean Production
focuses on cutting out waste, whilst ensuring quality.
Quality Control
Inspecting the quality of output at the end of the production process
Quality Assurance
Inspecting the quality of production throughout the process
Quality Circles
Groups of workers meet regularly to solve quality problems
Inflation
general rise in prices in an economy over time
Problems Caused by Inflation
Increased costs
Higher repayments on loans
Consumers change spending habits
International competitiveness reduces
Uncertainty
Impact of appreciation to an exporting business
Sales likely to fall
May need to lower prices and accept lower profit margins
Impact of appreciation to an importing business
Costs likely to fall
Expand the pool of overseas suppliers
Impact of depreciation to an exporting business
Sales likely to rise
Increase selling prices
Impact of depreciation to an importing business
costs likely to rise
seek domestic suppliers
interest rate
reward offered for saving money and the percentage charged for borrowing money
What happens if interest rates rise
businesses will have to pay more on new or variable rate borrowing which will increase their costs
The Impact of an Increase in Taxation on revenue
Revenue will fall
increased tax will reduce disposable income of customers
increased VART will make products more expensive and want to switch
The Impact of an Increase in Taxation on costs
Operating costs will rise
Higher costs, charge higher price
May mean lower sales
The Impact of an Increase in Taxation on business decisions
Operations decisions
Spending and investment
avoid taxation
Changes in the business cycle
Expansion
Boom
Down turn
Low growth
Recsession
Slump/depression
Recovery
Legislation
laws and regulations passed by governments that require businesses and individuals to conduct their behaviour in a particular manner
The Effects on Businesses of Legislation
Consumer protection
Employee protection
Environmental protection
Competition policy
Health and Safety
