Theme 2 Flashcards
List three method of external sources of finance
family and friends, bank loans and overdrafts, venture capitalists. and business angels, new partners, share issue, trade credit, leasing, hire purchase, and government grants
What is meant by peer to peer funding
a financial process that allows individuals to borrow money from other individuals or companies through an online platform
What is crowd finding
Involves a number of people investing small amounts into a business usually online.
how can businesses use trade credit as a method of finance?
Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date. Trade credit can be a good way for businesses to free up cash flow and finance short-term growth.
What is finance
Management of investment needed to open or run and grow a business
The reasons to raise finance
Pay debts, help business apply for a long term loan, start up business may apply for loan or ask friends and family to invest.
Owners capital
Amount the owner has invested in is known as owners capital.
Another name for Owners capital?
Owners equity
When is owners capital appropriate
When sole traders and partnerships would be the two business forms so they own the business and would use their money so owners capital to expand and to grow.
What is retained profit
After trading for a few years businesses will have made some profit which they can then reinvest into the business to help it grow.
If a business in first year if training why might it not have any retained profit
Not made any retained profit in the first year
Advantage of retained profit
No interest to pay
Disadvantage of retained profit
Once used it’s gone so an internal resource of finance.
When is retained profit appropriate
for funding an expansion or paying dividends to shareholders at a later date.
What is sales of assets
A business can raise finance by selling items that the. Can already own.
When is sales of assets appropriate
When a business growing might need to raise cash fast to be able to continue to trade.
Advantage of selling assets
you will get funds and you can pay off part of or all your debts.
Disadvantage of selling assets
liabilities are likely to stay with the seller.
What is Owners capital
The personal savings of the business’s owners.
What is retained profit
The profit that the business has made so far through trading that can be reinvested into the business.
What is external finance
the investment for the business that is obtained from; banks, investors and lenders outside of the business.
What is source of finance
This is where the finance has come from
What is method of finance
This is the use of finance or what use it would be used for
The sources of finance
Family friends banks peer to peer funding business angels crowd funding other businesses
Family friends
Plc raise finance by selling shares to friends and family.
How to banks lend finance
Banks lend loan to a business to start up or when a business wants to grow and expand. Banks Amy provide an overdraft to businesses to manage cash flow problems.
Advantage of banks sourcing finance
Banks lend to business without % of ownership. Banks let business owners run the business without interfering.
Disadvantage of banks sourcing money
Bank loans can be expensive compared to other sources of finance and interest must be paid back on time. May be hard for a new business owner to obtain a loan as they have no historical sales data to show the bank. The owner may need to use their own assets as security for the loan.
Peer to peer funding advantage
Can get access to funding within a week once approved can apply online
Disadvantage of power to peer funding
Private business loans so money for the loan comes from several investors or small businesses.not enough individuals wanting to invest means ur not able to acquire the amount you need.
Business angels
Investor offers to lend their personal disposable finance but in order would take shares in the business in return for providing finance.
Advantage of business angel being source of finance
Free to make investment decisions quickly and owner gets free access to investor sector knowledge and contacts,
Disadvantage of business angels being the source of finance
Not investment below 10,000 or more than 500,000 and also owner needs to give up the share of the business.
What is crowdfunding?
Crowd funding is where a large number of people fund y project over the Internet making small investments each.
Advantage of crowd funding to source finance
Good alternatives to loan for small business owners, can be obtained without paying upfront fees. Can generate funds and also promote the business at the same time.
Disadvantage of crowd funding to source finance
Need to show case the idea and present and attract investors
The methods of finance
Loans share capital venture capital overdrafts leasing trade credit grants
Loans advantage
Quick to set up and will not ask for % in business or get involved in the running of the business.
Loans disadvantage
Bank charge interest not flexible need security or collateral.
Share capital
Amount of finance raised by selling shares to share holders.
Share capital advantage
Investors prepared to provide extra fund cost effective way to raise finance than a loan.
Share capital disadvantage
Neeed a lot of back ground information can be expensive and slow process to organise.
Venture capital
Form of investment at early stage for business for potential growth.
Venture capital advantage
Useful if business trynna raise large amount of money In short time. Can create more networks and increase revenue streams.
Venture capital disadvantage
Venture capital firms typically want 20-30% stake in the business.
Overdrafts
Short term of lending money for a short time.
Overdraft advantage
Quick fix for when the business is in difficult month of trading. Can be instantly arranged
Disadvantage of overdraft
If business goes over the overdraft amount unauthorised and the business charged heavily, can be expensive source of finance
Trade credit
You purchase a good but the supplier gives u a number of days to pay it back.
Advantage of trade credit
Business can sell the good before the stock needs to be paid for and there is no interest to be paid back. The
Disadvantage of trade deficit
Not all stock is available to buy if business not paid back in time there is a risk of being refused further credit,
Grants
Giver and provide financial help to a business
Advantage of grants
Business don’t need to pay back them no interests to pay back
Disadvantage of grants
Need a grant that fits their project. Lots of competition to get the grants business needs to match to adjust to the funds.
What is limited liability
Business owner is responsible for the debt up to the value he invested
What is unlimited liability
Business owner is responsible for the debt and must sell own possession to find money.
Implications of limited liability
The owner and the business have separate legal identities so can sue or be sued separately
* The owner and the business can own separate assets
* The business can now sell parts of the business called
shares to shareholders
Implications of unlimited liability
Sole trader or partners may have to sell their own assets (like a family car) to pay the debts of the business
* They are unable to sell shares in the business
* However they may be able to secure finance due to the fact that they are demonstrating to a bank that they are prepared to risk their own finances on the business
Finances for unlimited liability
Business loan
* Private investors
* Credit cards
* Crowd funding
* Trade credit
* Owners savings (personal)
* Overdraft
* Retained profit
* Mortgage
* Grants (have to prove they qualify/long process)
Finance for limited. Liability business
Retained profit
* Sale of assets
* Debentures (loan on a specific item like a machine, asset cannot be sold without debenture holders permission)
* Ordinary and preference shares
* Hire purchase and leasing
* Trade credit
* Government grants
* Venture capital
* Share Capital
* Other sources (O/D)
What is finance plan
cash flow forecast, balance sheet, profit forecast sources of finance Start up costs
Marketing plan
pricing promotion competition market research distribution
What is work force
no of staff recruitment training hours worked parttime ro ful time
What is production plan
production materials stock control quality assurance machinery used
Cash flow forecast
Prediction of cash coming in and going out if a business most in a form of a table.
Inflow
Money coming into a business also knows as recepits
Insolvent
When. A business can no longer pay its debts or staff wages simply because they have no cash.
Purpose of sales forecasting
Sales forecasting allows the business to decide whether it needs to increase productive capacity and employ more workers in the future. Sales forecasting also allows the business to work out its cash flow forecast as it helps to estimate the cash inflows of the business. In addition to this, sales forecasting can help the business to identify when a business should start its promotional activity
Use of limitations and cash flow
Identify shortages in cash – A cash flow forecast allows the business to identify months in which they may have a shortage of cash. Therefore, it gives the business a chance to fix this.
Comparison to financial objectives – Businesses are able to compare the cash flow forecast to the financial objectives that they set out in their business plan.
Helps to get a loan – Most investors will want to see a cash flow forecast before they invest in the business. This is due to the fact that it helps them to know whether or not the business will be able to pay back the loan with interest
Uses of limitations and cash flow drawbacks
Bias – The business may overestimate their predicted cash inflows and underestimate their cash outflows in order to make the business seem better/more viable on paper then it actually is. This may be in an attempt to persuade potential investors to invest in the business.
Prediction – The cash-flow forecast is only a prediction of the cash inflows and outflows of a business. Therefore, there is likely to be some margin of error in the predictions. Furthermore, it cannot take into account unforeseen events such as extreme weather affecting the supplies.
Time consuming – The cash-flow forecasts can take a lot of time to make, especially if the size of the business is relatively large. Furthermore, it will need to be updated on a regular basis which can be very time consuming.
Mistakes – A cash-flow forecast is a relatively difficult document to make. This is especially if the owner is inexperienced. As a result of this, the document is prone to mistakes which may result in a reduction in the accuracy of the cash-flow forecast.
Accuracy – As the time period in which the cash-flow forecast is predicting, the accuracy of it is likely to decrease. This is due to the fact that the uncertainty of what may happen to the business increases as time goes on.
Sales forecasting
This is the process of estimating the future sales of the business
Factors affecting sales forecast
Consumer trends ,
Economics variables – Demand for good/services can be affected by a range of economics variables such as interest rates and exchange rates., Actions of competitors – Competitors may make actions that cannot be anticipated that may have a big impact on businesses sales forecasts.
Difficulty of sales forecasting
Dynamik Market , Start up business income and price elastic demand.
Sales volume
The total number of goods/services that are sold by a business
Sales revenue
The total amount of money earned from the sale of goods/services
Fixed costs
Costs that do not change with the level of business output e.g. rent and salaries
Variable cost
Costs that change with the level of business output
Calculation of sales volume and sales revenue
Sales revenue = Price x Quantity
Contribution
The profit made on individual products.
Contribution formula
Selling price – Variable cost per unit.
Break even
The point at which the business is making neither a profit nor a loss.
Break even formula
Total fixed costs + Total variable costs = Total revenue
Limitations of break even analysis
Break-even analysis assumes that every item produced/bought is sold
2. In a service business, the prices may differ
3. Costs may increase
4. It’s only a best guess of what may happen
5. In some businesses, the fixed costs are shared across a portfolio of products. For example, a bakery may produce crumpets, bread, rolls and wraps in the same factory. All these products share fixed costs.
Budget
An agreed spending limit within the business
Profit
the financial gain of a business through trading and can be found be deducting expenditure from income
Gross profit formula
GP = SR – Cost of sales
Operating profit formula
OP = GP - expenses
Net profit formula
NP = OP - interest
How the statement of comprehensive income helps to measure profitability
The statement of comprehensive income helps managers, owners and investors to know how the business is doing by measuring the profitability
Profit margin
The profit margin calculations compare profits to sales and show how well the business is handling its financEs
Gross profit margin formula
Gp/sales revenue x100
Operating profit margin formula
Operating profit/sales revenue x100
Net profit margin formula
Net profit /sales revenue x 100
Ways to improve profitability – increase revenue
- If profit is TR-TC then it makes sense to say that one of the ways to improve profitability is to increase revenue
- This can be done in a number of ways;
A. Have a sale, reduce the prices
B. Advertise more e.g. Yorkshire tea – see the advert on the right and the other advert HERE
C. Promote the products more
