Theme 2 - 2.1

Question 1

What are the internal sources of finance?

Answer 1

Retained profit - money from within the business.
Sales of assets
Owner’s capital - money from the owners.

Question 2

What are the benefits and drawbacks for retained profit?

Answer 2

Benefit - free source of finance that does not have interest.
Drawbacks - shareholders may wish to receive it back in forms of dividends.

Question 3

What are the benefits and drawback of sales of assets?

Answer 3

Benefits - frees up value in unwanted assets to be invested in other areas of the business.
Drawbacks - business loses the benefit of the assets e.g no longer owning a delivery vehicle.

Question 4

What are the benefits and drawbacks of owners capital?

Answer 4

Benefit - free source of finance that doesn’t have interest.
Drawbacks - owners could lose their personal investment.

Question 5

What are the external sources of finance?

Answer 5

Overdrafts
Leasing
Trade credit
Grants
Bank loans
Crowd funding
Venture and share capital

Question 6

What are the benefits and drawback of overdrafts?

Answer 6

Benefit - flexible way to find working capital(acts as buffer for day to day payments)
Drawback - banks may ask for repayments at any time and interest rates are high.

Question 7

What are the benefits and drawback of trade credit?

Answer 7

Benefit - suitable for purchasing raw materials from suppliers as it gives the business and opportunity to generate.
Drawback - delay in payments can damage relationships with suppliers.

Question 8

What are the benefits and drawbacks of bank loans?

Answer 8

Benefit - can be negotiated to meet business requirements.
Drawback - business has to pay interest and may have to offer collateral to secure it.

Question 9

What are the benefits and drawbacks of grants?

Answer 9

Benefit - government schemes can be available for small business.
Drawback - generally given for social, environmental or economic benefits.

Question 10

What are the benefit and drawbacks of leasing?

Answer 10

Benefit - assets can be acquired without large capital spending to acquired them.
Drawbacks - long term leased assets is more expensive then purchasing it outright.

Question 11

What are the benefit and drawbacks of venture capital?

Answer 11

Benefit - can bring expertise into the business.
Drawback - owners may not want input from elsewhere into running of the business.

Question 12

What are the benefits and drawback of share capital?

Answer 12

Benefit - can access large sums of capital and no interest.
Drawback - only available to Ltd and Public lc.

Question 13

What are the benefits and drawback of crowd funding?

Answer 13

Benefit - cheap and easy to set up.
Drawback - not suitable for raising large sums of money.

Question 14

What is limited liability?

Answer 14

Limited liability is when the shareholders is not responsible legally for the business.

Question 15

What business have limited liability?

Answer 15

Public and Private limited companies.

Question 16

What business have unlimited liability?

Answer 16

Sole trader and partnerships.

Question 17

What are the implications of unlimited liability?

Answer 17

The owners of unlimited liability business are exposed to financial obligations of the business. They could lose personal assets. This may be due to unlawful acts and financial.

Question 18

What are the implications of limited liability?

Answer 18

Business with limited liability are owned by shareholders. A limited liability is a separated legal entity the personal assets of shareholders are protected.

Question 19

What is the role of a shareholder?

Answer 19

Shareholders in a limited liability company have a significant impact on decision making in a business.

Question 20

What are the sources of finance for limited liability?

Answer 20

Share capital
Retained profit
Bank loans
Venture capital
Business angels

Question 21

What are the sources of finance for unlimited liability?

Answer 21

Personal savings
Retained profit
Mortgages
Grants
Peer-to-peer lending
Unsecured bank loans
Crowd funding
Bank overrafts

Question 22

What are the factors of a business plan?

Answer 22

Executive summary
Business ideas and opportunity
Aims and objectives
Market research
Financial forecasts
Sources of finance
Premises and equipment
Personnel
Buying and production.

Question 23

What is executive summary of a business plan?

Answer 23

One page overview of the purpose and the opportunity.

Question 24

What is a business idea and opportunity of a business plan?

Answer 24

Outline the business ideas and concept so stakeholders can understand the owners business.

Question 25

What is aims and objectives of a business plan?

Answer 25

Aims and objectives should be SMART aspects (specific, measurable, achievable, realistic and time related). Owners measure success against those targets.

Question 26

What is market research of a business plan?

Answer 26

Market research into the target markets, the markets and other competitors.

Question 27

What is financial forecast of a business plan?

Answer 27

Include forecast on costs, revenue,profit and cash flow (cash flow forecast budgets and break-even analysis).

Question 28

What is source of finances in a business plan?

Answer 28

Plan on how the business will be financed and how any borrowing will be repaid.

Question 29

What is premises and equipment in a bsuiness plan?

Answer 29

Location and rationale of the business. How this will be financed and any other equipment the business will need.

Question 30

What is personnel in a business plan?

Answer 30

Organisation chart outlining the personnel in the business, their areas of responsibility, skill and qualifications.

Question 31

What is buying and production in a business plan?

Answer 31

Details of how the product will be produced including details of suppliers.

Question 32

Who uses a business plan?

Answer 32

Owners
Lenders
Investors
Partners and employees

Question 33

Why do they use a business plan?

Answer 33

Owners - As a guide and working documents.
Lenders - Banks as they want to investigate the likely success and risk of lending to a new business.
Investors - To asset the risk and reward of investing in the business(ltd and plc)
Partners and employees - Anyone wanting to work in/with the business.

Question 34

What are the causes of cash flow problems?

Answer 34

Overtrading
Allowing too much trade credit to customers
Poor credit control
Inaccurate cash flow management
Unforeseen costs

Question 35

What speeds up inflows?

Answer 35

Reduce trade credit given to customers.
Inject fresh capital into the business.
Sell off stock at a discounted price to free up cash.
Incentivise early repayment by giving customers a discount for paying early.

Question 36

What slowest down outflows?

Answer 36

Delay payments to suppliers.
Increase trade credit agreement with suppliers.
Cut costs, like finding cheaper alternatives or postponing spending in areas such as training and advertising.

Question 37

What are the benefits of cash flow forecasting?

Answer 37

Support the budgeting process.
Identify any potential cash flow crisis.
To support an application for lending.

Question 38

What are the limitations of cash flow forecasting?

Answer 38

Some figures will be based on estimates.
Variable are constantly changing and cash flow forecast have to be updated for them to be valid.
Cash flow forecast focuses on one variable - cash. They do not consider other important variables, like profitability or productivity.