theme 2 (in papers 2 & 3) Flashcards
managing business activity
what are some internal sources of finance?
- owners capital
- retained profit
- sale of assets
What are the benefits to using internal sources of finance?
- Internal finance is often free (e.g. it does not involve the payment of interest or charges)
- It does not involve third parties who may want to influence business decisions
- Internal finance can usually be organised very quickly and without significant paperwork
- Businesses that may fail credit checks (necessary for a bank loan) can access internal finance sources more easily
what are the drawbacks of using an internal source of finance?
- opportunity cost, once retained profit has been used, it is not available for other purposes
- may not be sufficient to meet the needs of the business
what are some external sources of finance?
- loans
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
what is limited liability?
- Limited liability means that the business owner or owners are only responsible for business debts up to the value of their financial investment in the business.
- This means that a creditor can only take assets or finances belonging to the company.
what is unlimited liability?
- is when an owners personal assets are at risk.
- This means that if the business were to fail and go bankrupt, the owner’s personal assets would be sold in order to try and recover the debt.
what are the implications of unlimited liability?
- There is no legal distinction between owners with unlimited liability and the business
- As a result, these business owners may have to use their own personal assets to pay debts or legal fees
- E.g. a sole proprietor may need to sell their home to pay creditors if their business fails.
what are the implications of limited liability?
- Companies are incorporated and owners are considered a separate legal entity to the business.
- This means that if a company fails, the owners would lose their investment but would not have to use their assets to meet additional debts or legal fees.
what does a business plan do?
- helps finance providers assess te business model.
- provides structure assesment of the opportunities and risks.
- encourages analysis of the competitive position of the business and the market.
- helps determine the amount of finance required.
why is cash flow forecasting important?
- cash flow problems are why most businesses fail.
- cash is king, its the lifeblood of a business.
- cash is limited so it needs to be managed carefully.
what are the benefits of cash flow forecasting?
- advanced warning of cash shortages.
- makes sure that the business can afford to pay suppliers and employees.
- spot problems with customer payments.
- provide reassurance to investors and lenders that the business is being managed properly.
how do you work out net cash flow?
cash inflow - cash outflow
how do you work out closing and opening balance?
opening = amount business starts with each month.
closing = opening balance + net cash flow
- a negative closing balance suggests business needs bank overdraft or additional financing.
define cash flow forecast.
- an analysis of estimated cash inflows and cash outflows over a future period and the resulting impact on cash balance.
what are the limitations of a cash flow forecast?
- theres some uncertainty.
- sales could prove lower than expected.
- customers pay not pay on time.
- costs pay proof higher than expected.
