Theme 2.1 Raising Finance Flashcards
3 things that cash is needed for?
Setting up the business
Day-to-day trading
Growth
What happens if a business runs out of cash?
They will almost certainly fail
What is the main reason that businesses fail?
Cash flow problems
What is a cash flow forecast?
A forward looking statement that tries to predict cash inflows and outflows
3 uses of cash flow forecasts?
To identity the timing and significance of any shortfalls
To help secure finance from potential investors or the bank
To identify what method of finance is required e.g. overdraft. loan, trade credit
3 factors affecting cash flow?
Timing of cash flows - seasonal sales e.g. strawberry farm, Timings of payments in and out e.g. package holidays
Nature of the business - start up costs, time taken from outflow to inflow
Transaction types - sales and purchases cash or credit
3 causes of cash flow problems?
Credit sales - long payment terms
Seasonality and unexpected events
Internal management - stock control, relationship with suppliers
2 examples of cash flow problems?
Insufficient liquid cash funds meaning not able to meet short term debts - overdraft needed
Limited cash may result in missed opportunities
How can a business slow down cash outflows to avoid cash flow problems?
Negotiating longer payment terms from suppliers
3 ways to improve cash flow?
Increase volume of inflows
Decrease volume of outflows
Slowing down the timing of outflows
What is owners capital?
Capital/Finance put into the business by the owner
3 advantages of owners capital as a source of finance?
No interest to pay
Quick and easy
Can add as and when needed
3 drawbacks of owners capital?
Owner can get into significant debts if using credit card
Could place a strain on family and relationships
Owner capital could be earning return somewhere else
What is retained profit?
Profit that is reinvested back into the company
3 advantages of retained profit?
No interest
Flexibility
Can be substantial
A drawback of retained profit?
A drain of finance if profit isn’t made
3 advantages of sale of assets as a source of finance?
possibility of a large amount of money being raised
No interest
No effect on the ownership, just replacing the value of an asset
3 drawbacks of sale of assets?
May take time to sell the assets
Will only sell for a fraction of its original price
The business losers the use of the asset in the future
3 advantages of family and friends as an external source of finance?
More likely to have low or zero interest
Likely to be supportive
Can get finance quickly
3 drawbacks of family and friends as an external source of finance?
usually only a small amount of capital
Relationship damage if money is not repaid
Family and friends may not want to be involved in the business
what is peer to peer funding?
Alone finance where online platforms match investors who are prepared to make themselves available to a business who are in need of finance e.g. Zopa, Funding circle
3 advantages of peer to peer funding as an external source of finance?
Usually lower rate of interest
Access accessible and quick
No loss of business control
3 drawbacks of peer to peer funding as an external source of finance?
if failed to pay the loan, assets may be taken away
Arrangement fees for these websites
Interest and repayment
what is a business angel as an external source of finance?
An individual investor who provides finance for a business usually in exchange for shares and/or a loan and also provide extra support and advice
3 advantages of a business angel as a source of finance?
can be significant amount of investment
They provide the skills, expertise, contacts etc
Can lead to further investment
three drawbacks of business angels as a source of finance?
Loss of control due to having to sell a significant stake
They usually want to have quite a close involvement in decision-making
Not easy to find the right business
what is crowd funding as an external source of finance?
Using funding, project or venture to raise large amounts of money
three advantages of crowd funding as an external source of finance?
businesses in full control
Can also generate publicity
Don’t have to give away shares
three drawbacks of crowd funding as an external source of finance?
crowd funding platforms take fees
Lots of competition from other businesses doing the same
No guarantee of meeting required finance target needed
