Theme 2.1: Raising Finance Flashcards
Share Capital
Comes from the sale of shares
Venture Capitalists
People who invest in the early stages of a business on the hope that the value of the business goes up so they can sell the shares for a profit
Leasing
Regular monthly payment given to an outside business in exchange for the use of an asset such as a machine
Trade Credit
Loans in the form of assets and raw materials that are paid for a later date
Grants
A sum of money usually given by the government to a business in exchange for them creating jobs and an economy in a certain area e.g areas with low employment may have local businesses receive grants to expand their business and strengthen the local economy
Sole Trader characteristics
. Single person runs the business
. Unlimited liability
. Legally liable for all debts of the business
Partnership characterisitcs
. 2 - 20 people
. Unlimited liability
. Legally liable for all debts of the business
Limited Companies
Companies with limited liability have all the loss associated with them limited to the business and not the owners themselves
Private Limited Companies (LTD) characteristics
. Has up to 50 shareholders
. Shares can only be sold with consent of all other shareholders, usually sold to family and friends.
. Not on the stock exchange
. Small to medium sized enterprises but sometimes large
Public Limited Companies (PLC) characteristics
. Shares can be bought by everyone
. Sold to the general public through the stock exchange
. Whoever owns the most shares is the owner, usually 50.1%
. Accounts available to the public
. Owner looses some control
. Dividends given to shareholders
Unlimited Liability
All debts accumulated by the business are liable to be payed by the owners of the business even if this means selling personal assets such as houses or vehicles. Businesses with limited are sole traders and partnerships.
Limited Liability
The liability of the business is limited to the business itself and the owners or shareholders personal assets are protected as the business is a separate legal entity. Used by public and private limited companies.
Insolvency
When a company cannot pay its debts because it’s making a loss.
Liquidation
When a business is clearly insolvent (can’t pay debts) so has to close down. It’s assets or part of the company is usually sold so that they are able to pay of at least some of their debts
Share Capital
Money gained from the selling of shares used by limited companies but not sole traders and partnerships.
Business plan
A document that sets out what the business is, what it does, what it wants to achieve and how it is going to achieve this usually used in order to secure finance through investors such as the bank. Basically a blue print used to plan a businesses development.
What are some of the contents of a business plan?
. Summary - Brief overview of the business also know as the executive summary
. List of products or services
. The market and its competitors
. Marketing plan
. Organisational details I.e Human Resources
. Production plan
. Past financial data
. Future financial forecast (THE MOST IMPORTANT PART) cash forecast, break even analysis and the statement of comprehensive income
. Existing sources of finance
Cash flow forecast
A statement of the expected cash coming in and out of a business taking into account the costs going out, sales going in and so on.
Net Cash Flow
The difference between cash inflows and outflows e.g if 10,000 is coming in and 6,500 coming out the net cash flow is 3,500
Opening balance
Money at the start of the month
Total cash inflow
Total amount of money coming into the business over the month
Total cash outflow
Total amount of money coming out of the business in a month
Closing balance
Money at the end of a month, opening balance for the next month
Uses of a cash flow forecast
. To gain finance off the bank
. To predict when is best for expansion
. To look at when profits are low and figure out ways to prepare for that
. To estimate future trends in the amount of money they have
Limitations of cash flow
. Only an estimate / prediction
. Unforeseen circumstances cannot be planned for
. Costs of materials, production and so on change over time meaning it’s accuracy is limited the older it gets
What is a Creditor?
Someone who is owed money
What is a debtor?
Someone who owes money
What is Insolvency?
Occurs when a company is unable to pay its debts because it is making a loss
What is Liquidation?
Occurs when a business is clearly insolvent and has to close down. Its assets or part of the company are sometimes sold to raise cash to pay at least some of the debts
What do businesses need finance for?
Start Up Costs
Depreciation
Day to Day expenses
Expansion
