Unit 5 Flashcards
internal and external sources of finance
Internal:
* retained profit
* debt factoring
* owner capital
* sale of assets
External:
* bank overdraft
* share capital
* bank loan
* venture capital
* mortages/debentures
* crowd funding
what is retained profit and its pros and cons
sources of finance
net profit reinvested back into the business instead of being returned to the owners
pros:
* free source of finance that doesnt occur interest
cons:
* shareholders want dividends
what is debt factoring and its pros and cons
sources of finance
where a firm sells on its debt to a third party
pros:
* business recieve cash immediately
cons:
* customer should be aware if debts are factored and lose faith in the company
what is owners capital and its pros and cons
sources of finance
personal savings used to start and expand
pros:
* free source of finance that doesnt have interest
cons:
* owners could lose their personal investment
what is a bank overdraft and whats its pros and cons
sources of finance
when a bank allows a firm to take out more money than is in its bank account
pros:
* flexible way to fund working capital
* acts as buffer for day to day expenses
cons:
* bank may ask for repayment at any time with high interest rates
what is a bank loan and its pros and cons
sources of finance
borrowing money from the bank
pros:
* negotiated to meet business requirements
cons:
* business have to pay interest
what is share capital and its pros and cons
sources of finance
an owner’s investment into a limited company to become a shareholder
pros:
* can access very large amounts of capital and no interest
cons:
* only available to ltd and plc
what is venture capital and its pros and cons
sources of finance
capital invested at an early stage by individual or company in return for equity in the business
pros:
* bring expertise into business
cons:
* owner may not want input from elsewhere into running the business
what are mortages/debentures and its pros and cons
sources of finance
special type of loan made for purchasing property. a debenture is a loan made to a business secured against its assets
pros:
* ideal for long term investment
cons:
* large amount of interest can be charged over a lifetime
what is crowd funding and its pros and cons
sources of finance
raising monetary contributions from a large number of people, today often performed via crowdfunding websites
pros:
* cheap and easy to set-up
cons:
* not suitable for raising large amounts of money
what are the short and long term sources of finance
Short term:
- overdraft
- debt factoring
Long term:
- retained profit
- sales of assets
- owners capital
- bank loans
- mortgages and debentures
- venture capital
- share capital
- crowdfunding
key benefits of setting financial objectives
- providing focus for entire business
- measure of success of failure for the business
- reduced risk of business failure
- help coordinate different business functions
- provide target to help make investment decisions
- indicate to stakeholders
what are the 6 financial objectives
1. revenue objectives - revenie growth, market share, sales maximisation
2. profit objectives - rate of profitability, profit maximisation, exceed profit margin
3. cash flow objectives - maximum level of debt, cash flow to profit, amount of cash tied up in working capital
4. return on investment - level of capital expenditure, % return
5. capital spending objectives - gearing ratio, debt/equity ratio
6. cost minimisation - control fixed costs of the business
internal influences on financial objectives
- business ownership - nature of ownership has significant impact, ventrue capital investor have different approach to a long standing family ownership
- size and status of business - smaller tend to focus on survival, breakeven and cashflow. Bigger focus on growing sales and profit
- other funtional objectives - almost every other fucntion has a financial dimension
external influences on financial objectives
- economic condition - downturn many businesses chnage in favour of cost minimisation and maximising cash flow. Significant changes in interest and exchange rates also have potential to threaten the achievement of financial targets
- competitors - competitive environment directly affects the achieveability of financial objectives
- social and political change - often indirect impact, like legislation on environmental emmissions or waste disposal force business to increase investment in some areas
8 methods to improve cash flow
- discounting prices
- reduce purchases
- negotiate more credit
- delay payment of bills
- credit control - chase debtors
- negotiate additional finance
- factor debts
- sell assets
result and drawbacks of discounting prices
methods to improve cash flow
result:
* less revenue than expected
drawback:
* less revenue to cover costs so have to reduce costs
result and drawback of reduced pruchases
methods to improve cash flow
result:
* costs are going to be lower than initially expected so have to adjust cash flow forecast
drawback:
* less products to sell so less revenue
result and drawback of negotiating more credit
methods to improve cash flow
result:
* more cash available at certain banks
drawback:
* have more debt so might not be able to pay off
result and drawback of delay payment of bills
methods to improve cash flow
reuslt:
* costs are less in certain months
drawback:
* much higher costs in some months
result and drawback of credit control
methods to improve cash flow
result:
* more income in certain months but lose revenue in months you havent paid
drawbacks:
* less predictable distribution of revenue disrupting cashflow
result and drawback of negotiating additional finance
methods to improve cash flow
result:
* more money to spend
drawback:
* return the investment or dividends to shareholders
result and drawback of factor debt
methods to improve cash flow
factor debt = sell debt to third party
result:
* costs will increase when pay more debts that expected
drawback:
* higher payments in certain months
result and drawback of selling assets
methods to improve cash flow
result:
* raise revnue
drawback:
* no longer have cash or assets so cash flow forecast change
