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Raising Finance 2.1

Theme 2

Define Internal Finance Internal i.e. from within the business
Explain External Finance External i.e. from outside of the business
Describe Owners Capital This is when an entrepreneur invests their own money in a business e.g. from personal savings.
Define Retained Profit Profit kept within a business from profit for the year to help finance future activities
Define Current Assets and give an examples Items owned that will change in value in the short run (within one year) e.g. Stock is being bought and sold
Explain Sale of Assets Refers more to the sale of a long term or fixed assets. These assets can be sold in order to get an immediate injection of cash in to a business and thereby provide finance.
Describe Fixed Assets Assets that stay in the business for more than a year e.g. machinery and vehicles.
Explain Family and Friends as a source of finance 1. Investment from people known to the entrepreneur 2. Amount may be limited 3. Repayment terms and conditions may be flexible 4.May place pressure on relationships
State two problems of Sale of Assets 1. May be expensive in the long run if need to lease the asset back 2. Loss of use of the asset and future value 3.Is only a one off option
Give two Sale of Assets benefits 1.No interest charges or repayments 2. May be turning an obsolete asset into finance 3.Immediate lump sum cash injection
Give two Retained Profit drawbacks 1. Only an option if sufficient retained profit exists within the business 2. May cause shareholder dissatisfaction if this is at the expense of dividend payments
State two Retained Profit benefits 1. Avoids interest repayments 2. Does not dilute the business ownership
What are two benefits of Owners Capital? 1. Do not have to repay 2. No interest charges 3. Owner(s) maintain control 4. Risking own savings can be motivational 5. Do not have to go through any lengthy application procedures
State three drawbacks of Owners Capital? 1. May only be limited amounts available 2. Threat to personal finances and family
Define a Bank Financial institutions that are licenced to take deposits, pay interest, make loans and act as an intermediary in financial transactions, as well as provide other financial services to their customers
Explain Business Angels Wealthy individuals make personal investments into start-up businesses in return for a share of the business i.e. percentage equity
Describe Crowdfunding Involves raising finance from a large number of people each investing different, often small, amounts of money
Describe Peer 2 Peer Lending The practise of an individual lending to other individuals (peers) with whom there is no relationship or contact
Explain Loans 1. A set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time 2. May be secured against an asset and if there is a default on repayments the asset can be taken
Describe two things to do with Share Capital 1. Finance raised from the sale of shares 2.This is a form of equity capital i.e. the shareholder becomes a part owner of the business 3. Shareholders will be rewarded for their investment by the payment of dividends
Define Venture Capitalists 1. Investment from an established business into another business in return for a percentage equity in the business 2.Will normally look for a high rate of return in a specific time period
Define an Overdraft 1. The facility to overspend on a current account up to an agreed sum 2. The business in effect can withdraw money from the account that is not there meaning they go overdrawn or in the red
Define Leasing 1. Allows a business to benefit from the use of an asset without owning it or buying it outright 2. The business pays a set amount in instalments to lease the asset for a pre determined period of time
What is meant by Trade Credit? 1. Paying suppliers a period of time after the goods or services have been received 2. In effect the supplier is providing the business with finance for the period of the trade credit e.g. 30 days
Define Grants Fixed amounts of capital provided to business by the government or other organisations to fund specific projects
State three benefits of Loans 1. Quick and easy to secure 2. Fixed interest rates allow firms to budget 3.Improved cash flow 4. The borrower retains ownership of the company
Give two drawbacks of Loans 1. Interest must be paid regardless of financial performance 2. A firm that is highly geared may be seen as high risk 3. A firm normally provides security known as collateral 5.Can be charged a penalty for early payment
Give two benefits of Share Capital 1. Only need to pay dividends if a profit is being made and the amount of dividend is not fixed 2.Possible to raise large amounts of finance 3.No interest repayments
State two drawbacks of Share Capital . Loss of ownership as shareholders are part owners 2.Potential risk of loss of control for a Plc with a threat of hostile takeovers 3. Complex and costly process of issuing shares, especially for a Plc
Give three benefits of Venture Capital 1. Potential for large sums of money for investment 2. Expertise to help the business 3.Makes it easier to attract other sources of finance 4.Provides the required capital for expansion
State three drawbacks of Venture Capital 1.Expert financial projections are likely to be required 2. Initially expensive for the firm e.g. legal and accounting fees 3. Partial loss of ownership Risk of conflict or perceived interference
List two benefits of Overdrafts 1. Only borrowed when required allowing flexibility 2. Only pay for the money borrowed 3. Quick and easy to arrange 4. No charges for paying off the overdraft
Explain two drawbacks of an Overdraft 1. The bank can call it in at any time 2. Only available from a current bank account 3. Interest payments tend to be variable making it more difficult to budget 4. Banks may secure the overdraft against the business’ assets
What is limited Liability? An investor’s liability/financial commitment is limited to the total amount invested or promised in share capital
What is unlimited liability? The owners of a business are responsible for the total amount of debt of the business The owner may lose their personal belongings, e.g. home and cars, if the value of these is needed to cover the debts of the business
What are examples of cash inflows? Cash sales Payments from debtors Owners’ capital invested Sale of assets Bank loan
What are examples of cash outflows? Purchasing stock Paying wages Paying debts – bank loans, creditors Purchasing assets
What is a cash flow forecast? A cash flow forecast is a forward looking statement that tries to predict cash inflows and outflows in the future
What is a cash flow statement? A cash flow statement is a backward looking statement that shows what happened to cash inflows and outflows
State three causes of cash flow problems 1.Credit sales - Long payment terms 2.Overtrading - Increased capital expenditure 3.Internal management - Poor Stock control 4.Seasonality 5. Unexpected events
Why it is important for a business to have sufficient cash ? Businesses need to have sufficient cash to meet day to day finances e.g. Buying inventory/Paying wages and Utility bills Insufficient liquid cash funds may mean an inability to meet short term debts e.g. Bank overdraft
Why is it difficult for a new business to forecast cash inflow? What is expertise of entrepreneur? How have estimates been calculated? Is it a new product or service? How might competitors react?
Why is it difficult to forecast cash outflows? Payment of variable costs are difficult to forecast . Payment terms can make it difficult to forecast outflows e.g. What if a supplier changes terms and wants payment sooner or a lender demands their money back?
Why do businesses use cash flow forecasts? To identify the timing and significance of any potential shortfalls To identify possible corrective action To help secure finance from potential investors or the bank To provide a guide against which to measure actual cash flow
How can cash inflow be improved? Overdraft/Short term loan/debt factoring/Better credit control/Cash payments from customers
How can cash outflow be improved? Stock management (reduce money tied up in stock)/Delaying payments to suppliers/Reducing overhead spending
What are the issues of trying to improve cash flow? Damage to the firm’s reputation Potential loss of customers if payment terms affect competitiveness Administrative costs and time Loss of discounts or need to offer discounts
Give four benefits of cash flow forecasts Identify potential problems before they arise Control spending Help to raise finance Negotiate trade credit Plan to meet day to day expenses Where necessary take corrective action Set cash flow targets
State two drawbacks of cash flow forecasts Needs to be monitored and reviewed Based on forecasts and therefore maybe (is likely to be) inaccurate Does not ensure survival May lose customers if too concerned about the timings of cash inflows
What does a business plan consist of? The executive summary - a synopsis of the entire plan The business products or services The market e.g. size, share, competitors The marketing strategy The skills of the entrepreneur and other key employees Operations Financial forecasts
What is the purpose of a business plan? To secure external funding e.g. banks,venture capitalists, business angels Ensure that the firm develops a healthy financial structure Help identify problem areas the business might face As a focus to set targets and check on the firms development
When raising finance what is the benefit of a business plan? When raising finance a business plan acts as a sales document/brochure for the business telling potential investors how and why the business will succeed and how and why it will be able to repay loans or reward equity investors e.g. pay dividends
What is the benefit of a business plan to an investor? Shows that the entrepreneur is well organised and has logically worked through all the issues related to the start-up Gives objectives that the entrepreneur will work towards Provide detailed financial forecasts including: Cash - flow forecasts/Budgets
Distinguish between Capital and Revenue Expenditure Capital expenditure is spending on fixed assets such as equipment, buildings, IT equipment and vehicles/Revenue expenditure is spending on raw materials or day to day expenses such as wages or utilities
Explain how a joint Venture may be a source of finance A business may access finance via a joint venture with another business, such as a key customer /supplier e.g. In 2018 Mike Ashley,(Sports Direct) acquired a stake of 30% of Debenhams, a troubled high street retailer, to eventually take over the company
Define a debenture Debentures are long-term agreements between a business and a lender to repay a specified amount (with a fixed rate of interest) by a certain date
Explain two reasons why an unlimited liability business may struggle to raise finance (1) They may be small, (2) own few business assets (e.g. to use as collateral) or have a (3) limited trading record. (4) Lenders (e.g. banks) prefer to lend to more established businesses that own assets)
State the formula for Net Cash Flow The net cash flow is calculated by subtracting total outflows from total inflows
What is the Opening Balance in the Cash Flow? The opening balance is the previous month’s closing balance carried forward
Explain how Closing Balance in the Cash Flow Forecast is calculated? The closing balance is calculated by adding the net cash flow to the opening balance
State two advantages of Cash Flow Forecasts (1) Cash flow forecasts can support an application for a loan (2) They can help identify where the business may experience cash shortfalls or cash surpluses so that plans can be made to manage these periods (e.g. arranging an overdraft)
Describe two disadvantages of Cash Flow Forecasts (1) Forecasts are usually based on estimates and in reality inflows and outflows may differ significantly from the estimates (2) Cash flow forecasts require appropriate skills, insight, research and time to prepare and update adequately
Created by: durquhart1
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