2.1

Question 1

Why do businesses need finance?

Answer 1

Start up costs
Depreciation
Day to day bills etc
Expansion

Question 2

What is working capital?

Answer 2

The cash needed by the business to cover day to day payments for inputs required for the production process. E.g. wages

Question 3

Types of internal finance?

Answer 3

Owners capital - personal savings
Retained profit
Sale of asses

Question 4

What is owners capital finance best for?

Advantages and disadvantages?

Answer 4

Starting a small business.

Does not have to be repaid and carries no interested charges.

Owner risks losing everything.

Question 5

What is retained profit finance best for?

Advantages and disadvantages?

Answer 5

Expanding in an existing business.

Belongs to the business already so does not involve debt & no interest.

It may not be enough to meet finance needs. New businesses will have no retained profit.

Question 6

What is sale of assets finance best for?

Advantages and disadvantages?

Answer 6

Raising money quickly.

It is finance that does not need to be repaid and does not carry interested charges.

Only useful is the business does not need the assets.
Unsuitable for start-ups as they are unlikely to have any assets.

Question 7

What is collateral?

Answer 7

Refers to assets that can be used to repay a lender in the case the borrower does not have enough money to cover interest and repayments.

Question 8

External sources of finance?

Answer 8

Family and friends 
Banks
Peer to peer funding (P2P)
Business angels
Crowd funding
Business to business funding (B2B)

Question 9

What is family and friends finance best for?

Advantages and disadvantages?

Answer 9

Small businesses running as sole traders or a partnership.

May be flexible; loans without collateral. May provide interest free or low rate finance and happier with a longer repayment period.

Problems may damage relationships; lenders may lose their money. May also want to be more involved in the business.

Question 10

What is bank finance best for?

Advantages and disadvantages?

Answer 10

Established businesses with a credit record.

Fixed sum available via loans - easy to plan for fixed repayments.

Difficult to persuade banks to lend money. Require interest. May require collateral.

Question 11

Who is P2P finance best for?

Advantages and disadvantages?

Answer 11

Small established business.

Gives borrowers access to funds at advantageous rates compared to other forms of finance.

Finance is restricted to small amounts and to small established businesses.

Question 12

Who is business angels finance best for?

Advantages and disadvantages?

Answer 12

Never and possibly high risk, or early stage and high growth businesses.

Very knowledgeable in experienced business matters, can act as mentors.

May require some form of equity to give them some control.

Question 13

Who is crowd funding finance best for?

Advantages and disadvantages?

Answer 13

Unusual ideas and projects that may not attract other forms of finance.

Millions of potential funders can be reached.

No guarantee that it will raise enough finance.

Question 14

Who is B2B finance best for?

Advantages and disadvantages?

Answer 14

Trade credit is suitable for all creditworthy businesses.

Includes trade credit, hire purchase and leasing and corporate venture capital.

Trade credit is short term, hire purchase and leasing can be expensive and venture capital may involve some loss of control.

Question 15

Explain trade credit?

Answer 15

Trade credit provides stock and raw materials on credit. It gives the business time to use the supplies to produce and sell the output before paying invoices.

Not suitable for long term or large purchases.

Question 16

Sole trader and partnerships liability?

Answer 16

Unlimited liability. Can have all of their personal possessions seized to pay debts.

Question 17

Limited companies liability?

Answer 17

Limited liability.

Liability is limited to the company itself.

Question 18

Private limited companies liability?

What is a private limited company?

Answer 18

Limited liability.

A company who can have up to 50 shareholders but shares cannot be bought or sold without consent of all other shareholders. Cannot be bought on the stock exchange.

Question 19

Public limited company liability?

Answer 19

Limited liability.

Question 20

What is insolvency?

Answer 20

Occurs when a company cannot pay its debts because it is making a loss.

Question 21

What is liquidation?

Answer 21

Occurs when a business is clearly insolvent and has to close down. It’s assets are sold to raise cash that is used to at least pay some of the debts.

Question 22

Implications of limited liability is a business becomes insolvent?

Answer 22

Suppliers may not get paid, customers may lose deposits and guarantees will be worthless.

Question 23

Who is share capital available to?

Answer 23

Limited companies, so not sole traders and partnerships.

Question 24

Questions for businesses when trying to raise finance?

Answer 24

How big is the business?
How long has the business been operating?
What will the finance be used for?

Question 25

What is a business plan?

Answer 25

A document that sets out what the business is, what is does, what it wants to achieve and how it’s going to do it.

Useful for attempting to gain financial backing for the business.

Question 26

What information should a good business plan contain?

Answer 26

Executive summary
The business and its products/services
The marked and competitors 
The marketing plan
Organisational details
The production plan
Historic financial records
Financial forecasts
Existing sources of finance

Question 27

What is a cash flow forecast?

Answer 27

A statement of the expected cash inflow and the expected cash outflow. The difference between the two is net cash flow, a crucial indicator of the ability of a business to cover its day to day running costs.

Question 28

How to calculate cash flow?

Answer 28

Total monthly cash inflow - total monthly cash outflow = net cash flow.

Net cash flow + opening balance = closing balance.

Closing balance = opening balance for next month.

Question 29

Limitations of a cash flow forecast?

Answer 29

Prone to error
Further ahead you look, the less accurate they become.
Cannot take into account all the possibilities that may arise.
Cost of materials may increase, consumer tastes may change, rivals may bring out a new product etc.
External economy affects it - business cycle, interest rates, tax rates, exchange rates.