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2.1 rising finance Flashcards

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1
Q

What are types of internal sources of finance

A

Owners capital
Retained profits
Sale of assets
Sale and leaseback

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2
Q

What are types of external sources of finance

A 
‘Family and friends’
Banks
Peer to Peer lending (P2PL)
Business angels
Crowdfunding
Other businesses (B2B funding)
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3
Q

Why would business need finance

A 
Equipment
Raw materials
New premises
Expansion
New Technology
Staff training
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4
Q

What is capital expenditure

A

Spending on business resources that can be used repeatedly

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5
Q

What is revenue expenditure

A

Spending on business resources that are used in the short term

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6
Q

Examples of capital expenditure

A

Machinery
New Premises
Company vehicle
New technology

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7
Q

Examples of revenue expenditure

A 
Wages
Raw materials
Fuel
Maintenance
Repairs
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8
Q

Benefit of capital expenditure

A

Will help company to grow in the long term

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9
Q

Benefit of revenue expenditure

A

Will help company operate today

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10
Q

Owners capital examples

A 
Cash and investments
Redundancy payments
Inheritances
Personal credit cards
Remortgaging
Putting time into the business for free
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11
Q

What is owners capital

A

Money provided by the owners in a business

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12
Q

Advantages of owner capital

A 
Cheap 
The Entrepreneur maintains control 
Good for startups
Time - Quick can be reduced if funds are already available
Shows confidence to other investors
Focuses the mind!
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13
Q

Disadvantages of owner capital

A

It can take time to raise

Can be risky for the entrepreneur if they have remortgaged and have no plan B

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14
Q

What is retained profit

A

Profit after tax that is put back into the business

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15
Q

Advantages of retained profit

A

Cheap (no interest, debts)
The business maintains control
Flexible - the business can decide when they use it
Time - no need to complete lengthy applications
Low risk as no additional investors involved

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16
Q

Disadvantages of retained profit

A

No good for startups
The opportunity cost - dont get the money for shareholders is that the owners (shareholders) receive lower or no dividends
Conflicts between shareholders and managers
No profit no funding

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17
Q

What is sale of an asset

A

An asset that is no longer needed is sold

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18
Q

Advantages of sale of an asset

A

Cheap
The business maintains control
Time - no need to complete lengthy applications
Low risk as no additional investors involved

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19
Q

Disadvantages of sale of an asset

A

No good for startups
The opportunity cost is that the asset is no longer available for use in the business
Conflicts may arise amongst employees if the asset is still in use

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20
Q

What is sale and leaseback

A

The business sells an asset to another firm and leases back

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21
Q

Advantages of sale and leaseback

A

Cheap (no interest)
The business maintains control
Time - Quick

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22
Q

Disadvantages of sale and leaseback

A

Expensive - the cost of leasing back can be high

No good for startups

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23
Q

Advantages of internal sources

A

Cheap
Owner maintains control of business
Fast

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24
Q

Disadvantages of internal sources

A

Limited amount ££
Not always available (especially for startups)
Limited amount of options

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25
What is friends and family sources of finance
Can be a loan, gift or for % of business
26
Advantages of friends and family
Cheap - A lower interest (if any) can be agreed The business maintains control Time - no need to complete lengthy applications Low risk as no additional investors involved
27
Disadvantages of friends and family
Relationships may deteriorate if debt is not repaid
28
Banks sources of finance
loans, overdraft, mortgages and credit card
29
Advantages of banks
Great for startups, although can be hard to convince the banks lately Time - although a clear business plan must be presented Low risk as no additional investors involved The business maintains control
30
Disadvantages of banks
Expensive - interest rates can vary and can be high especially for credit cards and overdrafts Risk is high if debt is not repaid - the banks will not negotiate on repayment Lots of paperwork
31
What is peer to peer lending
Individuals can lend through an online process, do not give away equity but pay interest on loan
32
Advantages of peer to peer lending
Great for startups, although a clear business plan must be presented Time - easy to set up Control is maintained by the business Low risk to the entrepreneur as the lender takes all the risk Cheap: Low interest rates offered
33
Disadvantages of peer to peer lending
Expensive - the arrangement is based on the lender receiving a generous profit share The website managing the process will take a % of the deal Lenders have complete control over who they invest in
34
What is business angels
Individuals that invest in return for a stake in the business
35
Advantages of business angels
Great for startups and established businesses, although a clear business plan must be presented Time - can be quick if the angel has the funds readily available The business can benefit form the angels expertise in a particular area of the business
36
Disadvantages of business angels
Expensive - the angel will expect a stake in the business and will receive dividends The angel may want to have some control over the business
37
What is crowdfunding
Individuals lend to business through websites such as ‘kickstarter’ Business either gives up equity % or its final product
38
Advantages of crowdfunding
May be only way small business ideas can get funding (if they get turned down by bank loans) Acts as advert for business May attract advice and help as well as funds
39
Disadvantages of crowdfunding
May not attract any other investors May be a waste of time which could be used to source funds elsewhere e.g bank loans Alerts to competitors to your need for funds
40
Advantages of external sources
``` Can raise more ££ (Some) maintain control Get support (family/friends, bank or investor will all want you to succeed and may be able to help) ```
41
Disadvantages of external sources
Takes time & effort Give up control of business Expensive (interest rate)
42
What is credit
You can give credit or take credit. If you give credit you are the creditor if you take credit you are the debtor. If you are in credit with a supplier / bank that means you have access to funds with that supplier / bank
43
What is a creditor
Lender of Money (bank, supplier, loan shark)
44
What is a debtor
Person/Business that owes Money
45
How high is risk of unlimited liability business
Risk is high due to personal assets being at risk
46
How high is risk of limited liability business
Risk is lower, owners are protected - Therefore, more finance options are available.
47
How would investors view a unlimited liability business
Banks would view you as higher risk and therefore, you might find it more difficult to source finance
48
How would investors view a limited liability business
Less risky option for banks, you can also sell shares
49
Control on unlimited liability business
Tight control as the owner has all the decision making power.
50
Control on limited liability business
Control could be lost through the sale of shares
51
Amount of Capital expenditure on an unlimited liability business
There is usually lower capital expenditure as the types of businesses tend to be service orientated.
52
Amount of Capital expenditure on an limited liability business
Higher capital expenditure compared to sole traders, which debt can be secured against.
53
How much do unlimited liability businesses tend to borrow
Sole traders and partnerships tend to borrow less as they have fewer financial needs
54
How much do limited liability businesses tend to borrow
It would depend on whether the business is growing
55
How do businesses assess their choice of finance
``` TRECC (Time, risk, Established, Cost, Control) Or DRA (Duration, Reason, Amount) ```
56
What is cash flow forecasting
Cash flow forecasts are a prediction (forecast) of what the business expects their cash inflows and outflows are going to be over a period of time.
57
What is a positive cash flow
A successful business must try to have more cash flowing in than they have flowing out.
58
What is a cash flow deficit
If a business allows more cash flowing out than flowing in
59
Net cash flow formula
Net cash flow = Total Monthly Inflow – Total Monthly Outflow
60
Closing balance formula
Closing balance = Opening Balance + Net Monthly cash flow
61
What is the opening balance
The closing balance for one month is the opening balance for the next
62
Examples of Inflows (receipts)
``` Cash sales Receipts from trade debtors Sale of fixed assets Interest on bank balances Grants Loans from bank Share capital invested ```
63
Examples of Outflows (payments)
``` Payments to suppliers Wages and salaries Payments for fixed assets Tax on profits Interest on loans & overdrafts Dividends paid to shareholders Repayment of loans ```
64
Positives of cash flow
Plan ahead Spot problems Financial Control Make lenders confident
65
Negatives of cash flow
It is an estimate Can’t predict external forces It takes time Can't be used in isolation
66
Why Produce a Cash Flow Forecast?
- Advanced warning of cash shortages - Make sure that the business can afford to pay suppliers and employees - Spot problems with customer payments - An important part of financial control Provide reassurance to investors and lenders that the business is being managed properly

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