Business Planning And Sources Of Finance Flashcards
(30 cards)
What is a business plan?
A business plan is a written document outlining a business’s goals, strategies, market analysis, financial forecasts, and operational details. It is used to guide decisions and attract investors.
Why is a business plan important?
It helps set clear objectives, reduces risk, improves financial planning, and increases the chances of securing finance from lenders or investors.
What key elements are typically included in a business plan?
Sections usually include the executive summary, business objectives, product/service description, market analysis, financial forecasts, marketing strategy, and operations plan.
What is cash flow forecasting?
Cash flow forecasting predicts the flow of cash into and out of a business over a given period. It helps identify potential shortages and surpluses.
Why is cash flow forecasting important for new businesses?
It helps manage liquidity, avoid insolvency, plan expenditure, and reassure investors or lenders about financial control.
What is internal finance?
Internal finance comes from within the business, such as retained profit, owner’s capital, and the sale of assets.
What are the advantages of internal finance?
It avoids interest payments, maintains control, and is immediately available. However, it may be limited or reduce future flexibility.
What is external finance?
External finance comes from outside the business, such as bank loans, overdrafts, trade credit, leasing, and venture capital.
What are the pros and cons of bank loans?
Pros: predictable repayments, large sums available. Cons: interest costs, strict criteria, and collateral may be required.
What is venture capital?
Venture capital is investment from external individuals or firms in exchange for equity and involvement. It supports high-risk start-ups with high growth potential.
What is the difference between short-term and long-term finance?
Short-term finance is repaid within a year (e.g. overdraft), while long-term finance spans several years (e.g. mortgage, equity investment).
What is the purpose of a sales forecast?
A sales forecast estimates future sales revenue, helping plan production, staffing, budgeting, and cash flow.
What are the limitations of financial forecasts in business plans?
Forecasts rely on assumptions and past data. They can be inaccurate due to market volatility, unexpected costs, or incorrect data, potentially misleading decision-makers.
Evaluate the usefulness of a business plan for securing finance.
A clear, detailed plan shows lenders/investors that the business is prepared and understands its market, improving trust. However, overly optimistic or unrealistic assumptions can undermine credibility.
To what extent can forecasting reduce business risk?
Forecasting helps anticipate problems and plan accordingly, improving financial control. However, it cannot eliminate risk due to unpredictable factors like market changes or inflation.
How can reliance on external finance impact business strategy?
External finance can enable growth but may lead to loss of control (equity finance), pressure from lenders, and long-term obligations. Strategic flexibility may be reduced due to repayment commitments.
Assess the value of retained profit as a source of finance.
Retained profit is cost-free, maintains control, and reflects business success. However, using it reduces funds available for dividends or emergency reserves, and it may be limited in new firms.
Why might a growing business struggle with cash flow despite high sales?
Rapid growth increases costs (e.g. inventory, wages) before payment is received, leading to negative cash flow. Poor credit control or long payment terms worsen the issue.
What are the risks of over-reliance on financial forecasts in decision-making?
Forecasts are based on assumptions and may create false security. Over-reliance can lead to poor decisions if actual conditions differ significantly (e.g. recession or supply chain issues).
How should a business decide between debt and equity finance?
Debt maintains ownership but adds repayment pressure and interest. Equity brings expertise and no repayment, but dilutes control. The choice depends on risk tolerance, control preference, and growth potential.
What is trade credit and how does it support short-term finance?
Trade credit allows businesses to purchase goods/services and pay later, helping manage short-term cash flow. It improves liquidity but may harm supplier relationships if misused.
How can leasing benefit a growing business?
Leasing spreads the cost of expensive assets without upfront payment. It preserves cash and avoids obsolescence but may be more expensive long-term and doesn’t build ownership.
What is crowdfunding and when is it used?
Crowdfunding raises capital from many individuals, typically online. It’s used by start-ups or projects with public appeal. It offers exposure but requires strong marketing and legal clarity.
How does a poor cash flow forecast affect investor confidence?
Investors may view poor forecasts as signs of weak planning, high risk, or lack of financial control. This can lead to reduced funding or unfavourable investment terms.
