Flashcards in Raising Finance 2.1 Deck (62):
What are some of the needs for finance?
1. Starting up - businesses and equipment as well as for materials, wages, bills.
2. Growing - if the income costs are higher than operating costs then profit will be made, this could be used to help finance growth.
3. Other situations - May have a cash flow problem so they need extra funding.
What are the two main sources where finance comes from?
1. Internal finance - inside the business
2. External finance - outside the business
What is the definition of sources of finance?
Where the money comes from that a business needs.
What is working capital?
The money left for the day to day running of the business
For a new startup business what is a wise decision to make?
To set aside half of the start up capital as working capital
In addition to keeping a check on the working capital, managers need to: (4 things) - in terms of capital
- Identify the costs involved in making a product - these are the first steps in deciding a selling price
- Work out how many products need to sell to make a profit
- Find out how much capital they will need in the coming months and then decide how they will obtain extra finance
- Keep tight control over the way in which the firms money is spent
What three things need to be worked out as a starting point?
1. How much it will cost to get from a business idea to opening the doors on the first day
2. How much the running costs will be. These will be in 2 parts- fixed costs and the variable costs.
3. How much revenue can you expect from customers
What are the 8 sources of finance available to firms?
1. Bank overdraft
2. Trade credit
3. Bank term loan
5. Owners savings
6. Sale of shares
7. Reinvested profits
8. Venture capital loans
Describe in more detail the short term sources of finance: -2
Bank overdraft - allowing the firms bank account to go into the red up to an agreed limit.
Trade credit - suppliers agree to accept cash payment at a given date in the future
Give 2 examples of medium term sources of finance:
Bank term loan - banks lend sums of capital, often at a fixed rate of interest to be repaid over a fixed period
Leasing - firms sign a contract to pay a rental fee to the owner in return for the use of that asset over a period of time
Give 4 examples of long term sources of finance:
Owners savings - most small businesses are set up with this
Sale of shares - private and public limited companies can sell shares in the ownership of the company
Reinvested profits - most important source of long term finance
Venture capital loans - specialist providers of risk capital can provide large sums
What is a positives and negative of bank overdraft?
Positive: Flexible and easy to arrange
Negative: Interest charges are high
What is a negative of trade credit?
Failure to pay on time can present problems for future orders
What is a positive and negative of bank term loan?
Positive: Makes financial planning easy
Negative: Interest rates can be high
What is a positive and negative of leasing?
Positive: but this avoids large cash outflows when buying new assets
What is a positive and a negative of owners savings?
Positive: interest free (but this will be lost if the business fails)
Negative: banks won't provide a loan or overdraft unless the owners are sharing the financial risk
What is a positive of sale of shares to shareholders?
The shareholders gain a say in how the firm is run and are entitled to a share of profits
What is a positive of reinvested profit?
There are no interest payments to be made
What is the definition of fixed costs?
Those that do not change as the number of sales change
What is the definition of variable costs?
Those that change in line with the amount of business
What is the definition of working capital?
The finance available for the day to day running of the business
What are the three ways capital can be generated from within the business?
1. Retained profit - most common way to finance investment into a firms future
2. Sale of assets
3. Improved management of working capital
What are the 6 external sources of finance?
1. Family and friends - provide share capital or lend money
2. Banks - banks insist on collateral which depends on what you are starting up the business as
3. Peer to peer funding - matches individuals what want to lend to those who want to borrow
4. Business Angels - take huge risks in hope of success
5. Crowdfunding - getting small investors to put money into a new business which is often with an incentive
6. Other businesses - some companies allocate a chunk of capital to get the occasional winner
What are the 7 external methods of finance?
2. Share capital
3. Venture capital
6. Trade credit
Describe loans in more detail:
Usual way is through borrowing from a bank. This may be a bank loan or an overdraft. The loan can be repaid either in instalments or at the end of a loan period. The bank will demand collateral to provide security just in case the loan cannot be repaid.
Describe share capital in more detail:
This could come from private investors or venture capital funds. There is no need to repay the capital back. The venture capital investors are interested in investing in businesses with dynamic growth prospects.
Describe venture capital in more detail:
It is a way of getting outside investment for businesses that are unable to raise finance from the stock market. Venture capitalists invest in smaller, riskier companies. To compensate for this risk they often demand a substantial part of the ownership. They are likely to also want to contribute to the running of the business.
Describe overdrafts in more detail:
A facility which allows a company to spend up to an agreed negative balance on its current account. Then the company must pay interest on this negative balance. The banks can have a 24 hour recall so the bank can cancel them at any time leaving the company to go into administration.
Describe leasing in more detail:
An idea for new start up businesses to help them ease up their cash flow at the start means that a company can lease the assets instead of buying them. Leasing them means agreeing to pay a fixed price for a fixed period.
Describe trade credit in more detail:
The business obtains goods or services from another business but doesn't pay for it immediately. A disadvantage could be that a company is reluctant to trade with a business if they don't get paid in good time.
Describe grants in more detail:
They are handouts to small firms, usually from a local authority or the central government. It may be given to encourage a start up or relocation that is considered valuable.
Why might businesses finance expansion suing debt rather than equity?
Issuing more equity dilutes the value of shares, putting the founders control of the business at risk.
Why do venture capital companies invest in some businesses but not others?
Venture capitalists seek huge potential gains. Therefore they love 'scalability': a high potential for the business to grow massively.
What is the definition of an angel investor?
Investors who back a business before it has opened its doors, taking full equity risk
What is the definition of collateral?
An asset used as security for a loan. It can be sold by a lender if the borrower fails to pay back a loan.
What is the definition of crowdfunding?
Obtaining external finance from many individuals, small investments, usually through a web- based appeal.
What is the definition of a public limited company (plc)?
A company with limited liability and shares, which are available to the public. It's shares can be quoted on the stock market
What is the definition of seedcorn capital?
The early stage finance that might come from an angel investor.
What is the definition of share capital?
Businesses finance that has no guarantee of repayment or of annual income, but gains a share of the control of the business and its potential profits
What is the definition of the stock market?
A market for buying and selling company shares
Describe unlimited liability:
Means the finance and the business are treated as inseparable fro the finances of the business owner.
What two types of business organisations have unlimited liability?
1. Sole traders
Describe limited liability:
Means that the legal duty to pay debts run up by a business stays with the business itself, not its owners/shareholders.
What is a negative and a positive for limited liability?
Positive- can give owners confidence to push their business forward to the next level.
Negative - it can be a huge chance for fraud
How is a business with unlimited liability is financed?
1. Owners capital
2. Bank finance
How is a business with limited liability financed?
1. Share capital
2. Bank finance
3. Angel or venture capital investment
4. Peer to peer funding
5. Leasing and trade credit
What are the 7 parts of a business plan?
1. Executive summary
2. The product/ service
3. The market
4. Marketing plan
5. Operation plan
6. Financial plan
Describe in more detail what to include in the executive summary is in regards to the business plan:
Should be short - but compelling for the banker to read on. It should say:
1. Who you are
2. What the customers 'pain' is and how you will 'relieve' it
3. Why your team is ideal for the task
4. How much capital is needed for the start up
5. How much you are putting in yourself
Describe in more detail what to include in the product/service is in regards to the business plan:
Explain it from the customers point of view. If the product/service already exists the explain how your idea is different.
Describe in more detail what to include in the market in regards to the business plan:
Focus on the market trends, such as if the market is growing and if so then how rapidly. Also to provide brief analysis of key competitors.
Describe in detail what to include in the marketing plan in regards to the business plan:
1. Who are you targeting
2. And how to plan to communicate with them
3. How expensive this will be
Describe in detail what to include in the operational plan in regards to the business plan:
How will the product or service be produced and delivered?
Describe in detail what to include in the financial plan in regards to the business plan:
The cash flow forecast
Describe in detail what to include in the conclusion in regards to the business plan:
Some ideas of the longer term plans for the business.
What is the monthly balance?
Cash inflow for the month minus cash outlet
What is cash inflow?
The sums expected to arrive each month, either from financial sources or customers
What is cash outflow?
The planned payments per month - including wages, paying suppliers and paying the landlord
What are the 3 main ways to analyse a cash flow forecast?
1. Calculate the difference between the closing balance at the end of the period and the opening balance at the start. This gives a sense of what is happening over time.
2. Use the monthly closing balance to assess trends in data
3. Analyse the timings of cash inflows and outflows
How can a business work to improve its position of a negative cash flow?
- getting goods to the market in the shortest possible time as the sooner the goods reach the customer the sooner the payment is received
- getting paid as quickly as possible - to perhaps get paid cash on delivery
- keeping stocks of raw materials to a minimum
How can a business minimise short term spending to help with the cash flow?
- leasing rather than buying capital - as this increases expenses but conserves capital
- renting rather than buying buildings
- postponing expenditure (e.g. On company cars)
Give 3 examples of cash flow forecast limitations:
1. They are only as good as the raw data put in
2. Risk giving the impression of certainty where none exists
3. Because of these things it is vital to allow for contingencies