Theme 2.1 Raising Finance

Question 1

3 things that cash is needed for?

Answer 1

Setting up the business

Day-to-day trading

Growth

Question 2

What happens if a business runs out of cash?

Answer 2

They will almost certainly fail

Question 3

What is the main reason that businesses fail?

Answer 3

Cash flow problems

Question 4

What is a cash flow forecast?

Answer 4

A forward looking statement that tries to predict cash inflows and outflows

Question 5

3 uses of cash flow forecasts?

Answer 5

To identity the timing and significance of any shortfalls

To help secure finance from potential investors or the bank

To identify what method of finance is required e.g. overdraft. loan, trade credit

Question 6

3

Question 7

3 causes of cash flow problems?

Answer 7

Credit sales - long payment terms

Seasonality and unexpected events

Internal management - stock control, relationship with suppliers

Question 8

2 examples of cash flow problems?

Answer 8

Insufficient liquid cash funds meaning not able to meet short term debts - overdraft needed

Limited cash may result in missed opportunities

Question 9

How can a business slow down cash outflows to avoid cash flow problems?

Answer 9

Negotiating longer payment terms from suppliers

Question 10

3 ways to improve cash flow?

Answer 10

Increase volume of inflows

Decrease volume of outflows

Slowing down the timing of outflows

Question 11

What is owners capital?

Answer 11

Capital/Finance put into the business by the owner

Question 12

3 advantages of owners capital as a source of finance?

Answer 12

No interest to pay
Quick and easy
Can add as and when needed

Question 13

3 drawbacks of owners capital?

Answer 13

Owner can get into significant debts if using credit card

Could place a strain on family and relationships

Owner capital could be earning return somewhere else

Question 14

What is retained profit?

Answer 14

Profit that is reinvested back into the company

Question 15

3 advantages of retained profit?

Answer 15

No interest
Flexibility
Can be substantial

Question 16

3 drawbacks of retained profit?

Answer 16

A drain of finance if profit isn’t made.

danger of hoarding profits.

opportunity costs for shareholders.

Question 17

3 advantages of sale of assets as a source of finance?

Answer 17

possibility of a large amount of money being raised

No interest

No effect on the ownership, just replacing the value of an asset

Question 18

3 drawbacks of sale of assets?

Answer 18

May take time to sell the assets

Will only sell for a fraction of its original price

The business losers the use of the asset in the future

Question 19

3 advantages of family and friends as an external source of finance?

Answer 19

More likely to have low or zero interest

Likely to be supportive

Can get finance quickly

Question 20

3 drawbacks of family and friends as an external source of finance?

Answer 20

usually only a small amount of capital

Relationship damage if money is not repaid

Family and friends may not want to be involved in the business

Question 21

what is peer to peer funding?

Answer 21

finance where online platforms match investors who are prepared to make themselves available to a business who are in need of finance e.g. Zopa, Funding circle

Question 22

3 advantages of peer to peer funding as an external source of finance?

Answer 22

Usually lower rate of interest

Access accessible and quick

No loss of business control

Question 23

3 drawbacks of peer to peer funding as an external source of finance?

Answer 23

if failed to pay the loan, assets may be taken away

Arrangement fees for these websites

Interest and repayment

Question 24

what is a business angel as an external source of finance?

Answer 24

An individual investor who provides finance for a business usually in exchange for shares and/or a loan and also provide extra support and advice

Question 25

3 advantages of a business angel as a source of finance?

Answer 25

can be significant amount of investment They provide the skills, expertise, contacts etc Can lead to further investment

Question 26

three drawbacks of business angels as a source of finance?

Answer 26

Loss of control due to having to sell a significant stake They usually want to have quite a close involvement in decision-making Not easy to find the right business

Question 27

what is crowd funding as an external source of finance?

Answer 27

Using funding, project or venture to raise large amounts of money

Question 28

three advantages of crowd funding as an external source of finance?

Answer 28

businesses in full control Can also generate publicity Don’t have to give away shares

Question 29

three drawbacks of crowd funding as an external source of finance?

Answer 29

crowd funding platforms take fees Lots of competition from other businesses doing the same No guarantee of meeting required finance target needed

Answer 30

finance where online platforms match investors who are prepared to make themselves available to a business who are in need of finance e.g. Zopa, Funding circle

Question 31

What is the sale of assets?

Answer 31

Finance raised by selling assets that are no longer used.

Question 32

What is family and friends funding?

Answer 32

Involves borrowing or receiving money from relatives and close acquaintances to support a business.

Question 33

What is a loan?

Answer 33

A fixed amount of money that is given to a business by the bank that has to be repaid over time with interest.

Question 34

3 benefits of a loan?

Answer 34

Greater certainty of interest (terms of the loan). Lower interest rate than overdraft. Appropriate method of financing fixed assets.

Question 35

3 drawbacks of a loan?

Answer 35

Interest paid is outstanding. Harder to arrange. Start-ups and small business are often excluded.

Question 36

What is venture capital?

Answer 36

Investments made by professional, sophisticated investors - provided by venture capital firms or funds.

Question 37

3 benefits of venture capital?

Answer 37

Significant finance raising is possible. Wide variety of venture capital funds available. Businesses get access to professional support.

Question 38

3 drawbacks of venture capital?

Answer 38

Expensive and time-consuming. It is often a mix of shares AND loans - investor gets control and influence. Venture capitalist will be looking for a high rate of return.

Question 39

What is an overdraft?

Answer 39

An agreement with the bank where businesses can make payments from their bank account exceeding the cash balance.

Question 40

3 benefits of an overdraft?

Answer 40

Relatively easy to arrange. Flexible use as cash flow requires. Interest only paid on the amount borrowed under the facility.

Question 41

3 drawbacks of an overdraft?

Answer 41

Can be withdrawn at short notice. Interest charge varies with changes in rate. Higher interest than a bank loan.

Question 42

What is leasing?

Answer 42

A form of renting an asset, giving beneficial use of the asset without owning it.

Question 43

3 benefits of leasing?

Answer 43

Predictable cash flows. Asset owner carries risk. Lower interest than bank loan.

Question 44

3 drawbacks of leasing?

Answer 44

More expensive than buying an asset. The business doesn't own the asset. Some long term leasing contracts are difficult to cancel.