2.1

Question 1

what are sources of finance

Answer 1

options available to a business when seeking to raise funds to support future actions

Question 2

what are internal / external sources of finance

Answer 2

internal: raised capital from within the business
external: raised capital from outside the business

Question 3

what are the internal sources of finance

Answer 3

-owners capital (personal savings)
-retained profit
-sale of assets

Question 4

pros of owners capital

Answer 4

-no interest
-no repayment
-owners maintain control
-motivational
-no lengthy application

Question 5

cons of owners capital

Answer 5

-limited amount
-threat to personal finances + family (in business failure)

Question 6

what is retained profit

Answer 6

profit kept within a business from profit for the year to help finance future activities

Question 7

pros of retained profit

Answer 7

-no interest
-doesnt dilute ownerhsip
-no repayment

Question 8

cons of retained profit

Answer 8

-only available if sufficient profit exists
-shareholder dissatisfaction
-reduces security of keeping profit for unforeseen circumstances

Question 9

what are assets

Answer 9

items of value owned by a business

Question 10

what are current assets

Answer 10

items of value owned by a business that will change value in short term eg stock

Question 11

what are non current assets

Answer 11

items of value owned by a business that will stay in the business for over a year

Question 12

pros of sale of asstes

Answer 12

-no interest/ repayment
-obsolete assets can become cash
-immediate cash

Question 13

cons of sale of assets

Answer 13

-single use option
-loss of asset+ future value
-expensive long term if asset is needed again

Question 14

what are the sources of external finance

Answer 14

-family + friends
-banks
-peer to peer
- business angels
-crowd funding
-other businesses

Question 15

what are the methods of external finance

Answer 15

-loan
-share capital
-venture capital
-overdraft
-leasing
-trade credit
-grant

Question 16

what is a business angel

Answer 16

wealthy individuals who make personal investments in return for a share of the business

Question 17

what is crowd funding

Answer 17

raising finance from a large number of people, each investing different, often small amounts

Question 18

what is venture capital

Answer 18

finance provided by specialist investors into smaller businesses with potential for growth

Question 19

pros of venture capital

Answer 19

-large suns
-expertise
-easy to attract other sources

Question 20

cons of venture capital

Answer 20

-often require stake in business + expect control
-complex process, initially expensive
-risk of conflict

Question 21

what is an overdraft

Answer 21

-spending more money than is in a bank account
-it is paid back with interest

Question 22

pros of overdraft

Answer 22

-short term; flexible + aids cash flow
-only pay for whats borrowed
-quick + easy to obtain

Question 23

cons of overdraft

Answer 23

-high interest
-bank may “call in”

Question 24

what is leasing

Answer 24

-using an asset eg machinery for regular payments

Question 25

pros of leasing

Answer 25

-not responsible for maintenance -pay in small amounts

Question 26

cons of leasing

Answer 26

-expensive long term

Question 27

what is share capital

Answer 27

finance raised from sale of shares in an incorporated, limited company

Question 28

pros of share capital

Answer 28

-large amount. an be raised by PLCS -no interest, only dividends of profit

Question 29

cons of share capital

Answer 29

-loss of ownership -must please shareholders -dividends -complex process to sell

Question 30

what is a loan

Answer 30

sum of money borrowed + repaid over period of time with interest

Question 31

pros of loans

Answer 31

-**fixed** interest -repayment in instalment -ownership maintained -quick + easy to secure -good cash flow

Question 32

cons of loans

Answer 32

-interest -failure to repay; reputation

Question 33

what is trade credit

Answer 33

agreement with suppliers to buy raw materials which are paid for at a later date, usually 30-90 days

Question 34

pros of trade credit

Answer 34

-often interest free -improve cash flow

Question 35

cons of trade credit

Answer 35

-discount for early payment unavailable

Question 36

what are grants

Answer 36

governments/ industry trusts may offer grants to businesses meeting certain criteria eg environmental

Question 37

pros of grants

Answer 37

-no interest/ repayment

Question 38

cons of grants

Answer 38

-must use for intended purpose -conditions -difficult to get -time consuming

Question 39

what is limited liability

Answer 39

and investors liability is limited to the total amount invested, personal belongings beyond this are protected

Question 40

what is unlimited liability?

Answer 40

Owner is a responsible for total amount of debt of the business, may lose personal belongings

Question 41

which businesses have limited liability

Answer 41

– Private Limited company – public Limited company

Question 42

which businesses have unlimited liability

Answer 42

– sole trader – Partnership

Question 43

what is a business plan

Answer 43

an important part of setting up a business that will be used internally and externally by external investors

Question 44

what is included in a business plan?

Answer 44

– Executive summary – Aims and objectives – products/services – Market info – Marketing strategy – Operations – Skills of entrepreneur and employees – Sources of finance – Financial forecast – Staffing

Question 45

what is the purpose of a business plan?

Answer 45

– To secure external funding – Help identify problem areas – Set targets and check development

Question 46

what are the limitations of a business plan?

Answer 46

– Only a plan – Inaccurate forecasts

Question 47

how does a business plan help obtain finance?

Answer 47

Show investors how and why the business will succeed; the entrepreneur is well organised and has clear objectives

Question 48

what is a cash flow forecast?

Answer 48

A forward looking statement that predicts cash in flows and outflows in the future

Question 49

how is net cash flow calculated?

Answer 49

Cash inflows – cash outflows

Question 50

how is opening balance calculated?

Answer 50

Closing balance of the last month

Question 51

how is closing balance calculated?

Answer 51

Opening balance + net cash flow

Question 52

shown on a cash flow forecast

Answer 52

-Cash inflows -cash outflows -net cash flow -opening balance -closing balance

Question 53

what factors affect cash flow?

Answer 53

– Cash V credit -Timing of cash flow eg seasonal -Nature of business eg start up/ established

Question 54

what is a receivable?

Answer 54

Money the business is owed

Question 55

what is a payable?

Answer 55

Money the business owes

Question 56

what do businesses need cash for?

Answer 56

-Meeting daily finances, e.g. buying stock, paying wages, utility bills -Insufficient liquid cash could cause survival problems

Question 57

what could cash flow problems be caused by?

Answer 57

-Credit sales -Overtrading -Internal management -Seasonality -Unexpected events

Question 58

how can cash flow be improved?

Answer 58

-Increasing the volume of inflow -Speeding up time of inflow -Reducing volume of outflow - slowing down timing of outflow

Question 59

why are cash flow forecasts useful

Answer 59

-identifying cash short falls -Identify possible corrective action -Help secure finance -Confidence of short term survival -Provide a guide to measure actual cash flow

Question 60

what are the limitations of a cash flow forecast?

Answer 60

-may be inaccurate due to poor market research -Affected by external environment -Demand maybe wrongly estimated