2.1 Raising finance

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Sources of Finance

short term (under a year)

bank overdraft- going over the amount of money in their bank account. flexible and easy but has high interest rates 

trade credit- suppliers accept cash payment at a given future date. need to have suppliers trust and can impact future orders.

medium term (2-4 years)

bank loan- banks lend sums of capital at fixed interest rate to be paid over fixed period. good for financial planning but can have high interest 

leasing- pay rental free to asset owner in return for use of asst over period of time. expensive but avoids large cash outflows

long term (5+ years)

owners savings- overdraft not provided unless finanvial risk is shared

sale of shares- selling ownership of the company

reinvested profit- putting profit made back into the business

venture capital loans- part loan capital, part share capital

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Internal and External Finance

  • Internal
    • Retained profit- money already in the business 
    • Sale of asset- selling of things such as machinery or property
    • Improved management of working capital- making money go further and negotiating with suppliers 
  • External
    • Family and friends- can provide share capital 
    • Banks- loans, mortgages, overdrafts 
    • Peer-to-peer finding- people offer to give them money at a high interest rate 
    • Share capital- money from shareholders and personal assets. Can be both internal and external depending on the business structure 
    • Business angels- takes huge risks in a new and risky business in hope of getting a massive return. May of them are venture capitalists.
    • Crowd funding- lots of small investors putting money into a business 
    • Leasing- pay rental free to asset owner in return for use of asset over period of time. Good for small and startup businesses
    • Trade credit- paying the suppliers after the goods have been received. Good for handling day-to-day finances
    • Grants- often from the government if banks have refused to lend money
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Liability and Finance

Unlimited liability 

  • Business debt is carried on to owners
  • Can lead to bankruptcy
  • Sole traders and partnerships have unlimited liability 
  • Appropriate sources of finance are- owners capital, loans and overdrafts, leasing and trade credit

Limited liability 

  • Debts stay within the business. No personal liability 
  • Less risk when growing 
  • PLC's and Ltd.’s 
  • Appropriate sources of finance- share capital, bank loans, and angel or venture investment, crowd funding, and leasing and trade credit
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Business Plans

A business plan should include:

1.     Executive summary- what the business wants to do and what it needs to do it

2.     Product/ service- what the product does and how it is different to competitors

3.     Market- trends in the market

4.     Marketing- who is the product for and how to communicate with them

5.     Operational plan- production and delivery

6.     Financial plan- cash flow forecast

7.     Conclusion- long term plans

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Cash Flow Forecasting

interpreting a cash flow forecast 

cash inflow- money expected to be made that month

cash outflow- planned paymenta that month including their fixed and variable costs

monthly balance- inflow- outflow

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Advantages and Limitations of Cash Flow Forecasts

advantages 

  • It helps the company in making accurate projections regarding the future
  • It will highlight periods where your business may need extra financial help.
  • it will help you to spot problems early so you can make plans for the necessary solution.
  • It will inspire confidence in lenders and banks that you may have to approach for finance.

limitations 

  • only as good as the raw data. often entrepreneurs are optimistic and can overestimate sales and underestimate costs
  • doesnt take into consideration about economic or external troubles eg. a recession 
  • It can be a costly process because you will need the assistance of your accountant or financial adviser
  • In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc
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