The capital is available immediately/internal finance is cheap-there are no interest payments/The business will not be subject to credit checks/There is no need to involve third parties
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What are the disadvantages of internal finance?
Internal finance can be limited/Internal finance can be inflexible compared to external sources of finance/There are no inflationary benefits with internal finance/opportunity cost of using internal sources of finance can be high
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What is retained profit?
Retained profit is profit after tax that is put back into business and not returned to the owners
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What are the advantages of using retained profit as a source of finance?
It is a cheap source of finance/It is a flexible source of finance-it does not have to be used immediately
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What is sale and leaseback?
The practice of selling assets, such as property or machinery, and leasing them back from the buyer.
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Sources of finance-family and friends?
External type of finance. Common for small businesses. This is a cheap source of finance because if the money is a loan, interest charges may be low. However, if the loan is not repaid it could lead to the loss of friendship or family.
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Sources of finance-peer to peer lending?
This involves people lending money to unrelated individuals therefore avoiding the use of a bank. features-all loans are unsecured so no protection for lenders/all transactions take place online/Peer to peer sites make a charge
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Sources of finance-Business Angels?
Business Angels are individuals who typically may invest between 10,000 -100,000 pounds, often in exchange for a stake in a business. It is an external source of finance. A way to raise large amounts of money
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What are unsecured loans?
Where the lender has no protection if the borrower fails to repay the money owed
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What are the advantages of leasing?
No large sums of money are needed to buy the use of equipment/Leasing is useful when equipment is only required occasionally/Maintenance and repair costs are not the responsibility of the user
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What are the disadvantages of leasing?
Over a long period of time leasing is more expensive than the outright purchase of plant and machinery/Loans can not be secured on assets which are leased,
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What are venture capitalists?
They are specialists in the provision of funds for small and medium sized businesses. Typically they invest in businesses after the initial start up and often prefer technology companies with high growth potential.
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Give 3 types of internal finance?
1. Owners capital-personal savings 2. Retained profit 3. Sale of assets
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What is a cash flow forecast?
The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month
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What is net cash flow?
The difference between the cash flowing in and the cash flowing out of a business in a given time period
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Why is a business plan needed?
It is needed to support applications for finance, both at the start up stage and in the future. Lenders and other investors are not likely to put money into the business unless there is a business plan with a clear vision and profitability.
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Describe the contents of a business plan?
An executive summary/The business opportunity/Buying and production/Financial forecasts/The business and its objectives/The market/Personnel/Premises and equipment/Finance
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What are the uses of cash flow forecasts?
Identifying the timing of cash shortages and surpluses so they can identify when a bank overdraft will be needed/Supporting applications for finance/Enhancing the planning process/Monitoring cash flow
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What are the limitations of cash flow forecasts?
1. Some of the financial information used in forecasts will be based on estimates therefore it is not reliable. It is also difficult to estimate future costs. 2. It takes a lot of time gathering information.
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Additional limitations of cash flow forecasts?
Business activity is subject to external forces that are beyond the control of owners and managers. Changes in factors such as interest rates, competition, consumer tastes have an impact on business costs and revenues.
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Other cards in this set
Card 2
Front
What are the disadvantages of internal finance?
Back
Internal finance can be limited/Internal finance can be inflexible compared to external sources of finance/There are no inflationary benefits with internal finance/opportunity cost of using internal sources of finance can be high
Card 3
Front
What is retained profit?
Back
Card 4
Front
What are the advantages of using retained profit as a source of finance?
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