Unit 6

• What is an entrepreneur?

  Someone who is willing to take the risks involved with starting a new business.
• Why might businesses need to raise finance?

  To expand

  To improve efficiency

  To develop new products
• What does internal sources of finance mean?

  An internal source of finance is money that is available from within the business.
• Examples of internal sources of finance:

  Owners funds

  Retained profits

  Selling assets

  Trade credit
• What are owners funds?

  Money put into a business by its owner.
• What are retained profits?


  The part of the business’s annual profit which is kept within the business to finance future investments.
• What is an asset?

  Something that is owned by a business, for example land, building, machinery and vehicles.
• What is trade credit?


  A period of time which suppliers allow customers before payment for supplies is made.
• What does external sources of finance mean?

  Money that comes from out of the business.
• Examples of external sources of finance:

  Bank loans

  Mortgages

  Overdrafts

  New share issues

  Loans from friends or family

  Hire purchase

  Government grants
• What is a mortgage?

  Loans from banks and building societies that are used to buy land and buildings.
• What is an overdraft?

  A flexible loan which businesses can use whenever necessary up to an agreed limit.
• What are loans?

  Borrowing a specific amount of money which is repaid in instalments over an agreed amount of time.
• What is a hire purchase?

  A source of finance which businesses pu for assets such as vehicles by making an initial payment then paying in instalments over time.
• What is a government grant?

  A sum of money given to entrepreneurs or businesses by the government for specific purpose.
• Factors influencing a new businesses choice of sources of finance:

  The amount of personal finance available

  How risky the business is

  The amount of finance needed

  The legal structure of the business
• Factors influencing existing busineses choice of sources of finance:

  Past history and future prospects

  The businesses profitability

  Assets the business owns

  The amount of finance needed

  The legal structure of the business
• What is cash flow?

  The money that flows in and out of a business on a day to day basis.
• Cash inflows:

  Money flows into the business and becomes available to it.
• Cash outflows:


  When a business makes a payment it causes an outflow of cash.
• Benefits of having a positive cash flow position:

  • The business doesn’t need to borrow and can avoid paying interest charges
  • The business will be able to arrange long term loans
  • Reduces the risk of the business failing
• What is a cash flow forecast?

  A plan of the expected inflows and outflows to and from a business over a future period of time.
• What is a cash flow statement?

  A record of the cash inflows and outflows that took place over an earlier period of time.
• Net cash flow calculation:

  cash inflows - cash outflows
• What is the closing balance?

  The amount of money that is available to a business at the end of the accounting period.
• What is the opening balance?

  The amount of money available to the business at the start of an accounting period.
• How can cash flow forecasts help?

  • Managers can identify when the business may be short of cash?.
  • Managers can take suitable action to avoid cash shortages becoming a major problem.
• Why might business encounter cash flow problems?

  • Poor management
  • The business is making a loss
  • Offering customers too long to pay
• Solutions to cash flow problems:

  • Reschedule payments
  • Cut costs
  • Use overdrafts
  • Find new sources of cash inflow
• What is profit?


  The difference between a businesses revenue (sales) and its total costs.
• What is revenue?


  The income that a business receives from selling goods or services.
• Revenue formula:


  Revenue = number of units sold x price
• What are fixed costs?


  The costs that do not change when a business changes its output.
• What are variable costs?


  The costs that vary directly with the business’s level of output.
• Total costs formula:


  Total costs = fixed costs + variable costs
• Profit formula:

  Profit = revenue - total costs
• Why do businesses invest?

  They need assets such as buildings, machinery and vehicles to produce goods and services so they buy these assets to use when producing goods and services in hope of making a profit.
• What is the average rate of return?

  A method of deciding whether the investment is likely to be worthwhile.
• Average rate of return formula:


  ARR = average yearly profit x 100 / cost of investment
• Break even analysis:

  1. If total revenues are greater than total costs…
  2. If total revenues are less than total costs…
  3. If total revenue equal total costs…

  1.The business will make a profit

  2.The business will make a loss

  3.The business will break even