Theme 2

• Internal sources of finance.

  Owner's capital, sale of assets, retained profit.
• External sources of finance.

  Leasing, trade credit, share capital, grants, venture capital, bank loans, overdraft, business angels, family and friends, crowdfunding, peer-to-peer lending.
• Overdraft.

  A busines uses more than what is in their bank account. They can continue withdrawing money even if accounts are empty. High interest rates are often charged when paying back.

  • Easy and quick to set up.
  • Greater cash flow flexibility.
  • High interest rates.
  • Bank can ask for repayment at any time.
• Business angels.

  A private individual who directly invests into a business.

  • No repayment required.
  • Provide value with expert guidance and helpful contacts.
  • Loss of control - they obtain a % of business.
  • Pressure - they require a large return on investment.
• Family and friends.

  Family and friends of a business owner invest money in.

  • Family members or friends may be a lot more flexible with repayments.
  • May lend funds interest free.
  • They may ask for money back when it suits them, not when it suits the business.
  • They may try and get involved in the business.
• Crowdfunding.


  A large number of people each invest a small amount into a business project or idea.

  • Good way to test the public's reaction.
  • Investors could end up loyal customers.
  • Ideas could be stolen as it is public.
  • A lot of work goes into building initial interest - more time and money.
• Peer-to-peer lending.

  Individuals or businesses lend money to other individuals or businesses.

  • Potential to pay back loan early if you no longer need it.
  • A fairly quick and easy process.
  • If you have a poor financial profile you may not get the loan.
  • You may have to pay additional fees on top of interest charged.
• Trade credit.

  Allows business to obtain goods but pay for them later, usually 30 days.

  • Business can covert raw materials into stock and sell to make a profit for repayment.
  • Early payments = discounts.
  • New businesses may struggle to repay in 30 days.
  • If repayment is late, supplier may stop supplying.
• Share capital.

  Business raises finance by selling shares.

  • Business can raise capital quickly.
  • Share capital is a source of permanent capital.
  • Risk of takeover if too many shares are sold.
  • Control is diluted.
• Grants.

  A sum of money given by the government.

  • Normally no repayment.
  • No impact on business ownership.
  • Difficult to receive.
  • Can come with a lot of strings attached.
• Venture capital.

  Investor gives capital to business.

  • Venture capitalist can provide expert knowledge to business.
  • Access to large amounts of capital.
  • High return on investment.
  • Can be difficult to obtain if there is little interest in your business.
• Bank loans.

  Capital given to business by a bank. Needs to be repayed with interest.

  • You don't have to share profits generated and no impact on ownership.
  • Large amounts of capital can be obtained.
  • Need to be repayed with interest.
  • Could be paying interest on funds you're not using.
• Sale of assets.

  Business sells its goods or assets to another party.

  • Can avoid holding assets that aren't being used and make capital from them instead.
  • Costs paid for assets are depreciable.
  • May take time.
  • Buyers of assets might negotiate lower prices.
• Leasing.

  Renting assets. Monthly payments are made and the business doesn't own item until all payments have been made.

  • You can obtain good quality assets.
  • Balanced cash outflow.
  • No ownership of assets until it's paid for.
  • Can end up more expensive than buying asset outright.
• Owner's capital.

  Money invested by owner of the business.

  • No debts as no loans are taken out.
  • Allows business to quickly reinvest when operating in the market.
  • Not all owners have capital to add on.
  • If business fails, the owner will lose all capital invested.
• Retained profit.


  Profit made in previous years that has been reinvested into the business.

  • Instant availability.
  • Nothing to pay back.
  • Can take a long time to get to this stage.
  • Danger of hoarding cash - potentially unethical, opportunity costs.
• What are problems with cash flow forecasts?

  Sales may prove lower than expected, customers might not pay on time, costs may prove higher than expected, unexpected costs always arise.
• Good things about cash flow forecasts?

  Advanced warning of cash shortages, make sure business can afford to pay suppliers and employees, spot problems with customer payments, important part of financial control, reassures investers and lenders that business is being managed properly.
• Absolute profit is profit in £ value.
• Relative profit is profit in terms of sales achieved or investment made.
• What is perfect competition?

  Everyone in the market sells the same product, similarly priced. Lots of firms, each one has a small market share.
• What is a monopolistic market?

  Everyone in the market sells different products differentiated by quality and brand, therefore not the perfect substitute.
• What is oligopoly?

  A few firms dominate the market. It is a highly concentrated market.
• What is monopoly?

  One main firm operates within the market.
• Key factors affecting sales forecasting.

  Consumer trends, economic variables, competitor actions.
• Why do businesses forecast sales?

  Form the basis of other planning such as cash flow forecasts, and profit forecasts/budgets. They are a useful part of competitor analysis and help to focus market research.
• What happens to spending if interest rates increase?

  Decreases because people are spending.
• What happens to spending if interest rates decrease?

  Increases because people take out loans and start spending more.
• What uses do budgets have?

  Establish priorities and set targets, delegate without loss of control, motivate staff, monitor performance, provide direction, allocate resources.
• What are the principles of effective budgeting?

  Managers have a responsibility to stick to budgets. Performance is monitored against budget. Unaccounted for variances are investigated.
• Two approaches to budgeting.

  Historical budgets - use last year's figures as basis.

  Zero-based budgets - budgeted costs and revenues are set to zero. Based on new proposals.
• Historical budgeting evaluation.

  • Offers a solid framework because it's based on a reference point.
  • Higher chances of error.
  • Inaccurate predictions - how can one year be just like the previous year?
• Zero-based budgeting evaluation.

  • Emphasis on decision making.
  • Discontinuation of disused processes.
  • Complex and expensive.
• Main types of budgets.

  Revenue (income) budget = expected revenue and sales.

  Cost (expenditure) budget = expected cost sbased on sales budget.

  Profit budget = based on combined sales and cost budgets.
• Difficulties in budgeting accurately.

  Sales forecasting is harder in dynamic markets. It is hard to estimate sales and revenues in startup firms. There are always likely to be unexpected costs. Changes in external environment will impact costs.
• A variance analysis is calculating the difference between actual results and the budget.
• Favourable variances occur when actual figures are better than budgeted (costs lower, profits higher).
• Adverse variances occur when actual figures are worse than budgeted (costs higher, profits lower).
• Possible causes of favourable variance.

  Stronger market demand than expected, selling price increased, competitor weakness, better productivity or efficiency.
• Possible causes of adverse variances.

  Unexpected events lead to unbudgeted costs, over-spends by budget holders, over-optimistic sales forecast.