business finance, topic 3

• Why are funds needed for?

  - Short term needs- finance that has been borrowed in order to fund day-to-day running costs of the business that has to be paid within a year.

  - Long term needs - Finance that has been borrowed in order to fund long term expenses such as resources that has to be paid back for a longer period of time

  - Start up capital - Finance that is provided by the owners in order to start up the business. usually borrowed as most entrepreneurs usually don't have anough capital to fund the expenses of starting the business

  - Expansion - Finance that is needed in order to fund the heavy costs of things that will expand and enlarge the business such as expanding inventory in order to meet the growing demands, development of new products

  - branch to the overseas market
• Define internal source of finance

  Finance obtained within the business
• Give examples of internal sources of finance


  - personal savings

  - Retained profit

  - Selling assets
• What is personal savings and how is it beneficial and non beneficial to the business?

  Personal savings is money that has been invested in the business but isn't owned by the business and owned by the owners.

  
  

  Advantages-

  - Easier and quicker to use as you dont have to reach out to anyone in order to obtain finance, as the money is already within the business.

  - Cheap, no interest has to be paid as the money is already invested into the business which they can easily use to fund business expenses.

  
  

  Disadvantages-

  - However, it might not be suitable as most entrepreneurs don't have enough money to fund these expenses and will have to opt to obtain finance externally.
• What is Retained Profit and how is it beneficial and non beneficial to the business?

  Retained profit is the profit that stays within the business and isn't given back to the owners which can be used to fund future expenses when in need.

  
  

  Advantages-

  - Cheaper, no interest is needed to be paid

  - Flexible as it can be built up by a business and be kept in a account earning interest.

  - Increases company's balance sheet- attracting investors to invest in your business

  
  

  Disadvantage-

  - Shareholder dissatisfaction as shareholders may believe that the retained profit could be used to fund dividends instead of being kept within the business.

  - inefficient towards smart start up companies as retaining profit is unnecessary for them as the money has to be invested into the business in order to expand larger which is a heavy expense, so they would have to look for external sources of finance instead of retaining profit which is inefficient to them.
• What are selling assets and how is it beneficial and non beneficial to the business?

  Selling assets is when a business decides to sell their unnecessary assets such as machinery to the public in return for cash/finance.

  
  

  Advantages-

  - cheap no interest has to be paid

  - straightforward and is easy to be achieved as it can be done through online websites.

  
  

  Disadvantage-

  - only can be obtained if asset is no longer in use as the business wont have control over the sold asset anymore.

  - Unattractive to investors as sales of assets could indicate that the business is in trouble and is desperate to obtain finance.
• give overall benefits of internal sources of finance

  - cheap , no regular installments/interest needed to be paid so it is also more convenient.

  - Readily accessible as the money is already within the business and can be used straight away to be invested in production of products, marketing etc.
• Define external source of finance

  Obtaining finance outside of the business
• Give all examples of external sources of finance

  - Bank overdraft

  - Loan capital

  - Venture capital

  - Crowd funding

  - Share capital

  - Trade payables
• What are Bank overdraft and how is it beneficial and non beneficial to the business?

  Bank overdraft is an agreement between the business and the business where the bank enables the business to spend more than what the business actually have in account under a certain overdraft limit set by the business.

  
  

  Advantages-

  - easy to gain a large amount of capital

  - Easy to arrange as bank overdrafts can be made over a phone call

  - Business only has to pay interest ONLY if they have overdrawn, so it is cheap in a way. (wouldn't recommend using this one in an exam as an advantage)

  
  

  Disadvantages-

  - If the business goes over the overdraft limit, the business will be heavily charged and interest have to be paid towards the bank if business have overdrawn which is a very high expense.

  - Not suitable for a long term cause as at the end, there is an overdraft limit set by the bank and so the limit may not be enough for the business to use in order to grow and expand.
• What are Trade payables and how is it beneficial and non beneficial to the business?

  Trade payables is when businesses purchases supplies from their suppliers but pays them at a later date.

  
  

  Advantages-

  - Before the business will have to pay back what they owe, businesses are able to sell the supply in order to gain profit before they even pay for the supply.

  - When demand is high, businesses will be able to purchase supplies and stock up without having to increase their cash outflow at that moment.

  
  

  Disadvantage-

  - Suppliers may get upset and refuse

  - Costs of good may be higher if business bought the supplies in credit

  - Suppliers encourages early payments by setting lower prices and discounts to the business
• What is Loan capital and how is it beneficial and non beneficial to the business?

  Loan capital is an agreement between the bank and the business where the business is allowed to borrow a certain amount of money that has to be paid in monthly installments.

  
  

  Advantages-

  - easy to obtain a large amount of finance

  - Business will know exactly how much to pay the bank each months via fixed regular installments

  
  

  Disadvantages-

  - Inefficient as the business has to pay monthly regular installments

  - Business cannot pay back early or else the bank might believe that the business hasn't fully paid their loans.
• What is share capital and how is it beneficial and non beneficial to the business?

  Share capital is when businesses sells their shares to shareholders at a discount in order to obtain external finance.

  
  

  Advantages-

  - Able to obtain large amount of finance

  - interest payments are avoided so it is a more efficient way of obtaining finance

  - Shareholder are willingly want to help businesses with potential grow and high chance that they will ourchase the shares.

  
  

  Disadvantages-

  - Shareholder can take more control of the business than the business owner which could lead to a loss of control of the business

  - Businesses will have to disclose all their financial information to the public.
• What is Venture capital and how is it beneficial and non beneficial to the business?

  Venture capital is when venture capitalists provides income for high potential businesses (small/medium sized) to help the business grow and enlarge with advice and tips in return for interest and part ownership of the business.

  
  

  Advantages-

  - Guidance is provided by the venture capitalists so it is less risky to use.

  - Venture capitalists only provides income for businesses with high growth potential.

  - Easy to obtain large amount of finance as it is provided by the venture capitalist.

  
  

  Disadvantages-

  - Venture capitalist may control the business more than the business owner, losing control over the business

  - the venture capitalist are able to take full ownership of the business.
• What are crowdfunding and how is it beneficial and non beneficial to the business?

  Obtaining large amount of finance through a large audience/group of individuals that are willing to invest into the business, interested.

  
  

  Advantages -

  - cheaper as you can obtain large amount of finance without paying upfront fees

  - Allows businesses to showcase their ideas and recieve feedback which can be used to measure success rate of the product/idea based off customer feedback/opinions!!

  
  

  Disadvantages-

  - Lots of time being used up to organize promotional materials which may include videos, presentation etc in order to attract investors
• What is the main advantage of external sources of finance?

  Obtaining large amounts of capital is much easier under a shorter period of time
• Why is cash important for a business?

  Cash is a liquid asset which pays for the every day costs of the business as well as in order to pay suppliers, overheads and the business employees and prevent business failure.
• What is the difference between cash and profit?

  Cash is the money a company can spend immediately to cover bills.

  
  

  Profit is the amount of money a company earns after costs have been taken into account.

  
  

  A business can still survive even though they aren't making profit but if the business doesnt have cash, it will fail.
• Define cashflow forecast


  Document that helps a business estimate how much cash they need for each month in the business- Through business income and expenses.
• What does the cashflow forecast show?

  Cashflow forecast shows where the business will have a shortfall of cash and will not be able to pay their bills and therefore have to come up with ways in order to prevent a shortfall of cash.
• How do we know if a business is experiencing a shortfall of cash by looking at the cashflow forecast?

  The balance that is carried forward would be negative if businesses are experiencing a shortfall of cash.
• Define income


  Cash that is coming into the business (cash inflow)
• Define expenditure


  Cash coming out of the business (Business expenses)
• What happens to the closing balance when a new month comes

  It will become the starting balance of that month
• What is a business cashflow forecast used for?

  - control and monitor business's cash in and out of the business

  - Businesses can outlook where they may experience a shortfall of cash or a cash surplus so they are able to arrange suitable finance in order to cover for them.

  - Helps business come up with decisions to stabalize overall business overall cash flow

  - Allows businesses to compare what they have predicted to happen that year and what actually happened that year- allows to make decisions in how to improve etc.

  - Can see if there will be a shortage of cash and therefore will have to settle an overdraft to cover them.

  - show investors that if the business is managing the finance well or not
• What are limitations of a cashflow forecast?

  - Its just a prediction, what actually happen may be different- can be negatively or positively

  - Only lasts up to 12 months which is too short of time to make big decisions for the business

  - overestimating expenses and underestimating income is very common
• Define profit


  The money a business has left over after of its expenses have been paid.
• How to you calculate profit?

  Profit = Total revenue - Total Costs
• Define revenue


  The amount the business earns before making deductions of the business's expenditure
• How do you calculate revenue?

  Price x Quantity
• Define sales revenue


  the amount of money received for selling goods or services
• Define variable costs/direct costs

  Amount that it costs in order to make one unit of product from a wholesaler

  
  

  (on a graph, it would be linear passing from the origin (proportional))
• How do you calculate variable costs?

  Average variable costs x quantity that have been sold
• what happens to the output is variable costs increases

  Output also increases as more units of products are being made.
• Define fixed costs


  Amount that you pay that doesn't change whatsoever which can include rent, insurance, salaries, interests etc.

  
  

  ( on a graph, it would be a fixed straight line from y axis, no origin)
• Define total costs


  Sum of all of the costs
• how do you calculate total costs?

  fixed costs + variable costs
• How do you calculate the average costs of per unit of product?

  Total costs/total number of units
• Define break-even point


  The point where the business doesn't make a profit nor a loss
• How do you calculate break even point?


  Fixed costs/ sales price- variable costs (contribution)