1.3

• Cash


  Notes, coins and money in the bank
• Cash


  • Available quickly to businesses (unlike potential future profits)
  • Important to the day to day running of a business
• Cash is really important to the day to day running of a business
• Why cash is important


  • Paying employees
  • Paying for raw materials/paying suppliers
  • Paying for overheads (offices or shops)
• Cashflow


  The total inflow and total outflow of money into and out of a business' bank accounts
• Cash inflow


  All of the money coming into a business
• Cash outflow


  All of the money going out of the business
• Cashflow is different from profit because


  1. Profit only looks at money associated with making and selling goods and services

  2. Profit is often calculated for an entire year, but cashflow looks at when the money actually changes hands
• Cash is needed to make sure that a business does not become insolvent
• Avoiding cash flow problems


  • Negotiate an overdraft facility
  • Keep costs under control
  • Manage credit effectively
• Businesses need positive cash flow to reduce the risk of failure and insolvency
• Cash flow forecast


  Predicting the future flow of cash in and out of a business' bank accounts. Usually for a 12-month period
• Purpose of cash flow forecast


  1. Plan for the future

  2. See if they can afford more staff

  3. See if they can afford to expand

  4. See if they can reward owners

  5. See if they need to arrange more finance
• Total inflows


  All the money coming in that month
• Total outflows


  All the money going out that month
• Net cash flow


  The difference between all cash inflows and all cash outflows of a business
• Opening balance


  The amount of money a business starts with at the beginning of the period
• Closing balance


  The amount of money the business has at the end of the period
• Calculating closing balance

  Closing balance = Opening balance + Net cash flow
• Overdrafts


  • Short-term finance the bank allows the business to draw more money from their bank account than they actually have in it
  • Helps with cash flow because it means a business can carry on trading, even if the money is not currently available
  • Can be used at any time once set up
• Overdrafts - Drawbacks


  • High interest rates make this very expensive
  • The outstanding balance needs to be repaid
• Trade credit


  • When a supplier allows a business a period of time (such as 30 days) to pay for goods and services
  • Helps with cash flow because it gives a business the goods/materials to sell before having to pay for them
• Trade credit - Benefits


  • Allows a business to sell products before having to pay for them
  • Can allow a business to carry on trading, even if they don't have the cash right now
• Trade credit - Drawbacks


  • Doesn't actually give any extra money - just a change in timing of payments
  • New businesses or businesses with poor financial records are unlikely to be offered credit terms by suppliers
• Types of business finance


  • Personal Savings
  • Retained Profits
  • Bank loans
  • Selling Assets
  • Venture Capital
• Personal Savings


  Owner uses their own savings and puts money into the business. Most sole traders will use their own savings to start up a business.
• Personal Savings


  • No interest payments, so this is a cheap source of finance
  • Owner keeps full control
• Personal Savings disadvantages 


  • Limited to amount of savings
  • High risk of losing this, which can impact later on quality of life
• Retained Profits


  Money reinvested into the business to fund future expenditure/expansion
• Retained Profits


  • No interest payments, so this is a cheap source of finance
  • Owner keeps full decision on how to spend remaining money
  • No risk of reducing ownership or being taken over
• Retained Profits


  • Limited to amount of profit, not possible if business is not making a profit
  • Might annoy owners, stopping them from investing further
• Bank loans


  An amount of money borrowed from the bank, then repaid (with interest) over a set period of time. The loan period will usually be between 1 and 10 years.
• Bank loans


  • Large amounts can be borrowed
  • Repayments are scheduled
• Bank loans


  • Interest payments make this expensive
  • Time consuming to arrange
  • Lack of flexibility - repayments have to be made on time
• Selling Assets


  Selling off unwanted resources, and using the money to re-invest into the business
• Selling Assets


  • No repayment needed
  • Owner keeps control
  • Can get money for something of little use to the business
• Selling Assets


  • Only worth what someone will pay
  • The business can't use the assets when they have been sold
  • Buying back/replacing assets might be more expensive
• Venture Capital


  A person or company (venture capitalist) who buys shares in a business that they hope will grow fast. In the long term, they will sell the shares at a profit and often reinvest in other companies.
• Venture Capital


  • Will often 'back' risky ideas that don't meet bank criteria
  • Can provide large sums of money
  • Can gain new skills and ideas to run the business better
• Venture Capital disadvantages 


  • Venture Capitalist will take a (large) share of the profit
  • Venture Capitalist will have part ownership, so will influence decision making
  • Loss of control