2.1 Raising Finance

• Owner's capital


  The personal savings invested in the business by the owner
• Retained profit


  The surplus generated in previous years that is not distributed to owners, but reinvested back into the business
• Internal finance is often free (it does not involve the payment of interest or charges)
• Opportunity cost of using internal finance


  It is not available for other purposes
• Sale of assets


  The selling of business assets that are no longer required, such as machinery, land or buildings, to generate a source of finance
• A firm's working capital situation

  Can be improved by incentivising customers to pay more promptly for credit purchases
• Sale and leaseback arrangement

  When a business sells an asset, such as a building, for which it receives cash, and then rents the assets from the new owners
• Working capital


  Money used in the day-to-day operations of a business
• Capital expenditure


  Spending on non-current assets such as equipment, buildings, IT equipment and vehicles
• Businesses that own few non-current assets

  Most often struggle to raise internal finance
• Overdraft


  An arrangement for a business current account holder to spend more money than it has in its account
• Business angel


  An individual who specialises in making investments in start-up or expanding businesses
• Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter
• Interest


  A percentage charged on money borrowed from a bank or other financial provider, or a percentage awarded on savings and investments
• Venture capital


  Funds provided by specialist investors to businesses that have significant potential for growth
• Secured bank loan


  Borrowing backed by collateral such as a home or other financial asset
• Joint venture


  A contractual agreement between two or more firms to combine their financial resources and expertise to achieve a particular goal
• Leasing


  When an asset is used by the business in return for regular payments, e.g. a piece of machinery or a vehicle. The business does not own the asset.
• Trade credit


  An agreement made with suppliers to buy raw materials, components and stock which are paid for at a later date, typically 30 to 90 days later
• Grants do not need to be repaid
• Unlimited liability


  When business owners are fully responsible for all debts owed by the business. They are also liable for any unlawful acts committed by those connected to the business.
• Sole traders have unlimited liability
• Limited liability


  When owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails
• With unlimited liability, owners may have to use their own personal assets, such as their homes or savings, to pay debts or legal fees if their business fails
• With limited liability, there is a legal distinction between a business and its owners
• Unlimited liability businesses often struggle to raise finance as they are seen as risky by lenders
• Revenue expenditure


  Spending on current assets such as raw materials and components, or on day-to-day expenses such as wages or utilities
• Incorporated


  A business has been registered as a company to become a separate legal entity from its owners
• Business plan


  A detailed document that sets out the objectives of a business, its planned strategy and tactics, and its expected cash flows, revenue and profits
• Cash flow forecast


  A prediction of the anticipated cash inflows and cash outflows, typically for a six- to twelve-month period
• A cash flow forecast can help identify where the business may experience cash shortfalls or cash surpluses, so that plans can be made to manage these periods
• Opening balance


  The previous month's closing balance carried forward
• A cash flow forecast forecasts the predicted cash inflows and outflows over a future period of time, usually six- or twelve months
• Net cash flow


  Total cash inflows minus total cash outflows
• The main aim of producing a business plan

  To reduce the risk associated with starting a new business
• Closing balance


  Calculated by adding the net cash flow to the opening balance
• Cash flow forecasts require appropriate skills, insight, research and time to prepare and update adequately
• Formula to calculate closing balance

  Closing balance = Opening balance + Net cash flow