gcse.business.studies.paper.2.finance

• Short-term finance


  Used to help a business maintain a positive cash flow
• Uses of short-term finance


  • Get through periods when cash flow is poor for seasonal reasons
  • Bridge the gap when a large payment is delayed, leaving the business without enough money to pay its bills
  • Provide extra cash to pay for the manufacturing required to meet sudden or unexpected changes in customer orders
• Overdraft


  One of the most common forms of finance, but should be used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks
• Overdraft


  • Variable interest rates - the cost of borrowing money will change when the interest rate changes
  • Flexibility - a business uses its overdraft only when it needs to, therefore the business will only pay interest when the overdraft is used
  • The bank can demand full payment - banks can demand full repayment of an overdraft within 24 hours
• Trade credit


  A credit agreement with a supplier that allows a business to obtain raw materials and stock but pay for them at a later date
• Trade credit


  • Credit limit - the maximum amount of credit available to the business
  • Credit period - the length of time the business has to pay what is owed, usually 30, 60 or 90 days
  • Frequency of payment - how often payment is required, usually monthly
  • Method of payment - the way in which the business makes payment (eg bank transfer, cheque or card payment)
  • Retrospective discount - a discount given when the business has purchased a certain amount of stock or raw materials
• Long-term finance


  Businesses need to consider how they will fund their activities when starting up as well as during their day-to-day operations
• Costs businesses need to cover

  • Equipment
  • Stock
  • Paying bills
• Personal savings


  Money that has been saved up by an entrepreneur, does not cost the business as there are no interest charges applied
• Venture capital


  Money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits, venture capitalist wants a return on investment and input into how the business is run
• Share capital


  Money raised by shareholders through the sale of ordinary shares, buying shares gives the buyer part ownership of the business and certain rights
• Advantages of share capital

  • Share capital is a source of permanent capital, no dividends to be paid if the business has a poor year
• Disadvantages of share capital

  • It dilutes control for the founders, the business is vulnerable to takeover
• Bank loan


  Money lent to an individual or business that is paid off with interest over an agreed period of time, usually with a fixed rate of interest
• To get a bank loan, a business must apply to a bank, the bank then carries out credit checks and may require the business to secure its assets against the loan or provide a guarantor
• Retained profit


  When a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand, does not incur interest charges or require the payment of dividends
• Crowdfunding


  Involves a large number of people investing small amounts of money in a business, usually online
• Advantages of crowdfunding


  • Acts as a form of market research, provides opportunities for individuals to start up a business even if they don't have access to other sources of funding
• Disadvantages of crowdfunding


  • The business must be interesting, it can be difficult to reach the funding target
• Business growth


  Increasing the scale of a business's operation and competitiveness
• Internal (organic) growth


  • A business decides to expand its own activities by launching new products and/or entering new markets
• External (inorganic) growth


  • A business grows by acquiring or merging with another business
• Ways a business can grow internally

  1. Employ more people

  2. Open more branches

  3. Increase sales or revenue

  4. Increase profits
• Research and development


  Work directed towards the innovation, introduction and improvement of products and processes
• Internal (organic) growth


  Growth achieved by a business through its own resources and activities, without acquiring other businesses
• External (inorganic) growth


  Growth achieved by a business through acquiring or merging with other businesses
• Entering new markets


  1. Entering overseas markets

  2. Amending marketing mix

  3. Taking advantage of new technology
• Entering overseas markets


  • Gives access to a brand new market, which could increase profitability
  • Developing new, unfamiliar markets can be complex and expensive
• Amending marketing mix


  • Vital when entering a new market, especially an overseas market
  • May need to change price, product, promotion or place to appeal to new market
• Taking advantage of new technology

  • Can enable e-commerce to reach new customers
  • Can lower production costs to target lower-income markets
• External (inorganic) growth


  Business growth that involves mergers or takeovers
• Mergers


  • Two businesses join to form a new (but larger) business
• Takeovers


  • An existing business expands by buying more than half the shares of another business
• Merger example


  • Business 'A' and Business 'B' each want to expand but do not feel they can get any bigger alone. The two businesses decide to come together and share their locations, stock, marketing, products and staff. This allows them to grow together as a single business.
• Takeover example


  • Business 'A' decides it wants to grow but the area it wants to grow into is already occupied by a similar or smaller business; called Business 'B'. Business 'A' decides to buy over 50% of the shares in Business 'B' in order to take control. This gives Business 'A' access to growth through ownership of a new business in either the same or a different area of the market.
• Four methods of merger or takeover

  • Horizontal integration
  • Forward vertical integration
  • Backward vertical integration
  • Conglomerate integration
• Horizontal integration


  • Two competitors join through a merger or takeover. The new business then becomes more competitive and increases its market share. This gives it more control when negotiating and setting prices.
• Forward vertical integration


  • A business takes control with another that operates at a later stage in the supply chain.
• Backward vertical integration


  • A business takes control of a business earlier in the supply chain.
• Conglomerate integration


  • Businesses in unrelated markets join through a takeover or merger. This enables businesses to spread their risk over a wider range of products and services.