4 - Finance

• What is an internal source of finance?

  finance gathered from within the business
• What is an external source of finance?

  finance gathered from outside of the business
• What are the benefits/drawbacks of using family/friends?

  Benefits - interest rates low/non-existent, may not need to be repaid, no dilution of ownership

  Drawbacks - amounts may be limited, repayment may be with little notice, can cause conflict
• What are the benefits/drawbacks of new partners as a SoF?

  Benefits - new skills and qualities will increase profits, more interest-free money brought in

  Drawbacks - limited source of finance, dilution of ownership, lowers profits
• What are the benefits/drawbacks of venture capitalists?

  Benefits - get share of experience and expertise

  Drawbacks - they may want control over the business
• What are the benefits/drawbacks of overdrafts?

  Benefits - offers flexibility, good for short-term, interest is only paid on the amount used

  Drawbacks - repayable at any time, can be withdrawn at any time, high rates of interest
• What are the benefits/drawbacks of using trade credit?

  Benefits - allows business to use or sell the goods before repaying supplier, improves cash-flow, no interest

  Drawbacks - conflict with suppliers, very short-term, difficult to obtain for start ups as there is no trust
• What are the benefits/drawbacks of government grants?

  Benefits - doesn't have to be repaid, cut costs of setting up, no interest

  Drawbacks - difficult to obtain with complicated process, have to set up in area specified
• Total revenue = selling price x number of goods sold
• What is a fixed cost?

  a cost that doesn't change when a business changes output
• What is a variable cost?

  a cost that changes as the output changes
• Variable cost = variable cost of ONE good x number of goods produced
• Total cost = fixed cost + variable cost
• Profit = total revenue - total costs
• Sources of finance most suitable for start ups

  Owners capital

  Business Angels

  Bank loans

  Leasing

  Government grants
• Why must start ups have a strong business plan when applying for bank loans?

  Decisions on bank loans will be based on the strength and potential of success from the business plan
• Cash flow is the difference between the inflow and outflow of cash
• Suitable sources of finance when dealing with cash flow issues?

  Owners capital - covers short term debts

  Bank overdrafts - allows bills to be paid even with no money

  Trade credit - able to buy materials without cash and revenue from goods produced then sold can be used to make payments
• Suitable sources of finance from expanding businesses?

  Retained profits

  Selling assets

  Share issue - existing businesses are mostly plcs meaning they can sell shares

  Bank loans
• Revenue is the amount of money taken from customers when selling goods and providing services
• A loss occurs when a business spends more than it earns which threatens the survival of the business
• Break-even occurs when a business is making neither a profit or a loss
• Break-even level is reached when total revenue and costs are EQUAL
• Benefits of a break even chart

  Helps business understand costs, revenue and potential profit

  Helps aid business decisions
• Contribution is sales revenue minus variable costs
• To work out contribution..

  Selling price - variable costs
• Break-even output = Fixed costs / Contribution
• A break-even point is not fixed and can be impacted by the amount of profits made in the business following changes to costs and prices
• A rise in price means a business will need to...?

  sell fewer goods to cover their costs

  increase their profits
• How does a rise in fixed costs affect break-even?

  business will need to sell more goods to break-even
• Benefits of break-even analysis

  Helps businesses decide if providing a good/service is worthwhile

  Guides decisions whether to increase price or issues to do with costs
• Problems of break-even analysis

  difficult to estimate contribution

  assumes price is constant but in a competitive market, prices may alter
• Investment involves

  buying property such as land or buildings

  buying machinery, equipment and vehicles

  taking over other businesses
• Average rate of return is the average yearly profit from an investment to the cost of the investment
• ARR= Average profit / initial investment x 100
• average profit = net profit / number of years of investment
• An income statement is a financial statement showing a business‘s revenues, profits and loss
• Sales revenue

  -Costs of sales

  =Gross profit

  -Expenses/Overheads

  =Operating Profit

  -Interest/Tax

  =Net Profit
• Net profit is a measure of performance by showing how profitable its been
• Examples of overheads/expenses?

  Salaries

  Rent

  Maintenance costs

  Insurance