A-Level Business Studies: Raising Finance (Theme 2.1)

Overview

• Revision of Theme 2.1: Raising Finance.
• Covers internal and external finance sources, liability types, business plans, and cash flow forecasts.

Internal Sources of Finance

1. Owner's Capital

• Investment by the business owner from personal savings.
• Risks the owner's personal savings.
• Suitable for those with significant personal savings.

2. Retained Profit

• Profits retained after paying dividends to shareholders.
• No interest or loss of ownership.
• Depends on the business's profitability.
• Less profit as dividends might upset shareholders.

3. Sale of Assets

• Selling non-current assets like property or machinery.
• Reduces capacity if assets are crucial for business operations.
• Provides cash from unused assets.

External Sources of Finance

1. Loans

• Borrowing from banks or private lenders with interest.
• Requires collateral and increases fixed costs.
• High amounts available but interest rates vary by business size.

2. Share Capital

• Selling shares to raise money; applicable to limited companies.
• No repayment obligation but dilutes ownership.
• Public companies sell on stock exchange.

3. Venture Capital

• Private equity for startups with high growth potential.
• Includes mentorship and networking from experienced entrepreneurs.
• Ownership is shared with venture capitalists.

4. Bank Overdraft

• Short-term finance allowing negative bank balance.
• High interest rates; suitable for immediate cash needs.

5. Leasing

• Renting non-current assets instead of purchasing.
• Avoids large upfront costs, could be more expensive long-term.

6. Trade Credit

• Agreement to pay suppliers at a later date.
• Helps manage cash flow but records as trade payables.

7. Grants

• Non-repayable funds for specific projects from government or private sectors.
• Highly competitive with specific criteria.

8. Crowdfunding

• Accumulating small investments from many individuals for a project.
• Engages public interest but no guarantee of reaching funding targets.

Liability

Unlimited Liability

• Owner and business are the same entity; personal assets at risk.
• Applies to sole traders and partnerships.

Limited Liability

• Owner and business are separate entities; personal assets protected.
• Applies to private and public limited companies.

Business Plans

• Document outlining goals, strategies, financial forecasts.
• Includes business summary, opportunity, financial forecasts, market analysis, marketing strategy, and key personnel.
• Used to attract investment by demonstrating business viability and risk management.

Cash Flow Forecasts

• Tracks cash movement into and out of a business over time.
• Important for managing expenses and business operations.
• Includes cash inflows, outflows, net cash flow, opening and closing balances.
• Helps identify future cash flow issues and secure funding.
• Limitations due to unpredictability and potential inaccuracies.