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NEW BUSINESS FINANCE
SOURCES
Government grants
Owners funds
Selling shares (ltd only)
Bank loans
Mortgages Overdrafts
Loans from friends and
family
Leasing
Hire purchase
BANK LOAN
Bank agrees to lend a set sum of money
for an agreed period of time. In return
the bank will charge interest. The Halifax
charge 5.9% interest on a £10,000 loan
paid back over 5 years. The total loan
repayable would be £11,500, the bank
making £1,500 in interest.
ADVANTAGES DISADVANTAGES
Good for budgeting – payments
spread over loan term.
Expensive – interest must be paid
on the amount borrowed.
Quick – application process is
usually short
May not get approval – if have no
history of borrowing finance
SELLING SHARES (LTD)
Private individuals (friends and
family) are invited to become
part owners in the business.
They will purchase a specific
amount of shares in the business.
ADVANTAGES DISADVANTAGES
Permanent – does not have to be
repaid.
May lose control – if do not own
majority of the shares (51%).
Cheap – no interest charges. Less profits – dividends (% of profits)
may need to be paid to new
shareholders.
LEASING
ADVANTAGES DISADVANTAGES
Asset maintained by leasing
company – reduces maintenance
costs.
Never own the asset – belongs to
the finance company.
Have up-to-date equipment – can
be exchanged when newer
equipment become available.
Payments are high – include profits
for the finance company.
This allows a business to rent
assets such as vehicles,
computers and photocopiers
etc over a set period of time
e.g. 3 years.
LOAN FROM FRIENDS/FAMILY
ADVANTAGES DISADVANTAGES
Easy and quick to arrange – simple
bank transfer.
Lead to arguments – if loan is paid
back slowly or if no payments are
made at all.
Cheap – often lent free of interest
payments.
Confusion over control - may feel
that they are now part owners and
have the right to make decisions.
Family/friends agree to lend
a fixed sum of money.
MORTGAGES
ADVANTAGES DISADVANTAGES
Allows a business to purchase
expensive assets such as land and
buildings.
Bank can repossess asset – if loan
repayment are not paid.
Good for budgeting – payments
spread over loan term.
Interest must be paid – if mortgage
is taken over a long-term period i.e.
30 years, this will be costly.
Loans from banks that are used to
buy land and buildings. They are
normally very long-term loans of up to 30 years. The business will have to
make regular monthly payments until
the money and any interest is repaid.
GOVERNMENT GRANTS
ADVANTAGES DISADVANTAGES
Does not have to be repaid – no
accumulation of debt.
Can be difficult to obtain – business
has to meet a number of
conditions.
Cheap – no interest payments. Process is time consuming – lots of
forms have to be completed and
possibly an interview,
A grant is a sum of money given to an
entrepreneur or a business for a
specific reason. Grants from the UK
government are usually given if a
business creates jobs. Usually the
business has to put in a sum of money
equal to the government grant.
OVERDRAFTS
ADVANTAGES DISADVANTAGES
Flexible – can use overdraft facility
when it is needed.
Expensive - interest rates can be
high.
Interest is only paid on the amount
overdrawn.
Not permanent - bank can ask for
the overdraft to be repaid at very
short notice.
Overdrafts are flexible loans as
businesses only use them when
required. Bank will allow a business
to spend more than what they
have in their business account to
an agreed limit.
OWNERS FUNDS
ADVANTAGES DISADVANTAGES
Quick – no application process to
go through.
Not appropriate – may not have
enough savings to contribute.
Cheap – no interest payments. Risk – may lose savings if business
fails.
The owner(s) of a new
business may use their own
savings to invest in the
business.
WHAT IS CASH FLOW?
Is the money that
flows into and
out of a business
on a day-to-day
basis.
CASH INFLOW Money that becomes available to a
business:
• Income from sales
• Loans from banks
• Owners savings
CASH OUTFLOW Payments made by a business causes
an outflow of cash:
• Buying raw materials
• Wages
• Interest on loans
• Electricity and gas
CASH FLOW DOCUMENTS
CASH FLOW FORECAST
A plan of the expected inflows and
outflows to and from a business over a
period of time.
CASH FLOW STATEMENT
A historical record of the cash inflows
and outflows that have taken place
over a period of time.
IMPORTANCE
REASON 1 Cash flow forecasts help
entrepreneurs:
• Identify times when the
business might be short of
cash.
REASON 2 Cash flow forecasts help
entrepreneurs:
• Take action to avoid
cash shortages
becoming a major
problem.
CONSEQUENCES
INSOLVENCY If a business does not
have enough cash to pay
its bills it cannot trade. It is
said to be insolvent.
RECEIVERSHIP A business will go into
receivership when this
happens. A ‘receiver’
will be appointed to
administer the business.
They will try and sell the
business as a going
concern or close the
business down and sell its
assets.
CASH FLOW FORECAST Peter and Sue’s cash flow forecast
December January February
Cash inflows
Peter and Sue’s savings £5,000
Bank loan £7,500
Sales revenue from Sue’s £3,800 £6,000 £8,800
Total cash inflows (A) £16,300 £6,000 £8,800
Cash outflows
Purchases of stocks of food and drink £8,000 £4,250 £3,900
Wages £4,000 £3,500 £3,700
Interest on bank loan £250 £250 £250
Rent (3 months) £4,250 - -
Electricity and gas £250 £220 £210
Total cash outflow (B) £16,750 £8,220 £8,060
Net cash flow (C = A - B) (£450) (£2,220) £740
Opening balance (D) £1,000 £550 (£1,670)
Closing balance (E = D + C) £550 (£1,670) (£930)
SOLVING CASHFLOW PROBLEMS
ACTION POSSIBLE PROBLEMS Apply for an overdraft
Helps in the short-term but should not be relied on
long-term because of high interest. Banks do not
issue overdrafts to all businesses; they must have a
proven track record.
Apply for trade credit If a business is new they may not have the history
with the supplier to be accepted for trade credit.
Delay payments with suppliers If payments are delayed suppliers will stop supplying
stock/materials.
Pay workers monthly rather than weekly Workers may leave if the business changes to this
method of payment.
Speed up cash inflows by asking customers to pay
on delivery or pay monthly
Customers could be annoyed by this and purchase
elsewhere instead.
Increase cash inflows – increase sales, apply for a
loan
Banks do not approve bank loans to all businesses;
they must have a proven track record. Interest. Can
be difficult to increase sales during times of
recession.
Reduce cash outflows – employ fewer staff, hold
smaller stock of raw materials, find cheaper
gas/electrical rates
May affect operations of the business.
Owners invest more money into the business Interest free source of finance. Only a possibility if
owner has sufficient funds.
PRICE
DEFINITION Price is the amount a
business asks a
customer to pay for a single product. When
you go into a shop,
most items for sale
have a price attached
so you know how much
you have to pay.
WHAT PRICE? A business must consider the
following:
• What competitors are charging
• How much is costs to produce
the good/service that the
business sells
• Popularity of good/service –
high price
• Amount of stock left – low price
(sales)
• What customers can afford
and are willing to pay
SALES
DEFINITION
Number of
products sold by
a business over
some time
period, normally
a week, a month
or year.
EXAMPLE
A dressmaker
sells 12 dresses a
month.
SALES
Revenue
=
selling price x number of products sold
Is the income that a business receives
from selling its goods or services.
EXAMPLE
A dressmaker sells dresses at a standard price of
£110. If the business sells 12 dresses a month, the
monthly revenue will be £1,320.
£110 x 12 = £1,320
REVENUE
Revenue
=
selling price x number of products sold
Is the income that a business receives
from selling its goods or services.
EXAMPLE
A dressmaker sells dresses at a standard price of
£110. If the business sells 12 dresses a month, the
monthly revenue will be £1,320.
£110 x 12 = £1,320
COSTS
FIXED COSTS Fixed costs do not change
when a business changes its
output (how much it
produces).
VARIABLE COST Variable costs vary directly
with the business’s level of
output and sales.
EXAMPLES
Management Salaries
Insurance
Rent
EXAMPLES
Factory Labour
Raw Materials
Packaging
Total cost = Fixed cost + Variable cost
OTHER COSTS
START-UP COSTS One off costs when
starting a business.
RUNNING COSTS Are expenses that a
business has to pay
regularly as a normal
part of trading.
EXAMPLES Rent
Raw materials
Wages
Business taxes
EXAMPLES Buildings
Machinery and equipment
Market research
CALCULATING PROFIT
Sales – the number of
products sold
Price – what customers
pay
Revenue – the
businesses income
x
Total costs – fixed costs
and variable costs
Profits (or losses)
gives
minus
gives
CALCULATING PROFIT EXAMPLE
Sales
10,000 pens
Price
£1 per pen
Revenue
£10,000
x
Total costs
£5,000
Profits
£5,000
gives
minus
gives
FINANCE ADVICE
SOURCE OF
ADVICE
EXPLANATION
Business Link Organisation run by the government that operates in all
parts of the UK. Has 445 branches. Helps new and existing
business. Offers advise and support.
Private Websites Smallbusines.co.uk best known private website. Sponsored
by Lloyds TSB. Offers advise on starting a business, finance,
marketing, employing people and the law for small
businesses.
Banks • Help with writing business plans
• How to find suitable buildings for the business
• The issues involved in employing people
• How
Accountants Give support in financial matters such as borrowing money
and paying taxes.
Solicitor Offer help with legal matters such as setting up a private
limited company or signing a franchise agreement.