2 1 raising finance

Owner's capital is the personal savings invested in the business by the owner.

Retained profit is the surplus generated in previous years that is not distributed to owners, but reinvested back into the business.

True. Internal finance is often free (it does not involve the payment of interest or charges).

The main opportunity cost of using internal finance (retained profit) is that it is not available for other purposes.

The sale of assets refers to the selling of business assets that are no longer required, such as machinery, land or buildings, to generate a source of finance.

True. A firm's working capital situation can be improved by incentivising customers to pay more promptly for credit purchases.

A sale and leaseback arrangement is when a business sells an asset, such as a building, for which it receives cash. It then rents the assets from the new owners.

Working capital is money used in the day-to-day operations of a business.

Capital expenditure is spending on non-current assets such as equipment, buildings, IT equipment and vehicles.

False. Businesses that own few non-current assets most often struggle to raise internal finance.

An overdraft is an arrangement for a business current account holder to spend more money than it has in its account.

A business angel is an individual who specialises in making investments in start-up or expanding businesses.

True. Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter.

Interest is a percentage charged on money borrowed from a bank or other financial provider, or a percentage awarded on savings and investments.

Venture capital are funds provided by specialist investors to businesses that have significant potential for growth.

A secured bank loan is borrowing backed by collateral such as a home or other financial asset.

A joint venture is a contractual agreement between two or more firms to combine their financial resources and expertise to achieve a particular goal.

Leasing is 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 is 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.

False. Grants do not need to be repaid.

Unlimited liability occurs 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.

True. Sole traders have unlimited liability.

Limited liability is 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.

True. 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.

False. With limited liability, there is a legal distinction between a business and its owners.

True. Unlimited liability businesses often struggle to raise finance as they are seen as risky by lenders.

Revenue expenditure is spending on current assets such as raw materials and components, or on day-to-day expenses such as wages or utilities.

The legal status of a limited company is that it is incorporated, and owners are considered a separate legal entity from the business.

False. The owners of partnership businesses are known as partners. Shareholders are owners of companies.

Incorporated means that a business has been registered as a company to become a separate legal entity from its owners.

A business plan is a detailed document that sets out the objectives of a business, its planned strategy and tactics, and its expected cash flows, revenue and profits.

A cash flow forecast is a prediction of the anticipated cash inflows and cash outflows, typically for a six- to twelve-month period.

True. 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.

The opening balance is the previous month's closing balance carried forward.

False. 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 is total cash inflows minus total cash outflows.

The main aim of producing a business plan is to reduce the risk associated with starting a new business.

The closing balance is calculated by adding the net cash flow to the opening balance.

True. Cash flow forecasts require appropriate skills, insight, research and time to prepare and update adequately.

Formula.