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2.3.
1 Planning a Business 2 Internal Finance
Retrieval quiz Identify if these statements about business plans are true or false: 1. A business plan can reduce the risk to a bank or other investors allowing the business to access to a wider range of source of finance TRUE / FALSE 2. A business plan can mean that the business could negotiate a lower rate of interest on a loan TRUE / FALSE 3. A business plan can help the business to make a profit TRUE / FALSE 4. A business plan can allow the owner to negotiate a reduced percentage of equity being given away if a venture capitalist is investing TRUE / FALSE
1 Reasons for raising finance There are lots of reasons a business would need to raise finance, these are the main ones:
• This is also sometimes called owner’s equity • It shows the stake the owner has in the business • This represents the net assets of the company – if all the debts of the business were paid off how much would be owed to the owner
• Sole traders and partnerships would be the two business forms which would mostly use personal savings / owner’s capital start-up, and to trade and to grow • The amount of finance that can be raised will depend on the savings that the owner has
Why might the owner have significant savings?
Internal finance: Retained profits
• After a year or more of _______________________ a business may have some
profits that they are able to reinvest into the business to help it grow.
4 • The advantage of ___________________________ profits is there is no interest
to pay
• The disadvantage is once retained profit is used it has gone and cannot be
used __________________________ in the business
When is retained profit appropriate?
• If a business is in its first year of trading it will NOT have any retained profits, as it will not have made any to retain • If a business has not been profitable then there will not be any retained profit for the business to spend ______________________________________________________________________________
Internal finance: Sale of assets • A business can raise finance by selling items that they already own, these could be: A B C D
• The business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company, meaning the business will look less attractive to investors
5 When is the sale of assets appropriate? • All types of business can sell their assets, except those that have just started up • This may not raise enough money for growth or expansion • When a business is growing it may need to raise cash fast to be able to continue to trade • Assets (like a van) can be sold quickly (same day) for cash
A business is selling its assets. Why would this be a red flag to a
potential investor in the business?
Plenary Quiz Identify which of these is an internal method of finance: 1. Personal savings of the owner 2. Retained profit if the business is a start-up 3. Sale of machinery 4. Retained profit if the business is established
