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Financing a new business

Financing a new business. Start up money. Capital “money invested by the owners” - it can be a substantial amount - limited to personal wealth (Sole trader/partner) - LTD/PLC can sell shares Loans - Bank loan: fixed term; pay interest; instant money

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Financing a new business

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  1. Financing a new business

  2. Start up money Capital “money invested by the owners” - it can be a substantial amount - limited to personal wealth (Sole trader/partner) - LTD/PLC can sell shares Loans - Bank loan: fixed term; pay interest; instant money - Commercial mortgage: 80% value; need security - Venture capital loans: lend money in return for some business control - Private loans from family or friends Government Assistance - Welsh Assembly - Enterprise Capital Fund - Small Firms Loan Guarantee

  3. Financing Running Costs • Sales Revenue - money from selling goods and services • Overdrafts - short term borrowing • Credit trading - buying goods and services, and agreeing to pay at a later date (usually 30 – 60 days) • Selling Assets - selling items owned by the business • Retained profits -using profits made by the business • Hire Purchase - paying for goods in instalments • Share Issue - giving up sole ownership of the business

  4. Start up costs • Premises - buying (big expense) • - deposit on renting/leasing • - could work from home • - e-commerce will cost less • Equipment - varies to type and size of business: - IT equipment • - telephone • - desk • - van • Fixtures and fittings - Carpets • - Light fittings • Market Research - finding out what people want

  5. Running Costs Examples: Raw Materials Packaging Advertising Website up keep direct mailing Staff wages Recruitment costs Training Insurances Rent and Rates Utilities Telephone Stationery Postage Bank charges Accountant fees

  6. Flow of Cash: • Sources of cash • Customers • Overdraft • Capital • Investors • Bank loan • Uses of cash • Buying stock & • Materials • Running expenses • Paying owners • Surplus cash Liquidity – ability of a business to pay off its debts as they come due.

  7. Problems with cash flow: • What if sales fall below set targets? • What if a debtor goes bust? • What if the shop catches fire? • Bank will not lend anymore money? Expenses: no money To pay wages CASH DANGER POINTS Outside sources i.e. bank calls in O/D Debtors fail to pay Stock/Materials: No money to pay suppliers

  8. Cash Budget / Cash Flow • Receipts (money in) • Sales • Capital introduced • loan • Grant • Other income • Expenses (money out) • Stock • Equipment • Wages • Marketing • Utilities • Telephone • Rent Closing balance for one month is the opening balance of the next month. Cash flow used as a prediction. Good for “What if?” situations

  9. Forecasting Cash Flow “predicting future cash flowing in and out of the business” Example: Jan Feb Mar Opening cash 250 65 10 Cash in 0 0 85 Cash out 185 55 75 Net Cash flow (185) (55) 10 Closing cash 65 10 20 • Good cash flow: • Accurate sales predictions • Debtor collection times • Payment timing • Remedies for negative cash flow: • Cut stock levels • Increase credit time from suppliers • Reduce credit time to customers

  10. Break-even Revenue = Costs Fixed Costs - do not vary with output or sales and have to be paid Variable costs - vary with output or sales i.e.replenishing stock Formula: Fixed Costs Selling Price - Variable Costs i.e. £1000 = £1000 = 500 units £4 - £2 £2

  11. Break-even table & graph: Units 100 200 300 400 500 600 700 Fixed costs 5000 5000 5000 5000 5000 5000 5000 Variable costs 1000200030004000500060007000 Total costs 6000 7000 8000 9000 10000 11000 12000 Total Revenue 2000 4000 6000 8000 10000 12000 14000 TR £ TC B/E £10000 FC Units 500

  12. Break-even shortcomings: • Based on single product • Assumes all products made will be • Assumes all costs are constant • Does not take into account external factors i.e. rise in interest rates

  13. Profit and Loss Account “money made or lost by the business” Sales – running costs = Profit or loss Cost of Sales = opening stock + purchases – closing stock Gross Profit = Sales – cost of sales (money made from buying and selling) Net Profit = Gross profit – expenses (money made after all expenses have been paid) Payments ot owners = drawings Payments to shareholders = dividends

  14. Profit and Loss Account – Example: • £ £ • Sales 400,000 • - Cost of sales 220,000 • Gross Profit 180,000 • Expenses: • Wages 95,000 • Marketing 7,000 • Rent and rates 12,000 • Electricity 750 • Insurance 5,000 • Office Expenses 15,000 • Total Expenses 134,750 • Net Profit 42,250

  15. Balance Sheet Assets: items owned by the business Liabilities: owed by the business Capital: money invested into the business

  16. John Cooper Ltd: Balance Sheet as at 31 December 20.. • £ £ £ • Fixed Assets • Premises 200,000 • Equipment 40,000 • 240,000 • Current Assets • Stock 43,000 • Debtors 9,650 • Bank 0 • Cash 350 • 53,000 • Current Liabilities • Creditors 18,000 • Bank overdraft 15,000 • Bank Loan 75,000 • 108,000 • Working Capital -55,000 • Net Assets 185,000 • Financed by: • Opening Capital 150,000 • + Net Profit 35,000 • Drawings 0 • Closing Capital 185,000

  17. Working Capital “surplus between current assets and current liabilities” Current Assets: items owned by the business, or owed to the business i.e. stock, debtors, bank, cash Current Liabilities: owed to other people i.e. creditors, loans Need to able to pay debts when they fall due. Credit purchase Pay creditors Money in bank Stock held by business Debtors pay up Credit sales to customers

  18. Managing Debtors • Need to receive money from customers on time • Check customer references before giving them credit • Establish payment terms • Effective credit control – chase non payers • Managing Creditors (Suppliers) • Negotiate terms • Long credit payments • Managing Stock • Holding too much stock means money is tied up • Cost of storage • Could get out of date/fashion

  19. Budgets • “financial plan setting out revenues and costs for a given time period, this includes targets for incomes and expenditures” • Types: • Sales budget • Production budget • Staffing budget • Departmental budget • Cash budget • Advantages: • Motivated staff • Helps planning • Shows consequences to actions • Limitations: • only estimates • Can be restrictive • Must be set at realistic level

  20. Variances: • “difference between the budgeted figures and actual figures” • Outcomes are: • Favourable to the business (good) • Adverse to the business (bad) • Need to look at reasons behind the variances – spedning too much for materials, staff making mistakes during the production process, etc. • Examples: • Sales variances • Materials variances • Labour variances • Overheads variances

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