Presentation on theme: "Section 3 Finance An entrepreneur comes up with a new business idea"— Presentation transcript:
1Section 3 Finance An entrepreneur comes up with a new business idea They plan it well and do some market researchNow they need to raise the money to set up the businessBuy equipment, buy stock, have money for the first few weeks before customer’s start payingRaising finance for a new business is not easy
2By the end of this section you will FinanceBy the end of this section you willUnderstand why finance is important to a new businessUnderstand the main sources of finance and financial advice to small businessesUnderstand basic financial termsUnderstand how to calculate profit and lossUnderstand what cash flow is and how cash flow forecasts are interpretedUnderstand solutions to cash flow problems
3A corner shopIf you were starting a business similar to the one in the picture, what would you need to buy before you could start trading?Answers might include:a lease on the shop that is the right to rent it for an agreed periodfridges and freezers to keep food fresha till to record takings and a safe to keep money instock to sell in the shop, e.g. food and tobaccopossibly a delivery van
4Sources of FinanceNilesh the decorator started his painting and decorating business with an old cheap van and now it has broken down and is not worth repairingTo buy one he needs £5000 which will take him a long time to raiseHe has £1000 from the last 2 year’s profitsHis father has offered to lend him another £2000Suggest two other sources of finance for the remaining £2000
5Sources of FinanceAll businesses need finance at different stages in their lifeThis is simply a source of extra money for the businessSources of finance are used for a whole range of reasons from getting the business through hard times and good times when the business wants to expandA new business will need money to set up before they start tradingThey need money toBuy equipmentTo rent or buy a buildingAdvertiseBuy stock or the inputs that are used to make the stock
6Sources of Finance Bank Loan What is a bank loan? Finance provided by the bank that will be paid back over a set period of timeAdvantages – large amounts can be borrowed and payments can be spread over time (it doesn’t all have to be paid back in one go)Disadvantages – interest has to be paid increasing costs and repayment terms have to be metWhat does the bank need to give a loan?Cash flow forecastBusiness plan
7Branch of the Cooperative bank Banks often think that new businesses are risky (that is likely to fail) and may be unwilling to lend them money. Why do banks consider many new businesses to be risky?Answers might include:because the business does not have established customersentrepreneurs may not have a lot of experience or knowledge of the industrynew businesses can be short of money and therefore cannot survive difficult timescompetitors may respond to their entry into the market by cutting prices or increasing advertising
8Sources of Finance Loan from friends and family What is this? Finance provided by family and friends where the interest rate and repayment period are agreed with themAdvantages – they may be flexible about when the money has to be repaid and might not charge interestDisadvantages – they may not be able to lend very muchWhat will they need to give a loan?trustMaybe the Business plan
9Borrowing money from friends and family Why might an entrepreneur be worried about borrowing a large sum of money from a family member to start a new business?Answers might include:The family may demand repayment at short notice if they find themselves short of money.Families may argue and this can lead to demand for immediate repayment.Friends and family may not have enough money to give a large enough loan.An entrepreneur may be concerned that if the business fails he or she may not be able to repay friends and family.If a bank is not prepared to lend money (and the entrepreneur has to borrow from friends/family) it may be that the business idea is not a good one.
11Sources of Finance Overdraft What is this? A flexible agreement with the bank to spend more than you have in the bank account as an when it is requiredAdvantages – once it is set up the business can use it whenever needed without permission as long as it doesn’t go over the limitDisadvantages – high interest is paid and the bank can remove the overdraft whenever they wantWhat will they need to give a loan?To set it up they will need to see cash flow forecastsThis may be needed each year to review
12Sources of Finance Mortgage What is this? Long term loan for purchasing a buildingAdvantages – often has a fixed rate of interest and payments are monthlyDisadvantages – sometimes have variable interest rates which means your costs can go up and down – it will be expensive when rates rise. Also the lender may ask for securityWhat will they need to give a loan?The legal deeds of the property
13Sources of Finance Trade credit What is this? Suppliers who allow debts for goods and services to be paid one or two months after deliveryAdvantages – no interest is paid – this is free finance for the period of the trade creditDisadvantages – the buyer will probably not get discountsWhat will they need to give a loan?References from the bank/other suppliersMaybe cash flow forecast
14Sources of Finance Grants What is this? Money given to a business by a government organisation or charityAdvantages – the money does not have to be paid backDisadvantages – many businesses do not qualify for themWhat will they need to give a loan?Many forms have to be filled out to prove the business is eligible for the grant
15Northeast firms to get boost Almost £2 million of finance from the European Union has been given to the Institute of Digital Innovation (IDI) to help start 90 new companies in the northeast of England. Further finance has been given by the UK government and the University of Teesside in Middlesborough. The IDI project aims to help:entrepreneurs to start high technology businessesuniversity graduates make a business out of their ideasThe IDI not only provides finance but also offers expert advice to those planning to start up a new business.QuestionWhy might university graduates find it difficult to raise finance to start a new business?Answers might include:● they are likely to have little or no experience of starting and managing businesses● they may not have much of their own money to invest into a new business● they will not have a history of having repaid other loans successfully
16When to use the different sources of Finance To decide which is the best source of finance we need to ask the following questionsWhat is the money for?How much?How quickly will it have to be paid back?If a business only needs finance for a short period of time they should consider a short term solution such as an overdraft or trade creditIf a business needs finance over a long period of time and it is a large amount then they should go for a bank loan or a mortgageE.g. An overdraft should not be used for buying equipment
17Financial support and advice New businesses can get lots of free advice on the best types of financeHigh street banks will give free advice through their business banking service to new business ownersRegional development agencies (RDA) in the UK help businesses apply for grants and put them in contact with other businessesCharitable organisations such as the Prince’s trust focuses on helping unemployed people set up their own business. Business experts give advice and may provide a mentor for the early days. They also offer low interest loans and grants.For homework (and for discussion next time) have a look at the Business Link web site and make a note of what they do and why they are good for a small business
18Quick Quiz Look at table A on P52 Try to quickly learn each type of financeGet your neighbour to test youI will then call out the information in the box and you have to guess which source of finance it is associated withUpdate database
19Financial support and advice New businesses can get lots of free advice on the best types of financeHigh street banks will give free advice through their business banking service to new business ownersRegional development agencies (RDA) in the UK help businesses apply for grants and put them in contact with other businessesCharitable organisations such as the Prince’s trust focuses on helping unemployed people set up their own business. Business experts give advice and may provide a mentor for the early days. They also offer low interest loans and grants.For homework (and for discussion next time) have a look at the Business Link web site and make a note of what they do and why they are good for a small business
20Assessment of section 3.1Mark your work and let me know the mark for the databaseTo be handed in next lesson - Monday 10thGive Ali the exam paperPhotocopy Marketing Q papers
21Financial terms and basic financial calculations Two big worries for an entrepreneurAm I making a loss or profit?Do I have enough cash to pay my suppliers, workers and bills?This section will help you understand the main financial terms and help you do some financial calculations
22Revenue is the same as Turnover Calculating RevenueWhat is revenue?The amount of money a business receives from selling goods or servicesRevenue = number sold x selling priceIf I sell 10,000 hotdogs in one year and each hotdog costs £2.50 how much revenue have I taken?£25,000To increase the revenue what could the hot dog stand owner do?Increase the selling price and hope that the amount sold does not go downIncrease the amount sold by promotionRevenue is the same as TurnoverWhat is the difference between sales and revenue?Sales is how many the business sells; Revenue is how much money the business takes for selling those items
23A fruit stallWhy might the owner of a fruit stall decide to reduce prices towards the end of the day?Answers might include:the owner may not want to take any of the stock away at the end of the daythe stock is perishable and will be worthless in a day or twohe or she may need cash to pay suppliers
25Calculating CostsWhat is costs?The expenses a business pays in producing goods and servicesRent, wages, stock, equipment, fuel etc – all of these together add up to the firm’s TOTAL COSTSThe hotdog stand would have to pay what costs?Rental of the standIngredients (buns, sausages, ketchup etc)Wages of person on the standEquipment used to cook the hotdogsPetrol used to get to the siteElectricity etc etcStart up costs are the things that have to be bought when the business startsRunning costs or operating costs are costs that the business has to pay day-to-day
26A small hotelWhat start-up costs might an entrepreneur have to pay if she took over the hotel in the picture?Answers might include:the purchase of the buildingrefurbishing and decorating costspurchasing new equipment such as cookers, computers and tillsthe costs of researching the marketcosts of recruiting new staff
27Fusion SystemsCarl Bradley runs a computer shop called Fusion Systems with his wife in Eastbourne, East Sussex. He employs three people and the business has an annual revenue of £540,000. In December 2008 Carl said that his business’s sales had fallen and therefore the business was receiving less revenue. Carl is hoping to see his costs fall, especially his fixed costs.QuestionWhat will have happened to Fusion Systems’s profits in December 2008? What might Carl do in response?Answers might include:The business’s profits are likely to have fallen unless its costs fell too.It may be that the business made a loss depending on the balance between total costs and revenue.Carl could reduce costs as he suggests; perhaps not employ so many staff or buy less stock.Carl could try to increase sales again by, for example, advertising more.Carl should really try to find out why the business’s sales fell.
28Internet successHolly Tucker and Sophie Cornish are managing the rapid growth of Notonthehighstreet.com, the business they set up 2 years ago.Last year the business’s revenue was approximately £800,000 and the partners expect it to rise to £3.5 million this year.Holly and Sophie are not satisfied, however, and are planning to expand their business. Notonthehighstreet sources good-quality clothes and gifts from small producers and sells them online.Holly says, ‘We provide an opportunity for thousands of independent suppliers to sell their products. Sites like ours are acting as a kind of shop window for the long tail of the internet.’Would you expect the business’s profits to be higher than last year? Explain your answer.Answers might include:The partners expect their business’s revenue to rise to £3.5 million this year so profits should be higher.It depends what happens to the business’s costs. They may spend money expanding the business and this could reduce next year’s profits.
29Calculating Profit (or Loss) Profit = Revenue - CostsWork out these examplesVivien’s nail bar has sales revenue of £40,000 per year and total cost of £33,000What profit does she make?40,000 – 33,000 = £7000Jo’s sales revenue from his pet shop is £35000 per year and his costs are £39,000.What profit does he make?35000 – = -4000He has made a loss of £4000Complete activity 1 and 2 on P55
30Several key terms will appear They will disappear after 30 seconds (do not write anything in this time)Your task:(1)List the terms + (2) Define them(8 mins to get as many as possible)
31Loans from family and friends OverdraftsBank LoanMortgagerevenueProfitBusinesslinkGrantsTrade CreditSalescostsPrincesTrustLoans from family and friendsOwners Funds
33Calculating Profit (or Loss) In pairs think of a business (anything at all!) and then make up a question for the rest of the class to answerStart with a plain profit or lossThen have a percentage change in price and salesDon’t forget to work out the answersKeep it simple!To find a percentage increase e.g. 10%Multiply the number by 10/100 then add that to the originalOr easierMultiply by 1.1 (that’s 110%)To find a percentage decrease e.g. 20%Multiply the number by 20/100 then subtract that from the originalOr easierMultiply by 0.8 (that’s 100 – 20% = 80%)15 mins to complete
45Create a poster to revise Sources of financeHow to calculate profit (plus all the terms)
46Calculating profit - Recap AllCalculating profit - RecapWhat is revenue?What is the formula for revenuePrice x Quantity soldWhat is the difference between revenue and sales?Sales is how many items you sell; revenue is how much you get from selling themWhat is the formula for profit?Revenue – total costs = profitHow can you increase profits?Increase revenue by selling more (promotion maybe)Decrease costs by being more efficient
473.2 Assessment30 minutes to complete these short questions
48Cash Flow and Survival If a business is to survive it must have cash It needs cash to be able to payFor stockIts workersThe billsThink of a business like a car – it may be in perfect working condition but if it has no fuel then it won’t work.Cash is like the fuel in a car – without cash a business can’t buy stock, it can’t pay the workers – it just won’t work.
49Cash Flow and Survival Cash comes in from The entrepreneur putting money into the business from his savings or a loanSales paid for in cashPayments from customers who have been given extra time to pay rather than paying straight away (credit sales)Cash goes outWhen the business pays workers, suppliers or bills
50Cash Flow and Survival Cash and Profit are not the same When we work out profit we use revenue less costs. The revenue figure includes goods that have been sold for credit (where the business has not yet received payment)On paper the business is making lots of revenue but if its sales are credit sales it will not have cash until the customer pays at the end of the monthCash is the money that the business has in the bank or in the tillIf the business runs out of cash it will not be able to operateIt won’t be able to pay its suppliers so won’t get goods to sellIt won’t be able to pay its workers so they won’t want to work any more
51Cash Flow and SurvivalThe business will come insolvent (it won’t be able to pay its debts)If the suppliers don’t get paid they may take the company to courtThe business will be put into receivershipThe receivers will work out what money is left in the business by selling assets and then decide which suppliers should get itThe business will be closed down
52Delivery vanBuying a van can cause a major cash outflow for a business. Why might a new business choose to lease (rent) a van?A leased van would only result in a small payment each month — this would reduce and delay cash outflows.Any faults would be repaired by the business that owned the van — this would avoid any further large outflows of cash.
53House buildersWhy might house builders experience a large time gap between cash outflows and cash inflows?Answers might include:Houses can take a long time to build — sometimes more than a year, so builders have to wait a long time for payment.It can take some time to sell houses, so again this means that house builders have to wait to receive inflows of cash.
54Cash flowThe table shows that in % of small businesses thought that cash flow was the biggest obstacle to success. This includes small businesses that have just started up as well as those that have been trading for many years.Which of the first five obstacles does an entrepreneur have some control over?● The business only has control (to some extent) over its cash flow. No other factors are within its control.
55Cash Flow ForecastsCash is so important that most business owners will forecast the amount they will likely to receive and spendForecast = the business attempts to estimate future sales, cash flow or other financial variables.Cash flow forecast = a prediction of a business’s future cash inflows and outflows showing the closing balance shown in a table
56Cash Flow Forecasts Complete activities 1, 2 and 3 on Page 57 We need to understand all the different parts of a cash flow forecastReceipts/Income – is all the money/cash the business receives each month – these are inflowsPayments/expenditure – is all the money/cash the business pays out each month – these are outflowsNet cash flow is just the difference between these twoNet cash flow = Receipts – PaymentsOpening balance is the amount of cash the business has at the beginning of the monthClosing balance is the amount of cash the business has at the end of the monthClosing balance = net cash flow + opening balanceComplete activities 1, 2 and 3 on Page 57
57Why a Cash Flow Forecast is important Do I have enough cash to pay my suppliers?Why a Cash Flow Forecast is importantIt allows the business owner to check they will have enough cash available over the next few months to keep the business going . If they don’t then they can organise an overdraft or tell the bank that they need to increase their overdraftThe business owner can see if he needs to reduce outflows of cash – maybe ask suppliers for more credit – to avoid running out of cashThe forecast will help the owner with his application for an overdraft so that the bank can see that it will be paid back.The numbers can be used as a target for the business – it can be used to see if the business is meeting its aims.Will I need to use my overdraft?Do I have enough cash to pay my staff?
58Small restaurantWhy might this business run short of cash?Answers might include:it may not persuade enough customers to eat there to provide sufficient inflows of cashanother restaurant may open up nearbythe business’s rent may suddenly be increased by a large amountthere may be a health scare about the restaurant meaning that people do not want to eat there
59Using Cash Flow Forecasts When we look at a cash flow forecast we need to look at the main elementsCash in – hopefully this will be increasing in the future as the business gets more customersCash out – the payments out should increase at the same rate as the sales – the more you make the more you have to pay for materialsClosing balance – you would want to see this improving as the business grows - it is not unusual for it to be negative when the business first starts when lots of payments have to be made for equipment etc
60This is the cash flow statement for Peter and Sue’s restaurant after its first month of trading in December.Do you think Peter and Sue would be pleased with the information given in this cash flow statement?A forecast is what you think is going to happen; a statement is what has happened
61Yes, they would be pleased This is the first month of trading when not many people would know about the restaurant and cash inflows and cash outflows are roughly equalThey have a positive balance (£980) of cash in their bank accountSue and Peter can be confident that they will have enough cash next month — unless things changedramaticallyComplete activity 1 and 2 P58 P59
62Identifying solutions to cash flow problems There are a few solutions to cash flow problemsMake payments to your suppliers at a later date – ask them for credit. However the supplier may not want to do this particularly as you are a start up business and have not earned his trust yet.Encourage receipts to be paid earlier – maybe you can encourage your customers to pay cash rather than credit with discounts however this will affect your profits.Use a source of finance such as an overdraft particularly is the cash flow issue is only a short term problem – maybe you want to buy more stock for ChristmasReduce payments out by reducing numbers of workers however this may mean more work for the ownerThe solution to the problem will depend on the size of the problem and whether it is caused by increasing payments or falling receipts.
63Identifying solutions to cash flow problems Remember when you are answering an exam question and suggesting solutions to cash flow problems you need to think about the disadvantages too.E.g. advertising might increase sales which would increase cash in but it also costs money so it will affect cash out. In the short term it could make the cash flow problem worse.Complete activities 3, 4, 5 and 6Complete case study on P60Complete Revision Questions
70Cash Flow Forecast terms What are theseReceipts/Income?all the money/cash the business receives each month – these are inflowsPayments/expenditure?all the money/cash the business pays out each month – these are outflowsNet cash flow?just the difference between these twoNet cash flow = Receipts – PaymentsOpening balance?The amount of cash the business has at the beginning of the monthClosing balance?the amount of cash the business has at the end of the monthClosing balance = net cash flow + opening balance
71Several key terms will appear They will disappear after 30 seconds (do not write anything in this time)Your task:(1)List the terms + (2) Define them(8 mins to get as many as possible)
74Talkabout ‘Entrepreneur’ Pick a name out of the hat – that person leaves the class roomClass thinks of 10 things that person should mention in their 60 seconds of talkaboutWhilst the speaker talks the class listens for terms and makes a note of the ones that were mentionedRate that person out of 10 (the number of terms achieved)
75BingoDraw the shape below and in each space write one of these terms (so you will have five in total)Enterprise, entrepreneur, opportunity cost, government grant, franchise, copyright, trademark, patent,I will read out the definition and when I have read out all of your definitions you need to call out BingoTo be able to win you need to repeat back the definitions!Before we start show the person next to you what you have chosen so that no changes can be made!!
76Jeopardy For each of these answers give me the question the quaternary sectorthe primary and the secondary sectorsThe tertiary sectorSelling price – costs of inputsAdded valueFactors of productionProducts or servicesTo differentiate themselves from the competition and charge higher pricesAdvertising, product features, branding, location and personal serviceBecause more value can be added in this sector
77Jeopardy For each of these answers give me the question the quaternary sector – what sector transforms information?the primary and the secondary sectors – which sectors have declined over the last couple of decades in the UK?The tertiary sector – what sector does the service industry belong?Selling price – costs of inputs - how do we work out added value?Added value – what is the value of the process of transforming inputs into outputsFactors of production – what is another name for inputs?Products or services – what is another name for outputs?To differentiate themselves from the competition and charge higher prices – why would a business want to add value?Advertising, product features, branding, location and personal service – what ways can a business add value?Because more value can be added in this sector – why is there growth in the tertiary sector?
78Close the loop – Business Plan You will be given 2 or 3 cards which each have one part of a sentence. The person who has (start) on their card reads out their card first. Everyone looks at their cards to see if they have the next part of the sentence and then calls that out…and so on until we reach the person with (end) on the card. See how quick we can do it!
79I see you are psychic too! Yes I see that….advertising helps increase demanddemand has a negative relationship with pricedemand can be elastic if there are close substitutes