My neighbours Mr and Mrs Brown are planning to open a local business in their local are. They will need to have a sound financial plan in order to be successful. The Browns think they will need 25,000 pounds for equipment fixtures and fittings and 5,000 pounds for covering the operating costs for three months whilst sales build. They will need to borrow all of this money.
The Brown’s know very little about finance. They had heard that I study Business Studies and that I know about finance. They have approached me for some advice.
The aims of my research are to provide the Browns with sufficient information on all the possible sources of finance available to them so they are able to set up and run their business and how they should be used. To achieve this I must find out about the different types of finance available to them (internal/external). To do this I have a choice of either using primary research or secondary research. Primary being original research, finding out new information, and getting the exact information I need straight from a current source. Examples of methods of doing this are conducting questionnaires, surveys, and samples. Secondary research on the other hand is previously published data us
-Over drafting - the firm takes on too many orders as a result it buys in too many raw materials and hires too many staff. Mortgage - Long-term loan used to finance buying property. They can use these to get liquidity. Although large businesses would be suited for:Re-investing - Firms may have used retained profit from previous years to build up bank savings or buy stocks and shares. The firm will anticipate when an overdraft might be needed. Task 5One of the most important parts of any budget is the cash flow forecast. If the firm does well, it may need money to help it expand and move into a new premises. Disadvantages are that it is not always relevant to your needs, it is not specifically about your products, and it is often out of date; as in text books printed 10 years ago. More profitable businesses go bankrupt because of poor cash flow than any other reason. External could include start-up capital, long-term finance, and short-term finance:Start-up Capital is finance provided by the owners of a business. A sole trader"tms most likely source of this finance will be credit from his suppliers of materials. Task 6TypeExpenseCostDueFixedSalaries12,000 1st QAnnuallyFixedRent and rates900MonthlyFixedInsurance1100MonthlySet-upEquipment fixtures and fittings25000One-offVariable, operationalHeating and lighting700QuarterlyVariable, operationalTelephone and postage300MonthlyReplacement, variableOther"2000VariableTask 7Analysing cash flow forecastAccording to the cash flow forecast I have devised, in the first two months of trading it predicted that there would be negative cash flow. In summary I believe using a bank loan and using hire purchase gives the financial kick which is needed to see the Browns through these first profitless months, but is efficient enough not to hold back the increase of cash in the months to come. A cash flow forecast is a good way of predicting when the firm might face a liquidity problem.