Free Essay

Btec L3 Business 2010 (Qcf) Unit 2 P4 - Sources of Finance

In: Business and Management

Submitted By reynedd
Words 1724
Pages 7
ESS Products LLP

The Business.

ESS are a ventilation and electrical contracting business. Based in Liphook the business operates in London and throughout the South East. The main focus of the business is installing ventilation equipment into domestic properties. 70% of business turnover comes from working for Housing Associations in the London area. The company employs 16 people with the 2013/2014 turnover forecast at £750,000 which is 20% increase over the previous financial year.

Internal sources of finance.

Retained Profit: This is the cheapest form of finance and is a short-term source. This profit retained in the business at the end of the previous year’s trading can be used to grow the company organically – e.g. by spending on new equipment, staff and resources to grow their operations. This may mean potentially slower growth than taking out a loan to grow rapidly but more stable finances. It can also lead to higher long term profit as there is no debt to pay interest on for the business.

As the business had a 20% rise in turnover this year it is likely to have increased its retained profit, which should enable them to fund further growth in the future.

A way of boosting the retained profit is by reducing the owner’s salaries to retain profit in the business to fund growth. This may cause problems in the short term as the owners are not drawing enough salary, but in the medium term it can be highly beneficial for the company as a cheap way of funding growth.

Sale of assets: Because ESS owns a load of assets – i.e. things like the mechanical equipment, tools and vans. Iy would be possible for them to raise some money by selling some of this if they needed to. It wouldn’t be the most likely way to do it as they may end up selling some equipment or machines that they might need again in future and when they’ve gone, they’re gone. If they then had to replace them it would probably cost more money. Buts if it was equipment they didn’t use at all they would be better off with the cash to spend on something else. Generally Sale of Assets is not the first source of finance a business like ESS would use, but if they were short of money or unable to borrow any then it could be considered.

External sources of finance.

Bank Loan: A long-term source which could be used to help expand the business, for example funding a specific project to help grow the business such as a marketing campaign or employing extra staff.

It shouldn’t be used for funding for the day-today running of the business for example office lease salaries etc.

Bank loans can be are relatively cheap and easily managed form of external finance as they allow the owners to retain control of the business for a relatively low price.

Bank loans provide a risk to the owner/managed business as they have to be secured by an asset such as a building or the goods they were used to purchase. If there is a fall in demand for the service provided by ESS, such as might happen in a recession hit they can be very challenging times for the owners as the loan still needs to be repaid, even if they have less revenue coming in. If the business were to fail to keep up loan repayments they could lose the assets the loan is secured on and in extreme circumstances this could affect the chances of the business surviving. Because ESS is a type of business called an LLP (Limited Liability Partnership), they have Limited Liability, which means that any debts run up by the company only affect the finances of the company and not the personal assets of the owners such as their own property as well.

When the business was first started, it was just one person who was a Sole Trader who did have Unlimited Liability. Luckily this wasn’t ever a problem. As the company grew they chose to change to Limited Liability to be safer.

Overdraft: A short-term source. This is an essential shorter term finance requirement. It is for expenses that were not foreseen such as if you have to buy some extra materials before customers pay you, which helps unexpected cash flow issues but is a more expensive form of external finance because you have to pay higher interest rates than for loans, and sometimes fees to the bank too.

Overdrafts don’t have to be secured by an asset, but if the bank thinks there is a problem with the company in an emergency it can cancel the overdraft. It is a very good idea for all businesses to make sure they have an overdraft facility form their bank, even if they don’t use it.

Because ESS have had good cash-flow and are profitable they don’t often need to use their overdraft, except when they are doing big contracts where the customer doesn’t pay for a couple of months and ESS may have had to buy loads of materials and equipment to do the work.

Leasing: This can be a Short and long term source. Most of the equipment in the office is leased for example the computers, printers and vans. Leasing allows companies to invest in equipment without a large capital outlay. The leasing deals for the different equipment are normally for between 3 and 5 years, with the company paying a fixed amount each month. At the end of the lease the equipment goes back to the leasing companies. This is good for things that need replacing every few years like the vans as they just get new ones. If they want to they can buy them from the finance company at the end of the lease quite cheaply as they have depreciated in value a lot.

ESS don’t normally lease equipment such as the tools they use for the installations as they will always need these and they last a long time.

Shares: Long-term source because it changes the overall size of the company. This is the type of finance you see on Dragons’ Den. A business would use it for long-term expansion such as taking over another company or buying new equipment to expand into new areas.

A friend of the owner of ESS has offered to invest in the business without taking any ownership but on agreed profit share. Although this is a cheap and effective source of finance the owner has decided not to go down this route at the moment because they want to keep all of the ownership in the business and not have other shareholders controlling the decision making.

Trade Credit: Short term source. This is a very useful source of finance that most businesses can get and should take advantage of. To make it easier when they buy supplies form the same supplier every day or every week, they just get one bill at the end of the month, rather than making loads of separate payments. This means they get some goods for at least a month before having to pay for them, so the money can just sit in ESS’s bank account and gain interest.

ESS have to make the payments for these bills at the end of the month or else the suppliers would send them threatening letters that they might take them to court. They might also refuses to sell any more goods to ESS if they don’t pay the bills, so ESS might not get any supplies. It is very important to keep a good relationship with your suppliers because of this.

Obviously, because ESS get credit from their trade suppliers they also have to give credit to their trade customers, so it works both ways. If their customers don’t pay their bills ESS could run short of money.

Uses of funds.

The main things that the company has needed to spend money on this year have been the expansion to meet rising demand. A mixture of the different sources has been use for different items.

For example, the two new vans that have been acquired were not purchased by the company, but are on a three year leasing contract from the local Ford garage. The other way they thought about doing this was a credit loan provided by Lloyds Bank motor finance, but this would have been more expensive.

However a lot of the equipment used by the workers that is kept in the vans is purchased directly by ESS. Most of this comes from specialist suppliers and manufacturers, as there aren’t many places form which you can buy this sort of thing. To help spread the cost of the purchases ESS take advantage of trade credit from the suppliers, so they don’t have to pay cash up front.

The 4 extra employees that were taken on to use all of the equipment I have mentioned will need to be paid every month and also needed to be trained. The funds for this would have just come from the day-to-day money that ESS have. This basically means from the retained profit they have built up over the years and also the bank loan they took out. The money they have for things like this is called working capital. It is calculated by taking away the money you owe from the money you have. You need to make sure you have got some working capital all the time so you can pay for things in an emergency, it is like money in the till or piggy bank.

Conclusion:

ESS get their finance from loads of different sources. This is because they need different types of money at different times and for different purposes. Some is needed quickly, other times it is over a long period. The most important thing for them is to make sure they can pay their bills otherwise they may go bust. So they need flexibility and to be able to get finance from different places. It is always very important for them to plan ahead and make forecasts so they can plan how much money they need and when they need it. This is the job of the accountant and managers.…...

Similar Documents

Premium Essay

Business L3 Unit 44

...BTEC L3 Diploma in Business Unit 36: Starting a Small Business Assignment |Learning Outcomes | | | |To be able to present the initial business idea using relevant criteria | |Understanding the skills and development needed to run the business successfully | |Know the legal and financial aspects that will affect the start-up of the business | |be able to produce an outline business start-up proposal | |Scenario | |You have just completed a business course at Wolverhampton College and you are very interested in pursuing your dreams of | |starting your own business and being your own boss. | | | |Your Aunt and Uncle run a successful Property Management Company and they have proposed that if you can put together...

Words: 661 - Pages: 3

Premium Essay

P4 – Describe Sources of Internal and External Finance for a Selected Business

...P4 – describe sources of internal and external finance for a selected business Caledonia is a small takeaway outlet shop that sells chicken burgers, chips and drinks. It is located in Harlesden, near the estates. This is so that they can get a lot of customers coming in and out of there shop. There are two ways that Caledonia can get financial resources: * From within the business (internal sources) * From outside the business (external sources) Internal sources Caledonia can get financial resources internally from the business owner’s saving or from the profit that Caledonia makes. Owner’s savings The sole trader of Caledonia will have to use his own savings to start the business. This is because sometimes a bank may not want to invest in the business, because they don’t want to take the risk. Capital from profits Source | Details | Benefits | Drawbacks | Banks | Banks are able to offer loans, business accounts, commercial mortgages and overdraft facilities based on the business plan. Interest is payable based on the predicted risk. Some security will need to be provided, for example, assets such as a house. | * Quick and simple to start up * Various amounts of money can be loaned * Controlled repayment term | * Interest is allocated to the loan * Business can go bankrupt or get a poor credit rating if payments aren’t on schedule | Building societies | Building societies are also able to offer loans, business accounts, commercial mortgages......

Words: 905 - Pages: 4

Premium Essay

Btec Level 2 Unit 1

... St Cuthbert Mayne COURSE: BTEC Extended Diploma in Business (QCF) COHORT: 2014 - 2016 UNIT: 1 – The Business Environment (10 Credits) ASSIGNMENT 1 – Two Businesses on our Doorstep Learner Outcomes: 1. Know the range of different businesses and their ownership 2. Understand how businesses are organised to achieve their purposes Scenario: You work as a junior journalist for the local newspaper which is planning to run a feature article on local businesses Task: 1. Learners must describe (P1) the type of business, purpose and ownership of two contrasting businesses 2. Learners must describe (P2), explain (M1) the different stakeholders who influence the purpose of two contrasting businesses 3. Learners must describe (P3) how two businesses are organised 4. Learners must explain (P4) how their style of organisation helps them to fulfil their purpose 5. Learners evaluate (D1) the influence different stakeholders exert in one organisation TIP – Include the following: Range of different businesses Local, National, International, Global, Public, Private Not for profit/voluntary Sectors of business activity (primary, secondary, tertiary) Business purposes Supply of products or services, Difference between profit and not-for profit organisations Ownership Public, private & voluntary sectors Types of ownership (sole trader, partnerships, private and public limited companies, government agencies, worker cooperatives, charitable trusts) Main...

Words: 964 - Pages: 4

Premium Essay

Business Btec: Unit 2

...Bilborough College College Way Nottingham NG8 4DQ Riverside Café Canal Street Nottingham NG2 1CB 17th November 2014 Dear Adam and Josh, Having looked at the predicted and actual budgets for the business, I am going to give you some advice on how to manage your money more effectively which could start to help you and the business make a profit again. It is very important that you look after your cost and your budgets because you will be able to manage your finances; if you manage your costs you will be able to save more on your expenses which can then lead to increasing your revenue, for example if you controlled your costs you will be able to save money and then by having the correct amount of stock which can then be sold for money which will then bring extra money in so that you can spend that money on improving your business. If you didn’t look after your costs the amount that you spent on your expenses could impact on the amount of profit that you make. If you control your budget then you will be able to increase you income, you’ll be making sure that you have working capital and you will be able to set aside extra money when it is needed. You are over spending on the following things: stock, wages, administration, insurance, interest and loans, bank charges and repairs and maintenance. There are ways that you can adopt to make sure that the overspending stops. You could hire an accountant to help you structure you budgets, you could do research on what......

Words: 2403 - Pages: 10

Premium Essay

P4 Sources of Finance Unit 2

... P4 Sources of Finance INTERNAL An internal source of finance means to get money from within the business. Owners Savings The owners’ savings is the potential owners’ own money which is normally used when starting up a business. This can be a good source of finance especially for sole traders because since the owner has been saving up for most of their life, they would have enough money to invest in the business and they don’t have to worry about paying any employees or shareholders. However, there can be a disadvantage for sole traders when using this source of finance because they must be careful when investing money as they must know their limits in case they don’t have enough money to support themselves. PLC’s (Public Limited Company) would also use this source of finance through their shareholders who each invest money into the business. There can be an advantage for shareholders who use this source of finance when investing money into the business because if the business gains a profit, the shareholders will gain a dividend which means they will each get a share of the profits they make. However, there can also be a disadvantage because if the business makes a loss, the shareholders will lose the money they invested. Capital from profits Capital from profits refers to the money left over after most of the profits that have been earned have been shared with each of the shareholders. There are advantages of using this source of finance because the capital that is......

Words: 2148 - Pages: 9

Free Essay

Btec Business Unit 2 D1

...also they give employees pride to work for the company. I believe that if the management of the human resources department is done in the right way then it can be an important factor for what success a business will have. If the staff are well trained and looked after, they will provide better customer service which will bring more customers there so they will make more money but just doing that one task is nit enough, staff will also need to re-stock shelves that are bare and they would have to do that quickly so that there is always fresh food for customers to buy, staff will also need to multitask so being able to do the job they are doing while helping a customer at the same time. Managing physical can have big say in how much money Asda spend, ensuring that the building and the space inside is well maintained helps Asda work more efficiently because customers will be pleased about changes made therefore it will give them a reason to shop at Asda regularly and also it will make the staff pleased and encourage them to work more efficiently. It is important to have all equipment working properly e.g. machinery in the factories. Otherwise resources will end up being wasted and not used efficiently. The motivation for Asda was to produce 0% of waste going to landfill business and to support everyday low cost. Part of the project as to separate out the food waste from landfill and utilise Asda’s supply chain network to deliver a process that would also avoid increasing......

Words: 1034 - Pages: 5

Premium Essay

P4 - Information of Sources of Finance

...SOURCES OF FINANCE Matching the appropriate source of finance to a situation This is a paired exercise. The aim is to match the situation to the most appropriate source of finance. CASE STUDIES NEW MINIMARKET Roy Bhuvnesh has been made redundant after 20 years with a major organisation and has received a lump sum redundancy payment of £70,000. He is planning to set up a new minimarket and has identified suitable premises valued at £180,000 in Green Lane. BUYING A NEW FREEZER CABINET A small newsagent in Green Lane has decided to purchase a new freezer cabinet and oven/roasting unit to provide hot meals for local workers and for pupils at Northwood School which serves the surrounding area. The cost of the units is £8,500. MOBILE CAR VALET SERVICE You have just passed your driving test and along with a friend are setting a business to offer a mobile car valet service. This would involve them travelling to people’s homes and washing and internally cleaning customer cars. They are hoping to attract private customers and local garages who sell second hand cars. RE-LOCATING TO SWANSEA Sentinel Industries plc are planning on moving a major part of its production facility to Swansea. It has identified a site near a former chalk pit that is now not used. The estimated cost of the facility is £10 million. BUYING NEW EQUIPMENT Lucas Engineering Ltd with an annual turnover of £3.5 million has decided to install new machinery to help improve its......

Words: 872 - Pages: 4

Premium Essay

Btec Lvl 3 Business Unit 9 P4

...Explain the reasons behind the choice of media in a successful promotional campaign (P4) Newspapers Newspapers are a set of large printed sheets of folded paper containing news, articles, and other information, usually published every day. Businesses can use newspapers to advertise their business or products because a lot of people read the newspaper so there will be a lot of coverage on their advertisement Radio Radio is a system of broadcasting information and programmes that people can listen to. Businesses can advertise their businesses on the radio in an audio form and is also a good way to get exposure because people usually listen to the radio in their cars and this is a good way to convey information to listeners. Billboards Large outdoor advertisement (usually 12 feet x 25 feet) for which rent is charged according to three factors: (1) the amount of traffic that passes its location, (2) its visibility, and (3) its size. Businesses can advertise a specific product which needs a lot exposure in a specific area such as central London. Television Television is a media player which user can watch videos, television advertisements are the most used types of advertisements and businesses can use thing in order to gain more exposure Budget The budget for a business’s advertising campaign is important because they need to evaluate how much exposure they want with how much coverage they can afford. Small businesses would not advertise on TV......

Words: 496 - Pages: 2

Premium Essay

Btec Business Level 3 Unit 10

...|Assignment brief – QCF BTEC | |Assignment front sheet | |Qualification |Unit number and title | |BTEC Level 3 National in Business (QCF) |Unit 10 Market Research in Business | |Learner name | Assessor name | | |Duncan Llewelyn | |Date issued | Hand in deadline |Submitted on | |23rd April 2015 |19th June 2015 | | | | | |Assignment title |Unit 10 Market Research | |In this assessment you will have opportunities to provide......

Words: 1226 - Pages: 5

Premium Essay

Btec Business, L3, Unit 7, D1

...it gives a financial structure to the business. The data used for break-even, the business try to make the data as accurate as possible. They make this data depending on the previous year’s financial report. That’s why break-even is reliable to estimate current year’s results. In a short run, break-even analysis can be accurate. There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it is predicted. Data such as change in direct cost or indirect cost can have an impact on break-even analysis. This means that the results are going to be very different from the actual result. So, in the long run break even will not be reliable. Furthermore, if the company is selling more than one product, it will become really hard for the company to carry out break-even analysis. This is because; all the different products are going to have different prices meaning that the company will have to create different financial accounts for each product they sell. The break-even analysis has to be different for each one as well. Also, a change in the selling price is going to have huge effect on break-even analysis. If the selling price changes, the whole financial data will change as well. If the total revenue changes the total profit will change as well. This means that if the company relies on break-even analysis, at the end of the year they will see a huge difference in their profit of the business. Break-even analysis shows a......

Words: 1235 - Pages: 5

Premium Essay

Sources of Finance Unit 2

...Sources of Business Finance ----------------------- |Finance method |Explanation |Benefits |Drawbacks | |Owner’s Funds |Business owners often have to use their|Savings are a good source of finance |There is always risk involved; the owner could | | |own personal savings to start a |because no interest has to be paid |lose his funds if the business is not successful. | | |business, particularly if they are a |whilst the money is being used. | | | |new sole trader. | |The owner may not have sufficient funds to start | | | |Business remains in full control of the|up the business. | | |Banks may no be willing to take the |owner. | | | |risk and invest in them. | | | |Retained Profits |This is the money retained in the |Using......

Words: 1040 - Pages: 5

Premium Essay

P4 Sources of Finance

...External Source of Finance | Advantages | Disadvantages | Bank LoanBorrowing money from the bank at an agreed interest rate and then repaid in a fixed period of time. | * There is a set amount of money that is repayable, is paid over a certain period of time. * Larger amounts of money can be borrowed by the company in this process. | * It is more likely to have a higher interest rate which can change monthly. * Banks are less likely to offer a loan to a start-up business, as there is no credit history for the business if they are applying for the first time, and they do not want to take a risk by offering a loan if they can’t pay it back. | Trade CreditWhen the business buys the items needed first and pays the value of the item back later on in the year, usually within 90 days. | * No interest has to be paid on the product if the payment of the item has been completed in the agreed timescale. | * Have to manage the cash flow more carefully during the number of days before the payment has to be made, so that there is enough money to pay off the debt. | Share issuesPutting a part of the business on the Stock Exchange which is purchased by members of the public, who then own a part of the business. | * Company is not charged any interest on the shares that are sold. * The investment made by the shareholders does not have to be repaid to them by the business. | * Shareholders will expect to receive a share of the profits made by the business through......

Words: 794 - Pages: 4

Premium Essay

Btec Level 2 Business Unit 11 P4

...and problems? A staff can deal with queries and problems in a professional manner. These are ways it can be done by: * Always be smart * By being an excellent communicator at all-time both customers and colleagues. * Have a full knowledge and understanding of the organisation. * Behave responsibly and maturely. * Show a great sense of initiative. How do you deal with customer expectations? A way a business can deal with customers’ expectations is by following up on what the customers are saying even if a problem just a customer service agent can surpass the customers’ expectations by following up with the customer. A quick call to check if the product or service is working satisfactorily can show the customer that the business cares about the customers and also it show that the business has time to take problems on board and also it shows that the business working hard to avoid similar situations in the future. This can be a useful way to check feedback for the business because it gives the company a good idea of how effective the business services is. How do you deal with and speak to difficult customers? A way to deal with difficult customers is by being in control of yourself because what tends to happen a lot of the times is that the customers try to push your buttons by getting rude to you and saying a lots of hurtful things so that you will start arguing with them. So if lose control of yourself and say something hurtful back, you will lose......

Words: 1299 - Pages: 6

Premium Essay

Business Btec Unit 2 P1

...Unit 2 P1 & P2 For this assignment I will be describing the recruitment documentation used in ASDA. I will be talking about the employability, personal and communication skills required when applying for a specific role. Every organisation has different recruitment documentations and I will outline which documentations will be cost effective for a business. And I will also explain the different skills needed for different jobs. Job Description I have searched online for a job suitable for my demographic in a well-known supermarket; ASDA. I have chosen the job role of being a checkout operator. The first recruitment documentation I will be explaining would be the job description. The purpose of this section is to allow the candidates to be aware of what they need to do for the role. The description covers the job title and explains what duties the candidates are responsible for. It is also a document stating the initial role of the job that is being advertised and allows candidates to know what they are applying for and allows them to be prepared for the interview. Job descriptions are used through all stages of the recruitment process and is often used in the advertisement, be reminded of this again in the interview stage and being a successful employee by revisiting this document that the job requires and the hours that they are expected to work. Person Specification Each job role will have a different person specification because each one will need different skills...

Words: 1255 - Pages: 6

Premium Essay

Unit 2 Btec L3 Science

...BTEC Level 3 Subsidiary Diploma in Applied Science Unit2: Working in the Science Industry Assignment 3 – Data Storage (P4, M4, D3) Scenario Your school has been given funds for a rebuild. The science department classrooms and prep-rooms will be renovated. The current lab contains lots of previous testing results and other data, stored in several large filing cabinets. The management team want to improve the provision for data storage and have fewer filing cabinets in the new build. As a member of the leadership team, put a proposal together for updating the old data storage system with the new storage procedures that should be put in place in the laboratories of the new build. You need to justify why the funds from the budget should be given to implement the new data storage system. Grading Criteria * P4:Describe the procedure for storing scientific information in a laboratory information management system * M4:Explain the processes involved in storing information in a scientific workplace * D3: Discuss the advantages gained by keeping data and records on a laboratory management information system * Grading Criteria * P4:Describe the procedure for storing scientific information in a laboratory information management system * M4:Explain the processes involved in storing information in a scientific workplace * D3: Discuss the advantages gained by keeping data and records on a laboratory management information system ......

Words: 1219 - Pages: 5