UNIT 2 MANAGING BUSINESS ACTIVITIES.

2.1. Planning:
Business plan: a documented plan for the development of a business, giving details such as the
products to be made, resources needed and forecasts such as costs, revenues and cash flow.

The contents of a business plan:

● An executive summary: this could be the most important part of the business plan because
anyone who reads only part of the plan, such as potential investors or banks, will always look
at this particular section. It is an overview of the business start-up. It describes briefly the
business opportunity to be exploited, the marketing and sales strategy, operations and the
finance. The executive summary should be written last because it is a summary of the whole
plan.
● Elevator pitch: entrepreneurs will be expected to tell others about their business idea,
particularly investors, money lenders, and potential customers. The elevator pitch will be a
useful section in a business plan. This is a summary that can be used in a ‘pitch’ about the
business. The pitch is quick and concise talk introducing the business and should be
delivered in 2 minutes.
● The business and its objectives: this section should state the name of the business, its
trading address, its legal structure and its objectives. The whole planning process is driven
by the firm’s aims and objectives. When setting up a business it is much easier to make plans
if the business has something specific to aim for.
● The business opportunity: it is necessary to explain clearly what the business tries to sell. In
some cases this section is very important because the reader may not be familiar with the
products. It may be possible to provide some visual material in this section to show what the
products look like.
● Owner’s background: a number of people will be interested in the entrepreneur(s) who plan
to set up the business. They will have to decide whether the people running the business are
competent and trustworthy. Therefore, the business plan must include some details about
the owners, such as the motives for setting up a business, their level of commitment, the
nature of their training and work experience, their education and qualifications, and their
hobbies and interests.
● The market: in this section entrepreneurs need to show the size of the potential market. This
will also need to identify the customer profile. The nature of competition and the various
marketing priorities will also have to be discussed. It will be helpful in this section to show
how the business plans to communicate with potential customers. For example, the methods
of advertising and promotion that might be used, the role played by social media, the
business website, business literature such as leaflets, etc.
 ● Personnel: when a business is first set up there may be very few, if any, other employees.
However in some cases, other people will be needed and as the business grows, so will the
need for help from other workers. Therefore, the business plan needs to clarify the number
of employees needed and the skills, qualifications and experience that will be important.
● Premises and equipment: most businesses will need a place from which to trade and a wide
range of physical resources.
● Costing and finance: working out how much the business will cost. This will be an
intimidating task but entrepreneurs will find it almost impossible to raise capital or borrow
money if they cannot say with some accuracy how much will be needed before trading can
begin. This section may contain spreadsheets that list all the costs of setting up.
Once the set-up costs have been established business owners can work out how much
money they will need to raise from potential investors. They will then need to identify some
possible sources of finance. Finally, it is a mistake to be undercapitalised when starting a
business. This means that a business has not raised enough money to get started. This might
result in the business running out of cash and closing down.
● Financial forecasts: a business plan is likely to contain a variety of financial forecasts. These
might include a sales forecast, showing how the value of sales will change over a future time
period, etc.
● SWOT analysis: (S) Strengths, (W) Weaknesses, (O) Opportunities and (T) Threats. This
involves looking at the internal Strengths and Weaknesses and the external Opportunities
and Threats.

2.2. Internal finance:

Capital expenditure: spending on items that may be used over and over again, e.g. a company
vehicle, a cutting machine and a new factory.
- Firms need money to get started. They might need to buy equipment, raw materials and
obtain premises, e.g. once this initial expenditure has been met, the business can begin.

Capital: the money provided by the owners in a business. This is an example of internal finance.
Internal finance: the money generated by the business or the current owners.
● In most cases, a business cannot start unless the owners provide capital of their own.
Providing capital is part of the risk taken by entrepreneurs when setting up a business.
● Owners provide capital from their own personal resources. A common source is personal
savings. Some entrepreneurs have deliberately saved up over a period of time so that they
can start their own business. Sometimes, people who have lost their jobs may decide to go
into business using their redundancy payments. These sources are personal and can be used
by sole traders and partnerships.

Retained profit: profit after tax that is put back into business and not returned to the owners.
Retained profit is a flexible source of finance. It does not have to be used immediately. It can be
collected gradually by a business and retained in a bank account where it will earn interest. A
business can then use the retained profit at a later date. If a business does not make a profit,
retained profit is not possible as a source of finance.
Leaseback agreement: selling an asset, such as property or machinery that the business still actually
needs.
● An established business may be able to sell some unwanted assets to raise finance. E.g.
machinery, obsolete stock land and buildings that are no longer required could be sold off
for cash.
● Another option is to raise money through a sale and leaseback agreement. The sale is made
to a specialist company that leases the asset back to the seller. With such agreements instant
cash is generated for the seller and the responsibility for the repair and maintenance of the
asset passes to the new owner.

Advantages and disadvantages of internal finance:

Advantages:
- The capital is available immediately. There is no time delay between identifying a need for
finance and obtaining it. For instance, retained profit will be in a bank account ready and
waiting. Assets can be sold quickly if the price is competitive.
- It is cheap. There are no interest payments, which means that cost will be lower and profit
higher. Also, there are no administration costs.
- The business will not be subject to credit checks. External finance often requires
investigations into credit history of the borrowers.
- There is no need to involve third parties.
Disadvantages:
- Internal finance can be limited. A business may not be sufficiently profitable to use retained
profit or may not have unwanted assets to sell. Also the current owners may not have any
personal resources to contribute.
- Internal sources of finance cannot be subtracted from business profits to reduce tax owed. If
external finance is used, the interest paid on loan or leasing charges for assets. E.g. can be
treated as a business cost and subtracted from business profits to reduce tax owed.
- Internal finance can be inflexible compared to external sources of finance. There are a wide
variety of funding options for external finance, which can give the business flexibility.
- There are no inflationary benefits with internal finance. Inflation can reduce the value of
debt if external sources are used.
- Opportunity cost of using internal sources of finance can be high. E.g. a plc considering the
use of retained profits for funding will have to consider the reactions of shareholders if
dividends are frozen or cut. Some shareholders may have a very short-term view and
demand higher dividends now. This could result in conflict between shareholders and
directors.
2.3. External finance:
External finance: finance from sources outside the business.

Sources of finance:
- Family and friends: This may be a cheap source because the money is a loan, interest charges
may be low, or possibly zero. In some cases money may be gifted to an entrepreneur.
- Banks: Commercial banks such as ANZ (Australia), State Bank Of India, Commerzbank
(Germany), and HSBC provide a range of different external funding arrangements for
businesses. These include loans, overdrafts and mortgages. Most commercial banks have
specialist departments or staff that deal exclusively with businesses. Banks will be involved in
a business start-up because businesses need a bank account to facilitate financial
transactions with customers and suppliers. Banks might also offer advisory services to
businesses. These are often free. A formal application is required to get finance from banks
and it will probably be necessary to provide a business plan.
- Peer-to-peer lending: Involves people lending money to unrelated individuals or ‘peers’ and
therefore avoiding the use of a bank. Transactions are undertaken online and are organised
by specialists. Although this source of finance can be used by a business, it is not exclusive to
businesses. Anyone can apply for a peer-to-peer loan.
The key features of peer-to-peer loan:
● All loans are unsecured, which means there is no protection for lenders. Therefore, lenders
might lose their money if a borrower is unable to repay the loan.
● The whole financial arrangement is conducted for profit.
● All transactions take place online.
● No previous knowledge or relationship between lenders and borrowers is needed.
● Lenders may choose which borrower to lend to.
● Peer-to-peer sites make a charge - typically about 1%.

- Business angels: Business angels are individuals who typically may invest between £10,000
and £100,000+, often in exchange for a stake in a business. An angel might make one or two
investments in a 3-year period, either individually or together with a small group of friends,
relatives or business associates. Most investments are in business start-ups or in early stages
of expansion.
- Crowd funding: Crowd funding is similar to peer-to-peer funding in that banks are excluded
and individuals can lend money to others without previous knowledge of them. However, the
fundraisers tend to be businesses or groups who are involved in a particular venture such as
putting on production, building a school or setting up a community project. The lenders or
investors will be large numbers of individuals who collectively represent ‘the crowd’.
Transactions are conducted online.

Methods of finance:
- Loans: A loan is an arrangement where the amount borrowed must be returned over a fixed
period of time in regular equal payments. Loans tend to be inflexible and interest will be
added to the total. There are different sorts of loan capital:
 ● Bank loans: The most common type of loan. They may be unsecured loans. This
means that the lender has no protection if the borrower fails to repay the money
owed. They can be used for long-term or short-term purposes depending on the
needs of the business. However, the use of unsecured bank loans has probably
diminished in recent years due to the high risk they carry for banks.
● Mortgages: Are secured loans where the borrower has to provide some assets as
collateral to support the loan. This means that if the borrower defaults, the lender is
entitled to sell the assets and use the money from the sale to repay the outstanding
amount. Mortgages are long-term loans and are typically for 25 years or more. They
might be used by a business to fund the purchase of premises or a large item of
capital equipment. Mortgages are usually cheaper than unsecured loans because
there is less risk for the lender.
● Debentures: A specialised method of loan finance. The holder of a debenture is a
creditor (someone to whom the business owes money) of a company, not an owner.
Debenture holders are entitled to a fixed rate of return, but have no voting rights.
They must also be repaid on a set date - when the term of the loans ends. Public
limited companies use this long-term source of finance.
- Share capital: For a limited company, share capital is likely to be the most important source
of finance. The sale of shares can raise very large amounts of money. Issued shared capital is
the money raised from the sale of shares. Authorised share capital is the maximum amount
shareholders want to raise. Shared capital is often referred to as permanent capital. This is
because it is not normally redeemed. Once the share has been sold, the buyer is entitled to a
share in the profit of the company. Different types of shares can be used:
● Ordinary shares: These are also called equities and are the most common type of
share issued. They are also the riskiest type of share since there is no guaranteed
dividend. The size of the dividend depends on how much profit is made and how
much the directors decide to retain in the business. All ordinary shareholders have
voting rights. When a share is first sold it has a nominal value shown on it - its
original value. Share prices will change as they are bought and sold again and again.
● Preference shares: The owners of these shares receive a fixed rate of return when a
dividend is declared. They carry less risk because shareholders are entitled to their
dividend before the holders of ordinary shares. Preference shareholders are not
strictly owners of the company. If the company is sold, their rights to dividends and
capital repayments are limited to fixed amounts.
● Deferred shares: These are not used often. They are usually held by the founders of
the company. Deferred shareholders only receive a dividend after the ordinary
shareholders have been paid a minimum amount.
- Venture capital: Venture capitalists are specialists in the provision of funds for small- and
medium -sized businesses. Typically they invest in businesses after the initial start-up and
often prefer technology companies and high growth potential. They prefer to take a stake in
the company, which means they have more control, and are entitled to a share in the profit.
Bank overdraft: this is an important source of finance for a large number of businesses. A bank
overdraft means that a business can spend more money than it has in its account. The bank and the
business will agree on an overdraft limit and interest is only charged when the account is overdrawn.

Leasing: a lease is a contract through which a business acquires the use of resources, such as
property, machinery or equipment, in return for regular payments.
- Advantages of leasing:
● No large sums of money are needed to buy the use of equipment
● Maintenance and repair costs are not the responsibility of the user
● Hire companies can offer the most up-to-date equipment
● Leasing is useful when equipment is only required occasionally.
- Disadvantages of leasing:
● Over a long period of time leasing is more expensive than the purchase of equipment
and machinery
● Loans cannot be secured on assets that are leased.