Financial Requirements and Sources of Finance

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Questions and Answers

What is a key step in determining a business's financial requirements?

Choosing a business location

Projecting sales, revenues, and expenses (correct)

Minimizing operational costs

Reviewing previous financial statements

Which of the following is considered a source of short-term finance?

Common stock issuance

Venture capital

Trade credit (correct)

Corporate bonds

What is an example of bank credit as a source of short-term finance?

Government grants

Overdraft facility (correct)

Long-term loans

Equity financing

What is a factor to consider when estimating investment levels for a business?

Projected sales volume Signup and view all the answers

Which of the following sources of finance is NOT typically classified as short-term?

Long-term bonds Signup and view all the answers

What is a common challenge that entrepreneurs face regarding financing?

Identifying sources of financial support Signup and view all the answers

Which method is considered a part of the financial planning process?

Determining financing needs Signup and view all the answers

Which of the following is an example of a lesser-known source of short-term finance?

Bills of exchange Signup and view all the answers

What is primarily evaluated in Stage 3: Deal evaluation when attracting investors?

The potential for business innovation and market conditions Signup and view all the answers

Which stage of attracting investors involves how the initial investment will be structured?

Stage 4: Deal structuring Signup and view all the answers

What is a common concern for entrepreneurs regarding raising finance?

The fear of acquiring debt and losing control Signup and view all the answers

What type of cost is associated with preparing the proposal to attract investors?

Upfront cost Signup and view all the answers

Which of the following is considered a back-end cost when raising finance?

Investment banking fees Signup and view all the answers

What is often the ultimate method for raising growth capital for a business?

Initial public offering (IPO) Signup and view all the answers

What requirement must be met for a business to consider going public on the JSE?

A specified profit history for several years Signup and view all the answers

Which activity is often preferred by investors after a deal is finalized?

Retaining a degree of involvement Signup and view all the answers

What is the primary characteristic of medium-term finance?

Repayable between one and three years Signup and view all the answers

Which of the following is an example of a source of long-term finance?

Debentures Signup and view all the answers

What defines equity capital in the context of long-term finance?

Initial capital contributed for business startup Signup and view all the answers

Which of the following statements about retained earnings is true?

It is internal financing retained for business reserves. Signup and view all the answers

Which institution is NOT typically involved in financing small and new businesses?

Stock Exchanges Signup and view all the answers

What is considered a common informal source of finance for startups?

Family, fools, and friends Signup and view all the answers

What type of loans refers specifically to a funding method tied to immovable property?

Long-term loans/mortgage bonds Signup and view all the answers

What can be a limitation of sourcing equity capital from a sole proprietorship?

Capital sources are limited to the personal assets of the proprietor. Signup and view all the answers

What is a common characteristic of a stokvel?

Members contribute to a communal account. Signup and view all the answers

What distinguishes venture capital from private equity?

Venture capital is focused on early-stage businesses. Signup and view all the answers

What is the main purpose of crowdfunding?

To finance new businesses using small amounts from many individuals. Signup and view all the answers

Which of the following describes 'deal screening' in the investment process?

The evaluation of proposals to determine their suitability. Signup and view all the answers

What are typical members of a savings stokvel expected to do?

Contribute a fixed amount on a regular basis. Signup and view all the answers

Who typically provides venture capital?

Venture capital organizations and angel investors. Signup and view all the answers

What is a key benefit of crowdfunding for entrepreneurs?

A larger pool of potential investors via social networks. Signup and view all the answers

Which stage follows making contact in the investment process?

Deal screening. Signup and view all the answers

Study Notes

Determining Financial Requirements

Forecasting future sales, revenue, and expenses is crucial for determining financial needs.
This involves projecting asset investment levels to support projected sales.
The process culminates in determining financing needs throughout the planning period.

Short-Term Finance Sources (≤12 months)

Trade credit: Credit extended between businesses.
Bank credit: Overdraft facilities linked to accounts.
Other sources: Bills of exchange, acceptance credits, factoring, customer advances, shipper's finance (availability may vary).

Medium-Term Finance Sources (1-3 years)

Installment sales: Purchase price paid in installments.
Leasing: Goods leased for a stated sum, paid in installments or a lump sum.
Medium-term loans: Typically repaid over 24-60 months, used for working capital, bridging finance, or fixed asset acquisition.

Long-Term Finance Sources (≥3 years)

Equity capital: Initial capital contribution. Variations exist across sole proprietorships, partnerships, close corporations, and companies (ordinary and preference shares).
Debentures: Borrowed money via negotiable, transferable documents.
Retained earnings: Profits reinvested instead of distributed as dividends.
Long-term loans/mortgage bonds: Secured by immovable property.

Institutions Supporting Small Businesses

Commercial banks
Merchant banks
Business Partners
Small Enterprise Finance Agency (sefa)
Industrial Development Corporation (IDC)
Local business support centers

Informal Finance Sources

3 Fs: Family, fools, and friends (often a last resort).
Stokvels: Savings systems with various objectives (savings clubs, loan stokvels, investment clubs).

Venture Capital and Private Equity

Private equity: Capital from diverse investors (development finance institutions, pension funds, high-net-worth individuals).
Venture capital: Private equity for early-stage businesses, sourced from venture capital organizations and angel investors.

Crowdfunding

Raising small amounts of capital from many individuals via social media and crowdfunding websites.
Expands the investor pool beyond traditional sources.

Attracting Investors (Private Placement)

Five key stages: Making contact (deal origination), deal screening, deal evaluation (innovation, market conditions, competition), deal structuring (investment and return), post-deal activity (ongoing investor involvement).

Cost of Raising Finance

Upfront costs: Proposal preparation (accountants, consultants, etc.).
Marketing costs: Advertising, travel, brochures, and opportunity cost of the entrepreneur's time.
Back-end costs: Investment banking fees, legal fees, brokerage fees, etc.

Initial Public Offering (IPO)

"Going public" to raise growth capital.
Requires meeting stock exchange listing requirements, including profit history.

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Description

This quiz covers the essentials of determining financial requirements with an emphasis on forecasting sales, revenue, and expenses. It explores sources of finance categorized by short-term, medium-term, and long-term, including trade credit, bank credit, leasing, and equity capital. Test your knowledge on financial planning and funding options available to businesses.