Internal source of finance
“100% of shares are owned by john Ariki”
No need to give dividends.
A lot of money in the business if the event of an issue.
-Personal Funds/Personal savings - When the owner a business uses their personal funds/savings into their business as a source of finance.
Benefits and costs of using personal funds.
Pro: You Will Run a Better Business
If you’ve got your own money on the line, you’re going to look at your business very differently,You’re going to want to really do your due diligence to make sure you can minimize the risk of losing your money. You’re going to plan differently. You will run a smarter and better company as a result. And all the rewards will be yours, not the bank’s.
Con: The Risk of Personal Debt and Bankruptcy
many entrepreneurs get in trouble. A lot of small business owners are taking on debt on the personal side. Let’s say they’re taking on a line of credit for their business with the bank. They have to then personally guarantee that money. if the business goes under, then the entrepreneur will either spend the next decade paying it off on the personal side, or need to file for personal bankruptcy. Using personal funds makes you financially liable, using only your personal funds to invest your in your company can be drastic if the business doesn't work out
Pro: Your Business, Your Way
You have complete control. You’re not beholden to anybody but yourself. You don’t have investors looking over your shoulders asking for specific returns. You decide how the money is being used. You decide how fast you’re looking for a return.
Con: Your Money Might Not Be Enough
If you’re going to be successful, you’re going to need a lot of capital. The whole dilemma of cash flow comes up real quick. A bank loan can give you more financial room for potential success. A dip into your savings could see your quick start meet a quick dead end. Smith drives that point home very clearly: “You could have the world’s best business idea, you can be smart, you can be a serious hustler, but if you run out of cash? Your business is gone. No cash, no business.”
Not always financially stable
"in 2015 Utopia recorded its first financial loss in 16 years"
Business is at a loss since the Cost of production > revenue, caused by lack of bookings as a result of a recent natural disaster that struck the island.
Calculate Margin of safety = Level of demand and - Break even quantity.
In a break even analysis, margin of safety is how much output or sales level can fall before a business reaches its break even point.
The costs of rebuilding and/or repairing are high due the significant proportion of damage taken, 7 villas are damaged and 17 are destroyed. Because all villas have suffered some sort of damage making them unavailable for service without repair.
Utopia's financial stability can be heavily influenced by the environment. As natural disasters can occur, pacific islands are at risks of those natural disasters as they often brew in the pacific islands. Therefore, Utopia is at risk of an unfortunate event, which could heavily damage it's assets thus limiting its availability to clients, limiting its bookings and it's revenue.
The potential of expanding globally
“Liza is looking for new ways to expand the business”
This process could be expensive as there would be high initial costs of building up the business in other countries
Lose Unique selling point of the business, what makes it special
Expanding globally does have its benefits
It could increase cash flow as more customers are reached
Increase brand loyalty
Revenue made could help develop the original business in the Pacific Islands
“John realized that he has to consider new revenue streams”
Not as applicable since the likelihood of being sponsored by an organisation is low (although not impossible). Items used at Utopia like umbrellas, cups, towels, other inhouse products can be sponsored by external organizations.
Subsidy for business that positively affects society
Tourists are likely to buy souvenirs if they come to the resort, can help support other local businesses too
Increases cash flow
Awareness of product/service
“Gross profit margin would be high” = good
Gross profit margin is value of gross profit as a percentage of sales revenue
Gross profit / Sales revenue * 100
Have to take into account the fixed costs
Cash flow forecast, pay back period average rate of return
“Capital expenditure of $10 000 required to set up” - high risk
To find out how risky:
Use cash flow forecast
Use payback period
Use average rate of return
Cash flow problems
Due to damaged and destroyed villas
Lack of customers
How to deal with cash flow problems
Reduce cash outflow
Better credit terms
Seek alternative supplies
Better stock control
Improve cash inflows
Tighter credit control
Cash payments only
Improved product portfolio
Which ones apply to Utopia the most? Give reasons.
Expansion of JAC
Expanding to other markets
Conduct investment appraisal
Cost of expanding
With reference to Utopia and its finance, what is the impact of change on innovation?
Evaluate the advantages and disadvantages of external sources of finance?
How could Utopia increase its revenue?
Create a cash-flow forecast for Utopia.
What are the costs and benefits of expanding Utopia and JAC?
Why is it important for Utopia to budget?
Finance terms: https://quizlet.com/75313726/ib-business-finance-terms-flash-cards/
How to create a cash flow forecast: https://www.youtube.com/watch?v=uUIZfRqeGKc
Advantages/Disadvantages of sources of finance: https://quizlet.com/64955642/sources-of-finance-advantages-and-disadvantages-flash-cards/
Investment appraisal: https://quizlet.com/114262625/38-investment-appraisal-ib-business-management-flash-cards/