FINANCE TYPES OF FINANCE ACCOUNTING METHODS IGCSE Business Studies Term 1

Startup and Running Costs Imagine buying a new house... What do you need before you can move into it? These are STARTUP Costs! What costs can you think of that are paid each month? These are RUNNING Costs!

Business Startup Costs... Market Research Do you outsource, or do it yourself? Each comes at a cost! Machinery and Equipment What you need will depend on the business type Do you need an office? Consider fishermen! Fixtures and Fittingas Lights, sockets, kilns for Gas, telephone points, furniture etc

Business Running Costs... Advertising How do you do this? What can you afford? What do you NEED to do to get to your customer? Do you outsource or do it yourself?

Business Running Costs... Rent and Rates Rates have to be paid for rented or bought properties Rent can reduce your startup costs, but you will need a “bond” for about 6 weeks rent in advance! Power For light and Heat

Business Running Costs... Raw Materials NEED TO FINISH SLIDES FOR RUNNING COSTS !!!

Business Running Costs... Advertising How do you do this? What can you afford? What do you NEED to do to get to your customer? Do you outsource or do it yourself?

Business Running Costs... Advertising How do you do this? What can you afford? What do you NEED to do to get to your customer? Do you outsource or do it yourself?

Business Running Costs... Advertising How do you do this? What can you afford? What do you NEED to do to get to your customer? Do you outsource or do it yourself?

Business Running Costs... Advertising How do you do this? What can you afford? What do you NEED to do to get to your customer? Do you outsource or do it yourself?

Internal Sources of Finance Profit and Reserves Profits – these are kept and used for machinery/vehicles etc... Reserves – profits not used are tucked away for “a rainy day”!

Internal Sources of Finance Selling Assets ASSETS – large items like buildings, machinery, vehicles Can be sold to raise capital You can sell them off to a finance house and lease it back off them! So it gives you the money and you still get to use the asset

Internal Sources of Finance Owner’s Capital The owners own money No interest to be paid to the bank Risk of losing it all if business fails

External Sources of Finance Short Term - up to 3 years Medium Term – 3 – 10 years Long Term Finance – over 10 years So, what types of finance can you think? Think of the good thing and bad things of the types of finance you can think of...

External Sources of Finance Friends and Family No interest Small amounts  Only for short term finance  Could lose their money 

External Sources of Finance Banks - Overdraft or Loan Large amounts can be borrowed High interest on overdrafts  Must be paid back regularly  Security against the loan will be required  A Business Plan and forecasts must be produced

External Sources of Finance Hire Purchase Purchase the item now and pay for it in installments You will have to pay interest on the amount of the item Eg – buy a car for $10,000 You borrow the finance to purchase it You pay 5% for each instalment of $1000  You DON’T own it until it is all paid for!

External Sources of Finance Trade Credit You buy goods off the supplier now You pay for it in 30 days time A short term way of keeping your money in the bank until you need to pay!

External Sources of Finance Leasing You hire the property/machinery or vehicles for a set period of time (like car hire!) Avoids paying large amounts outright for them Can use money for other things Medium to Long Term option

External Sources of Finance Debentures Long Term Loan Fixed interest rate – usually a low rate Have to be paid back by a set date

External Sources of Finance Issuing Shares Private Ltd or Public Ltd company Private Ltd Company – agreement needed by all shareholders! Public Ltd Company – no agreement needed YOU DON’T HAVE TO PAY THIS BACK

External Sources of Finance Public Sector finance Grants Subsidies from local/national government Will have conditions attached Poor areas more likely to get them! So, which method of finance is the best one to use? What is the SAFEST option? Retained Profits? BUT... New businesses don’t have any!

How to decide on a type of finance... Deciding Factors on choosing finance... Long Term or Short term? What is the purpose of the finance? How much is needed? What is the risk? Is the GEARING too high? (Loans v’s Capital employed)

The PROVIDERS of finance... What will they want/expect? Interest/Dividend Accounts/Forecasts Repayment of debts... (not highly geared!) Effective Management COPY OUT TOP TIP FOR EXAMS ON PAGE 119