Business Finance

Introducing the topic Two US companies page 475 Answer questions….

Business Finance Why does a business need finance? - Expansion - Start up costs - Paying day to day bills - Purchasing Assets

Capital Working Capital – the capital needed to pay for raw materials and the day to day running costs of a business. Capital Expenditure – Purchasing assets that will last for more than one year. Revenue Expenditure – Expenditure incurred to improve or maintain an asset that generates revenue or the day to day costs of generating revenue. i.e. rent.

Capital or Revenue Expenditure

Answer

Working Capital Working capital is the difference between Current Assets and Current Liabilities. And can be considered the lifeblood of a business as it will cover the day to day running of a business and purchasing stock. What happens if you don’t have enough working capital?

How Much Working Capital is needed? A Business needs enough working capital to meet its immediate debts. It can be unwise to have a high level of working capital because you missing opportunities to invest money to improve or expand your business.

Finance Businesses can get finance from internal and external sources. What are Some ways a business could secure finance? Internal External Retained Earnings Bank Overdraft Sale of Assets Trade Credit Reduction in Working capital Debt Factoring Loans Debentures Shares Hire purchase and leasing

Internal Sources of Finance Retained earnings – When businesses make a profit a portion of it may be used as retained earnings in the business, often these earnings are used for expansion. Asset Sales – Selling old machines or other assets to raise finance. Businesses can sell assets to a leasing agency then enter a lease agreement on the same machine to raise short term finance as well.

Internal Sources of Finance Reduction in WC – Sell excess stock or reducing the amount of credit sales offered will provide a source of finance. Note: Reducing WC is risky as you could be reducing your companies ability to pay immediate debts.

Internal Sources This method of raising finance has its benefit in the fact that there is no direct cost to the organization, and there is no loss of control for the owner. Could a New Business relay on Internal Sources of Finance to expand?

External Sources of Finance Bank Overdraft – Finance given by a bank to a business to allow purchases beyond the companies means. Trade Credit – Delaying payment to suppliers can help raise finance for a business.

External Sources of Finance Debt Factoring – Debtors can take months to pay to get around this we can pass the debtor onto a debt factor, who will provide us with cash (not the full amount) and then chase the rest. Hire Purchase/Leasing – Purchasing an asset and paying off over a period time therefore avoiding outlaying large amounts of money initially.

External sources of Finance Loan – These can be offered at a fixed or variable interest rate, you also need to provide security to the bank to ensure they receive payment. Debentures – Bonds issued by companies to raise debt finance. Shares – Offering shares to people outside the business will raise finance.

Long Term Finance Which Method should a business choose? Debt Finance has its advantages in that you do not lose control of your business by selling shares, loans are repaid eventually and interest charges are paid out before company tax. Where as Equity Finance never has to be paid back and you don’t have to pay a dividend every year.

Other Sources Grants – A sum of money given by an agency or government to help a small business or businesses expanding in developing regions to help fund there success. Venture Capital – Money given by investors to firms who find it hard to get finance from traditional sources ie banks. There is great risk involved normally for the investor.

Activity Sources of Finance page 486

Business Plan Getting Finance can be difficult especially for small businesses so it is important that a company provides a detailed business plan to support what they are trying to achieve and give investors confidence that they will get there money back.

Mid Unit Test What is Trade Credit and why is it a source of finance? (3 marks) State two ways a business can raise finance from internal sources? (2 marks) Outline the main sources of long term external finance available to a limited company? (10 marks)