1. Chapter 26 – Cambridge Tutorial
Business Finance
Chapter 26 – Cambridge Tutorial

2. Learning Objectives Understand why business activity requires finance
Recognise the difference between capital revenue expenditures and different needs for finance these creates
Understand the importance of working capital to a business and how this can be managed
Analyse the different sources of long, medium and short term finance both internal and external
Select and justify appropriate sources of finance for different business needs

3. Why business activity requires finance
Start-up capital: money needed to set up a business
To finance working capital: the money needed to pay for raw materials, day-to-day running cost of the business
For explanation
Special situations like declines in sales many consumer default on their loans
For R&D

4. Capital and revenue expenditure
Capital expenditure: involves the purchase of assets that are expected to last for more than one year, such as building and machinery
Revenue expenditure: is spending on other items than fixed assets that includes wages, materials…

5. Working capital Working capital allows business to day liquid
Liquidity: the ability of a company to be able to pay its short-term debts.
Current assets – current liabilities
Liquidation is when companies stop business activities and sell it’s assets for cash to pay suppliers and other creditors.

6. How much working capital is needed?
Materials and stock
Production
Sell on credit
Cash
Will depend on the working capital cycle the longer the cycle is the more working capital is needed

7. Where does finance come from?$
Internal: money raised from the business's own assets or from profits left in the business
External: money raised from sources outside the business

8. External Sources of Finance
Short term sources
bank overdraft
Trade credit (buying on credit)
Debt factoring (selling receivables)
Medium term sources
Lease purchases
Medium term loan
Long term sources
Long term bank loan
Issuing bonds
Issue shares
Grants
Venture capital

9. Chapter 27 - Cambridge Tutorial
Forecasting Cash flow
Chapter 27 - Cambridge Tutorial

10. Learning goals Understand the importance of cash to business
Explain the difference between a firm’s cash flow and it’s profit
Structure a cash-flow forecast and understand the sources of information needed for this
Evaluate the problems of cash-flow forecasting
Analyse the different causes of cash-flow problems
Evaluate different methods of solving cash-flow problems

11. Importance of cash flow
Paying bills and expenses of running a business
New business are often offered much less time to pay suppliers

12. Forecasting cash flow Cash inflow Cash outflow
Owner’s capital investments
Customers’ cash purchases
Debtors’ payments (debtors: customers who have bought products on credit and will pay cash at an agreed date in the future)
Lease payment for premises
Annual rent payment
Electricity, gas, water and telephone bills
Labour cost payments
Variable cost payments such as cleaning materials

13. Key definitions on page 496
Cash-flow forecast: estimate of a firm’s future cash inflows and outflows.
Net monthly cash flow: estimated difference between monthly cash inflows and outflows
Opening cash balance: cash held by the business at the start of the month.
Closing cash balance: cash held at the end of the month becomes next month’s opening balance.

14. What uses does this type of financial planning have?
Can plan to raise money for times of negative cash flow
Plan can be made to manage and reduce cash outflow if it lead to negative cash flow
Cash flow statement is necessary to secure any debt.

15. The causes of cash-flow problems
Lack of planning
Poor credit control: not keep proper record of which customer paid and which need to pay
Allowing customers too long to pay debt
Expanding too quickly: expenses increase faster than revenue can be generated
Unexpected events: such as breakdown in equipment

16. Ways to improve cash flow
Lets look at page 501 together.