Business FinanceBusiness Finance

Introducing the topicIntroducing the topic

Two US companies page 475Two US companies page 475 Answer questions….Answer questions….

Business FinanceBusiness Finance

Why does a business need Why does a business need finance?finance?

- Expansion- Expansion

- Start up costs- Start up costs

- Paying day to day bills- Paying day to day bills

- Purchasing Assets- Purchasing Assets

CapitalCapital

Working Capital –Working Capital – the capital needed to the capital needed to pay for raw materials and the day to day pay for raw materials and the day to day running costs of a business.running costs of a business.

Capital Expenditure –Capital Expenditure – Purchasing Purchasing assets that will last for more than one assets that will last for more than one year.year.

Revenue Expenditure –Revenue Expenditure – Expenditure Expenditure incurred to improve or maintain an asset incurred to improve or maintain an asset that generates revenue or the day to day that generates revenue or the day to day costs of generating revenue. i.e. rent.costs of generating revenue. i.e. rent.

Capital or Revenue Capital or Revenue ExpenditureExpenditure

AnswerAnswer

Working CapitalWorking Capital

Working capital is the difference Working capital is the difference between Current Assets and Current between Current Assets and Current Liabilities. And can be considered Liabilities. And can be considered the lifeblood of a business as it will the lifeblood of a business as it will cover the day to day running of a cover the day to day running of a business and purchasing stock. business and purchasing stock.

What happens if you don’t have What happens if you don’t have enough working capital?enough working capital?

How Much Working How Much Working Capital is needed?Capital is needed? A Business needs enough working A Business needs enough working

capital to meet its immediate capital to meet its immediate debts. debts.

It can be unwise to have a high It can be unwise to have a high level of working capital because level of working capital because you missing opportunities to you missing opportunities to invest money to improve or invest money to improve or expand your business.expand your business.

FinanceFinance Businesses can get finance from internal and external sources.Businesses can get finance from internal and external sources. What are Some ways a business could secure finance?What are Some ways a business could secure finance?

InternalInternal ExternalExternal

Retained EarningsRetained Earnings Bank OverdraftBank Overdraft

Sale of AssetsSale of Assets Trade CreditTrade Credit

Reduction in Working Reduction in Working capitalcapital

Debt FactoringDebt Factoring

LoansLoans

DebenturesDebentures

SharesShares

Hire purchase and leasingHire purchase and leasing

Internal Sources of Internal Sources of FinanceFinance Retained earnings –Retained earnings – When businesses When businesses

make a profit a portion of it may be used make a profit a portion of it may be used as retained earnings in the business, often as retained earnings in the business, often these earnings are used for expansion.these earnings are used for expansion.

Asset Sales –Asset Sales – Selling old machines or Selling old machines or other assets to raise finance. Businesses other assets to raise finance. Businesses can sell assets to a leasing agency then can sell assets to a leasing agency then enter a lease agreement on the same enter a lease agreement on the same machine to raise short term finance as machine to raise short term finance as well.well.

Internal Sources of Internal Sources of FinanceFinance Reduction in WC –Reduction in WC – Sell excess Sell excess

stock or reducing the amount of stock or reducing the amount of credit sales offered will provide a credit sales offered will provide a source of finance. source of finance.

Note:Note: Reducing WC is risky as Reducing WC is risky as you could be reducing your you could be reducing your companies ability to pay companies ability to pay immediate debts.immediate debts.

Internal SourcesInternal Sources

This method of raising finance This method of raising finance has its benefit in the fact that has its benefit in the fact that there is no direct cost to the there is no direct cost to the organization, and there is no loss organization, and there is no loss of control for the owner.of control for the owner.

Could a New Business relay on Could a New Business relay on Internal Sources of Finance to Internal Sources of Finance to expand?expand?

External Sources of External Sources of FinanceFinance Bank Overdraft –Bank Overdraft – Finance given Finance given

by a bank to a business to allow by a bank to a business to allow purchases beyond the companies purchases beyond the companies means. means.

Trade Credit –Trade Credit – Delaying Delaying payment to suppliers can help payment to suppliers can help raise finance for a business.raise finance for a business.

Debt Factoring –Debt Factoring – Debtors can take Debtors can take months to pay to get around this we months to pay to get around this we can pass the debtor onto a debt factor, can pass the debtor onto a debt factor, who will provide us with cash (not the who will provide us with cash (not the full amount) and then chase the rest.full amount) and then chase the rest.

Hire Purchase/Leasing –Hire Purchase/Leasing – Purchasing Purchasing an asset and paying off over a period an asset and paying off over a period time therefore avoiding outlaying large time therefore avoiding outlaying large amounts of money initially.amounts of money initially.

External Sources of External Sources of FinanceFinance

External sources of External sources of FinanceFinance Loan –Loan – These can be offered at a These can be offered at a

fixed or variable interest rate, you fixed or variable interest rate, you also need to provide security to the also need to provide security to the bank to ensure they receive bank to ensure they receive payment.payment.

Debentures –Debentures – Bonds issued by Bonds issued by companies to raise debt finance.companies to raise debt finance.

Shares –Shares – Offering shares to people Offering shares to people outside the business will raise outside the business will raise finance.finance.

Long Term FinanceLong Term Finance

Which Method should a business Which Method should a business choose?choose?

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

Other SourcesOther Sources

Grants –Grants – A sum of money given by an A sum of money given by an agency or government to help a small agency or government to help a small business or businesses expanding in business or businesses expanding in developing regions to help fund there developing regions to help fund there success.success.

Venture Capital –Venture Capital – Money given by Money given by investors to firms who find it hard to investors to firms who find it hard to get finance from traditional sources ie get finance from traditional sources ie banks. There is great risk involved banks. There is great risk involved normally for the investor.normally for the investor.

ActivityActivity

Sources of Finance page 486 Sources of Finance page 486

Business PlanBusiness Plan

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

Mid Unit TestMid Unit Test

What is Trade Credit and why is it What is Trade Credit and why is it a source of finance? (3 marks)a source of finance? (3 marks)

State two ways a business can State two ways a business can raise finance from internal raise finance from internal sources? (2 marks)sources? (2 marks)

Outline the main sources of long Outline the main sources of long term external finance available to term external finance available to a limited company? (10 marks)a limited company? (10 marks)