Business Finance: Needs and Sources (Copy)
- Finance department
- Record financial transactions
- Make final accounts
- Accounting information for managers
- Forecasting cash flows
- Important financial decisions
- Need for finance
- Starting up
- start-up capital
- Non-current assets need to be prucased
- Initial inventories need to purchased
- Launch the business and promotion
- Expansion
- More non-current asets
- New products developed
- High amounts of finance for research and development
- Additional working capital
- Working capital is the your current assets- current liabilities
- Money required
- Capital expenditure
- Non-current assets
- Permanent improvement in non current assets
- Their initial installation or legal fee etc.
- Revenue expenditure
- Recurring expenses
- No permanent improvement in non current assets
- Usually benefit consumed within 1 year.
- Capital expenditure
- Starting up
- Source of Finance
- Internal
- Retained profits
- No interest paid
- New business may not have it
- It may also reduce dividend to owners
- Sale of redundant existing assets
- Easy
- No interest and permanent capital
- Takes time and fast selling can cause problems
- Fast selling can reduce price
- It may not be available to new businesses
- Inventories sold
- Opporutnity cost and storage costs reduce
- Fast selling may not fetch the right price
- Owner’s savings
- Available fast to business
- No interest payments
- Problems
- Savings can be very low
- Risk taken by owners will increase
- Available fast to business
- Retained profits
- External Sources
- Issues of shares
- Limited companies only
- Permanent source of capital
- No interest paid
- Problem
- Dividend may be paid
- Tax is not reduced by dividends
- Ownership can change hands
- Bank loans
- Readily available
- Varying time lengths
- Large companies offer low rate of interests by bank
- Interest is deducted from profit before tax
- Problems
- Interest has to be paid
- Have to be repaid
- Collateral or security required
- Debentures
- Long-term loan certificates
- Loan, interest and repaid
- Grants and subsidies from outside sources
- Strings attached often
- Microfinance
- Small sized loans
- Poor groups can benefit from it
- Crowdfunding
- Many people fund it
- No initial fee
- Platform charges percentage of the total gained
- Fast way to raise huge sums
- Public reaction to new businesses
- Best if traditional sources of finance not available.
- Issues of shares
- Short-term and Long-tern
- Short-term
- Overdraft
- Overdraw from account
- Short-term expenses met
- Vary each month
- Interest only the overdrawn amount
- Cheaper than short-term loans
- Interest rates are variable
- Bank can ask for repayment on a short notice
- Trade Credit
- Delaying payment to suppliers
- Interest-free methods
- Discounts may not be offered
- Factoring of debts
- Go to someone to buy the loan that you have to receive from someone else
- Get a percentage of it today
- He will then collect himself
- Overdraft
- Long-term finance
- Bank loans
- Hire Purchase
- Buy a non-current asset over a long time with monthly payments having interest charge
- Not a huge immediate expense required
- Cash deposit is paid at start
- Interest can be high
- Buy a non-current asset over a long time with monthly payments having interest charge
- Leasing
- Use an asset but not purchase it
- Pay each month
- Buy or return at the end of the leasing period
- Sale and leaseback
- Sell an asset to leasing company
- Then lease it back
- Large sum of cash may not be available at the start
- Care and maintenance of assets is carried out by leasing company
- Total cost may be higher than purchasing the asset
- Issues of shares
- Already dsicussed
- Called equity financing
- Long-term loans
- Debt financing
- Already discussed
- Debentures
- Short-term
- How to select source of fiannce
- Purpose and time period of amount required
- Amount needed
- Legal form and size can make differences in the way finance can be raised
- Control
- Lose control over the business
- Gearing
- Total percentage of long-term liabilities in capital employed
- High gearing can reduce options of finance raising.
- Will bank lend
- Require cash flow forecast
- Income statement checked
- Existing loans and sources of finance used
- Evidence of collateral or security
- Business explains hope for future benefits
- Shareholders will see if share price rising and dividends high
- Internal
