3.1 - expenditures, sources of finance

capital expenditure

• finance spent on fixed assets (items used repeatedly in long term)

• 12 months or above

revenue expenditres

• finance spent on daily operations of the business

• short term

internal sources of finance

funds that come from within the business

• personal funds

• retained profit

• liquidification/ sale of assets

personal funds (c&r)

money contributed by the owner or partners of a business

+zero costs of finance

-amount is limited

retained profits (c&r)

the portion of a company's net earnings

+zero costs of finance

-if business makes a loss this will not be available

-if dividends are high, this source is limited

sale of assets (c&r)

the process of liquidating company property to generate cash

+zero costs of finance

-difficult to sell if no demand

external sources of finance

funds that come from outside the business

• share capital

• loan capital

• overdraft

• trade credit

• crowdfunding

• leasing

• microfinance providers

• business angels

share capital (r )

money raised by issuing shares in the company

+can raise a huge amount of money

-shareholder dividends may reduce profits

-time and money consuming to prepare and launch

-requires legal compliance.

loan capital (c )

money borrowed to be repaid with interest

+provides larger funding over a longer period -requires regular repayments and interest payments

overdraft (r )

a facility allowing a business to withdraw more money than it has in its account

+provides short-term funding flexibility -repayments can be unpredictable and often incur high fees

trade credit (r )

an agreement allowing businesses to buy goods or services now and pay for them later.

+provides short-term financing options

-if payments are late penalties may be charged

crowdfunding (c )

the collection of funds from a large number of investors

+potentially high reward with low risk

+feedback from investors may provide valuable market research

-signing up for crowdfunding platforms costs

-limited control over the fundraising process

leasing (c )

a financial arrangement where a business can use equipment or property by paying a fee over time without purchasing it

+provides access to necessary assets without large upfront costs
+flexibility in upgrading equipment

+maintenance costs are covered by the ones that lease the equipment to the business
-obligations to pay fees regardless of use

microfinance providers (c )

organizations offering small loans and financial services to individuals or businesses that lack access to traditional banking

+accessibility to disadvantaged sectors of society

+job creation through the businesses who opened due to micro financing

-limited amount of finance due to high risks of no repayment

business angels

a wealthy individual investors providing capital to start-ups in exchange for ownership equity or convertible debt

+source of finance for firms that are unable to secure loans and attract investors

-loss of control

-business might have to buy out the ownership back from the business angel

types of costs

• fixed

  • rent, interest, salaries

• variable

  • wages, raw materials, utilities

• direct

  • specifically related to an individual project or output

• indirect/ overhead

  • cannot be clearly traced to production or output