business unit 3.1, 3.2 ,3.3 mid year exam

what is capital expenditure?

money spent to acquire items that will last more than one year (fixed assets), can be used as collateral

what is revenue expenditure? with examples

money spent on the day to day running of a business e.g. wages, rent, electricity

3 internal sources of finance

• personal funds

• retained profit

• sale of assets

advantages of personal funds

• maximised control over business

• positive sign of communication to potential investors

disadvantages of personal funds

• very risky as sole trader could be investing their life’s savings

• funds may not be enough to maintain a business

advantages of retained profits

• full control over use

• does not have to be repaid

retained profits

profit that remains after a business has paid tax to the government and dividends to shareholders

disadvantages of using retained profits

• start ups have no retained profits

• owners may overuse them and leave no buffer for emergencies or future growth

disadvantages of sale of assets

• may only be option for established firms

• time consuming

8 external sources of finance

• share capital

• loan capital

• overdrafts

• trade credit

• crowdfunding

• leasing

• microfinance providers

• business angels

share capital

money raised from the sale of shares of a limited company

advantages of using share capital

• permanent source of capital that does not need to be repaid

• no interest

disadvantage of using share capital

shareholders have to be paid dividends when the business makes a profit

loan capital

money sourced from financial institutions, interest has to be repaid

advantages of using loan capital

• is accessible and quick

• repayment is spread out over time reducing the burden of a lump sum

disadvantages of using loan capital

• interest has to be paid

• collateral may be required

overdrafts

when a lending institution allows a firm to withdraw more money than it currently has in its accounts

advantages of using overdrafts

• helps to settle short term debts

• flexible

disadvantages of overdrafts

• banks can request for the overdraft to be paid back at very short notice

• high interest rates

trade credit

an agreement between businesses that allows the buyer of goods or services to pay the seller at a later date

advantages of using trade credit

• no interest

• businesses are left in a better cash flow position

disadvantages of using trade credit

• lose out on possible discounts of using cash

• could lead to poor relationship between debtor and supplier

crowdfunding

when a business is funded by a large group of people each contributing a small amount of money

advantages of using crowdfunding

• provides access to thousands of investors

• opportunity for feedback and expert guidance

disadvantages of using crowdfunding

• strong competition

• scrutiny and rejection

definition of leasing, with examples

when a business enters into a contract with a leasing company to use particular assets e.g. machinery, property

advantages of using leasing

• firm does not need a high initial capital outlay

• leasor does repair and maintenance

disadvantages of using leasing

• can be more expensive than the outright purchase of an asset due to leasing charges

• cannot act as collateral

microfinance providers

offer banking services to low income or unemployed people who would otherwise have no other access to financial services

advantages of using microfinance providers

• do not seek collateral

• provide loans quickly and with less formalities

disadvantages of using microfinance providers

• can adopt harsh recovery methods

• offer small loan amount

what are business angels or angel investors?

individuals who provide financial capital to small start ups or entrepreneurs in return for ownership equity in their businesses

advantages of business angels

• more open to negotiation than other lenders to small businesses

• no repayment or interest

disadvantages of business angels

• may want a large degree of control

• expect a substantial return on their investment

what are the classifications of finance?

• short term less than 1 year

• medium term 1-5 years

• long term over 5 years

what are the factors that determine the choice of a particular source of finance?

• purpose of funds

• costs such as interest

• status and size

• amount required

• flexibility

what are fixed costs?

costs that do not change as output changes e.g. rent

variable costs, when does it occur?

cost that changes as output changes, occurs in the short and long run

formula for total revenue

total revenue = price x quantity sold

formula for variable costs

variable costs = cost per unit x total number of units

formula for total costs in the short run

total costs = fixed costs + variable costs

formula for total costs in the long run

total costs = variable costs

what are direct costs? with examples

costs that can be identified with the production of a specific good or service e.g. raw materials, direct labour

what are indirect or overhead costs? with examples

costs that cannot be clearly identified with the production of a specific good or service e.g. rent, administration salaries

first columns in a profit and loss account

sales revenue

costs of goods sold

gross profit

expenses

net profit before interest and tax

interest

net profit before tax and after interest

tax

net profit after interest and tax

dividends

retained profits

what are intangible assets?

non-physical assets that are difficult to value and increase the businesses competitiveness

what are patents? (intangible assets)

provide inventors with exclusive rights to manufacture, use and sell their inventions

• patent holders may give permission for others to use patent

goodwill definition, what does it include? (intangible assets)

positive attributes of business, includes a good customer base, strong brand name and skilled workforce

• is an extra fee on what your firm will be worth

what is copyright loss? (intangible assets)

give creator exclusive rights to protect the production and sale of their artwork

• can sell permission to use

what is a trademark? (intangible assets)

recognisable symbol, phrase or design that identifies a business

• can sue if infringements are made and can be sold for a fee

advantages of sale of assets

• no interest

• good way of raising cash in assets that were not used

sale of assets

when a business sells of its unused assets to raise funds

parts of balance sheet

non-current assets

property, plant & equipment

accumulated depreciation (subtracted)

non-current assets

current assets

cash

debtors

stock

current assets

total assets

current liabilities

bank overdraft

trade creditors

other short term loans

current liabilities

non-current liabilities

long term borrowings

non-current liabilities

total liabilities

net assets

equity

retained earnings

share capital

total equity

assets

resources of value a business own or are owed to it, includes non-current (fixed) and current assets

non-current (fixed) assets with examples

long term that last more than 12 months e.g. property, equipment, machinery

current assets with examples

short term that last for up to 12 months e.g. cash, debtors, stock

liabilities

firm’s legal debts or what it owes to other firms

non-current liabilities definition with examples

last more than 12 months e.g. bank loans, mortages

what are current liabilities? with examples

payable by business within 12 months e.g. overdrafts, creditors, tax

what is equity?

amount of money returned to shareholders if all assets were liquidated (sold off)

net assets calculation

net assets = total assets - total liabilities

equity calculation

equity = share capital + retained earnings (is equal to net assets)