Business- Sources of Finance (copy)

Revenues

Income generated from normal business operations.

Cost

The value of money needed to make or supply a service or a product

Profit

Income remaining after settling all expenses

Retained Earnings

The amount of net income left over for the business after it has paid out dividends to shareholders

Working Capital

The finance needed by a business to pay its day to day costs

Financial needs of a business

Revenue expenditure

Capital expenditure

Start-up capital

Capital to expand the business

Additional working capital

Choosing sources of finance

• Purpose

• Amount required

• Risk and gearing

• Status and size of business

• Control over the business

What are the sources of finance?

internal and external

Internal sources of finance

Personal funding
Retained profits
Sale of assets

Personal funds

A source of finance which comes mostly from the owner's own savings

What are Advantages and Disadvantages of Personal Funds?

ADVANTAGES:

-Easily accessible

-No interest

DISADVANTAGES:

-Big risk

-May not be enough money

Retained profit

Reinvesting profit back into the company

What are Advantages and Disadvantages of retained profit?

ADVANTAGES:

-No interest

-Doesn't have to be paid back

DISADVANTAGES:

-Not available for newly founded companies

-Little to nothing has been paid to shareholders as dividends

sale of assets?

Selling assets like machinery, vehicles, and property

What are Advantages and Disadvantages of sale of assets

ADVANTAGES:

-Good way of getting quick cash

-No interest

DISADVANTAGES:

-Not available for newly founded companies

-takes a lot of time to find a buyer

Short term External sources of finance

overdraft and trade credit

overdraft

When you spend more money than you have in your account

What are Advantages and Disadvantages of overdraft

ADVANTAGES:

-Spend more money than you have in your account

-Cheaper interest compared to a loan

DISADVANTAGES:

-Short time to pay back

-Banks may charge high interest rates at any time

trade credit

Get now, pay later

What are Advantages and Disadvantages of trade credit?

ADVANTAGES:

-No immediate cash

-interest free

DISADVANTAGES:

-Lose the opportunity to get a discount by paying in cash

-May lead to a fine if you pay after the designated date

Long term External sources of finance

Leasing / hire purchase
Bank Loans
Issue of Share (Share Capital)

What's leasing and what's hire purchase?

1.Use of an asset without owning it (like renting)

2.Allows the business to buy a fixed asset over a long period of time (installments)

What are Advantages and Disadvantages of leasing and hire purchase?

ADVANTAGES:

-The firm doesn't have to find a large cash sum to purchase the asset

-The firm isn't responsible for maintenance and repairs

-Useful when assets are needed for a short period of time

DISADVANTAGES:

-Can't be used as collateral

-Can be more expensive than buying the asset

-Cash deposit is needed at the start of the period

Bank Loan

A set amount of money borrowed from the bank

What are Advantages and Disadvantages of bank loans?

ADVANTAGES:

-can be arranged quickly

-repayment is spread out

DISADVANTAGES:

-Collateral will be needed

-There will be interest

issue of share

Money raised from sale of shares (equity capital)

What are Advantages and Disadvantages of issue of share

ADVANTAGES:

-No interest

-Permanent source of capital

DISADVANTAGES:

-Shareholders will be expecting dividends

-Ownership may change hands from original shareholders