SL Business Unit 3 - Finance

Types of Spending

Types of Spending

1. Capital Expenditure

2. Revenue Expenditure

Capital Expenditure

spent on fixed-assets (items used repeatedly in the long term. Ex: machinery, buildings)

Revenue Expenditure

Spent on daily running of the business (ex: advertising, electricity, insurance)

Sources of Finance

Where or how businesses obtain their funds

Internal Sources of Finance

1. Personal Funds

2. Retained Profits

3. The sale of assets

Personal Funds

The use of the entrepreneurs own funds. Main source of finance for sole proprietors.

Benefits: zero cost

Drawbacks: Limited amount of money

Retained Profits

Value of finance that the business keeps after paying taxes.

Benefits: zero cost

Drawbacks: not reliable, differs every year

The sale of assets

Dormant assets are sold ex: cars, machinery

Benefits: zero cost

Drawbacks: undesirable assets (like old stuff) have different demands and may not raise funds

External sources of finance

1. Share capital

2. Loan capital

3. Overdrafts

4. Trade credits

5. Crowdfunding

6. Leasing

7. Microfinance

8. Business angels

Share capital

Money raised from selling shares in a limited liability company. Long term

Benefits: raises large amounts of funds

Drawbacks: time consuming, expensive to launch, not guaranteed

Loan Capital

Medium/Long-term source obtained from commercial lenders at banks. Interest charges are imposed at fixed/variable rates. Ex: Mortgages. Long term

Benefits: repayment by instalments allows companies time to make revenue

Drawbacks: High interest rates, collateral/business fails means the lender takes possession of the assets

Overdrafts

Allows a business to withdraw a temporary overdraw on its bank account. Short term

Benefits: flexible

Drawback: high interest rate

Trade Credits

Allows a business to postpone payments. Short term

Benefits: allows a business to earn revenue to pay loan

Drawbacks: interest rates, late payment develops poor relationships with suppliers

Crowdfunding

Raising finance from a large # of individuals ex: GoFundMe. Short term

Benefits: potential high reward, low risk

Drawbacks: low success rate, hosting fee on platform

Leasing

Hiring a contract. Lesee pays rental incomes to hire assets from the lessor, who is the legal owner of the assets. Long term

Benefits: useful for businesses without capital, repair, maintenance

Drawbacks: more expensive in the long run

Microfinance providers

aimed for low income small female business owners. Long term

Benefits: accessibility, creates jobs, increased social well being

Drawbacks: unethical lending, limited sums, limited eligibility

Business angels

wealthy individuals that harvest their own money into businesses that offer high growth potential. Long term

Benefits: for businesses that cannot take loans from banks

Drawbacks: loss of control, stakes will need to be bought out

Fixed Costs

cost of production that must be payed regardless of how much it produces or sells. ex: rent, interest payments, managerial salaries, advertising, indirect costs

Variable Cost

Cost of production that change in proportion to output. Ex: sale staff commission, packaging cost, direct costs

Total Cost

variable + fixed

Revenue Streams

money can come into a firm from means other than sales revenue ex: sponsorships, memberships, interest earnings, dividends

Limitations of Balance Sheets

Static documents, not detailed → can be incomplete, different formats for different companies, intangible assets and human capital not included

Balance Sheets

Incorporated:

Unincorporated: do not have shareholders → share capital is not part of equity

P&L Limitations

not guaranteed, no international format, window dressing (manipulation to make them appear more attractive)

Intangible assets

non-physical fixed assets that have the ability to earn revenue for a business. Ex: brand names, goodwill, trademarks, copyrights and patents

Intangible assets: Branding

help to drive global sales - recognition and brand loyalty stay with the company for as long as it exist

Intangible assets: Patents

provide legal protection for inventors, preventing others from copying their creation for a fixed number of years

Intangible assets: Copyright

provide legal protection for the original artistic work of the creator, such as an author, photographer, painter or musician

Intangible assets: Goodwill

the value of an organization's reputation, corporate image, business connections

Intangible assets: Registered trademarks

signs that uniquely identify a brand, a product or a business entity.

Limitations of financial accounts

use of single year accounts is invalid, human resources are ignored, do not reveal priorities, time consuming