Studied by 5 people
Types of Spending
Capital Expenditure
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
Personal Funds
Retained Profits
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
Share capital
Loan capital
Overdrafts
Trade credits
Crowdfunding
Leasing
Microfinance
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
Note 
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