SL Business Unit 3 - Finance (copy)

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Types of Spending

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17 Terms

1

Types of Spending

  1. Capital Expenditure

  2. Revenue Expenditure

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2

Capital Expenditure

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

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3

Revenue Expenditure

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

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4

Sources of Finance

Where or how businesses obtain their funds

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5

Internal Sources of Finance

  1. Personal Funds

  2. Retained Profits

  3. The sale of assets

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6

Personal Funds

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

Benefits: zero cost

Drawbacks: Limited amount of money

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7

Retained Profits

Value of finance that the business keeps after paying taxes.

Benefits: zero cost

Drawbacks: not reliable, differs every year

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8

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

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9

External sources of finance

  1. Share capital

  2. Loan capital

  3. Overdrafts

  4. Trade credits

  5. Crowdfunding

  6. Leasing

  7. Microfinance

  8. Business angels

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10

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

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11

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

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12

Overdrafts

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

Benefits: flexible

Drawback: high interest rate

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13

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

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14

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

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15

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

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16

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

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17

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

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