3.1 Introduction to Finance Role of Finance in Business: Finance helps businesses manage money, make investments, and ensure operations run smoothly.

Role of Finance in Business

Finance helps businesses manage money, make investments, and ensure operations run smoothly.

Capital Expenditure

Spending on long-term assets like buildings or machinery.

Revenue Expenditure

Spending on daily operations like wages and rent.

Difference Between Capital & Revenue Expenditure

Capital expenditure is for long-term assets, while revenue expenditure is for short-term operational costs.

Sources of Finance

Methods through which businesses acquire funds for operations and investments.

Personal Funds

Money invested by the owner, important for sole traders to start businesses.

Retained Profit

Profits reinvested into the business instead of being distributed to owners.

Sale of Assets

Selling business-owned items to generate cash.

Share Capital

Selling shares to investors to raise money.

Loan Capital

Borrowing money from banks that must be repaid with interest.

Overdrafts

Banks allow businesses to withdraw more money than they have in their account.

Trade Credit

Businesses buy now and pay later, helping with cash flow.

Crowdfunding

Raising small amounts of money from many people online.

Leasing

Renting assets instead of buying them.

Microfinance

Small loans given to low-income entrepreneurs.

Business Angels

Wealthy individuals who invest in startups.

Short-Term Finance

Used for immediate needs, like overdrafts.

Long-Term Finance

Used for large investments, like mortgages.

Balancing Risk & Cost

Considering interest rates, repayment terms, and risks before choosing finance.

Fixed Costs

Costs that do not change with production.

Variable Costs

Costs that change with production.

Direct Costs

Costs that are directly related to production.

Indirect Costs (Overheads)

Costs not linked to production.

Total Revenue

Income from sales.

Revenue Streams

Different sources of income.

Purpose of Accounts

Helps stakeholders understand financial performance.

Profit & Loss Account

Shows a business’s revenues, costs, and profit over a period.

Balance Sheet

Shows assets, liabilities, and equity at a specific time.

Intangible Assets

Non-physical assets.

Depreciation

Reduction in asset value over time.

Gross Profit Margin

(Gross Profit / Revenue) × 100.

Net Profit Margin

(Net Profit / Revenue) × 100.

Return on Capital Employed (ROCE)

Measures efficiency in using capital to generate profit.

Current Ratio

Current Assets / Current Liabilities.

Acid-Test Ratio

(Current Assets - Inventory) / Current Liabilities.

Stock Turnover Ratio

Measures how fast inventory is sold.

Debtor Days Ratio

Measures the time customers take to pay.

Creditor Days Ratio

Measures time taken to pay suppliers.

Gearing Ratio

Measures debt levels compared to equity.

Profit vs. Cash Flow

Profit is revenue minus costs; cash flow is actual cash movement.

Working Capital

Current Assets - Current Liabilities.

Cash Flow Forecast

Predicts future cash inflows and outflows.

Payback Period

Time taken to recover an investment.

Average Rate of Return (ARR)

Measures investment profitability.

Net Present Value (NPV)

Future earnings adjusted for inflation.