ib business - finance 3.1,3.2,3.3

what is capital expenditure

money spent on fixed assets that a business will use for a long time

key features of capital expenditure

helps the business in the long term, long term investement, high cost equipment , collatoral for loans, helps the business grow and expand

examples of capital expenditure

buildings, machinery, computers, printers

revenue expenditure

money spent on the day to day running of the business

key features of revenue expenditure

short term, keeps the buisness operating, needs to be paid immediately w working capital

examples of revenue expenditure

stock/raw materials, delivery costs, wages and salaries, rent, insurance

why does revenue expenditure matter

impacts profit levels, poor control levels of revenue expenditure can conclude to irregular cash flow

why does capital expenditure matter

often serves as collatoral, influence deppreciation and invesement decisions

why does a business need finance

• launch the business

• required for day to day operations

• expansion and growth

• purchased fixed assets

• dealing w a crisis

• research

• marketing + promotion

3.2

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what is the definiton of sources of finance

refers to where or how businesses obtain their funds

Personal funds

Personal funds (owner's capital), business start-ups, short term

Retained profit

Retained profit is the value of profits that a business keeps after paying taxes and dividends

• used for capital expenditure

• kept in a contingency fund in case of emergencies

• both long and short term

The sale of assets

Existing businesses can sell their dormant assets (unused assets), obsolete machinery

• sale of land and buildings

• selling subsidiaries due to a major liquidity threat short term

what are external sources of finance

external sources of finance refer to money that come from outside the busine

Share capital

Share capital is the money raised from selling shares, main source of finance for most

• can provide a huge amount of finance.

• ownership becomes diluted

• involves many legalities and administrative procedures

• loss of ownership

• best for expansion and long term

Loan capital

money borrowed from a bank or financial insitiutions and repaid over time w interest

• large sums available

• predictable repayment schedule

• interest increases cost

• requires collateral

• risk if cash flow is weak

• best for buying machinery, equipment, long term

overdraft

a short term arrangement where a bank allows a buisness to withdraw more money than it has in its account.

• very flexible + quick access to cash

• ideal for temporary cash flow problems

• high interest rates

• can be withdrawn at any time

• short term, buying stock before sales revenue arrives

trade credit

suppliers allow the business to receive goods now and pay later

• imrpoves cash flow

• no interest if paid on time + helps businesses

• late fees for missed payments

• best for retailers, cafes/restaurants both short and long term

crowdfunding

raising finance from a large number of small investors via online platforms (gofundme)

• good for start ups

• no trad loan/interest

• builds a community + customers

• not guaranteed to succeed

• strong marketing

• time consuming

• best for start up products, creative projects and tech innovations both long and short term

leasing

renting an asset

• low upfront cost

• asset maintenance often included

• keeps cash flow healthy

• more expensive long term

• business over owns the asset

• best for expensive machinery, vehicle, equipment for start ups, long term

microfinance providers

organizations provide very small loans to entrepeuners who cannot access trad bank loans

• helps invids w no collateral

• encourages entrepreneurships

• flexible and accessible

• small loans amounts

• higher interest rates

• not suitable for large investements

• best for small start up business w low capital needs

business angels

wealthy individuals who invest their own money into start ups in exchange for equity

• investor brings expertise and industry contacts

• no interest

• useful when banks refuse loans

• loss of ownerships

• potential for investor influence over decisions

• best for: high growth potential start ups long term

what is dilution of control means

loss of ownership percentage when new shares are issued

cost of debt

interest payment on loans or bonds

• ownership remains

• mandatory repayments

cost of equity

dividends payed to shareholders

• no repayments obligatory

• cost of dividends

3.3

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fixed cost

cost a business pays regaardless of output. it does not change w output in the short run. eg rent,insurance, salaries, adv, security, matters bc of break even and long term planning, impact on business

variable cost

costs that change in proportion with the level of output or sales eg hourly wages, raw materials, packaging utilities

formula for tvc

vc per unit x quantity or vc also is tc - fc

total costs

sum of variable and fixed

determines profit and break even

formula fixed costs

fixed costs and variable costs

Direct costs

direct cost is related to an individual project or the output of a particular product; without which the costs would not be incurred- Not necessarily related to the level of output

For example, the direct costs of purchasing a commercial building include consultancy costs, solicitor's fees, telephone bills

Indirect costs (overheads)

Indirect costs cannot be clearly traced to the production or sale of any single product- Not necessarily related to the level of output

For example, rent and lighting costs can be associated with all areas of a business rather than being directly related to the output of a particular product

revenue

Revenue refers to the money coming into a business, usually from the sales

revenue streams

revenue streams are the sources of revenue from the sale of goods and services and others

revenue streams examples

1. advertising revenue - Google, Twitter and Facebook

2. Transactions fees - credit card commission

3. Franchise costs and royalties - McDonald's, Burger King and KFC

4. Sponsorship revenue - Sponsorship whereby the sponsor financially supports an organization in return for prominent promotional display

5. Subscription fees - charges on customers who use or access a good or service

6. Merchandise - entertainment industry

7. Interest earnings - positive cash balance can earn interest on their cash deposits

8. Dividends - a share of the net profits distributed to shareholders

9. Donations - financial gifts from individuals or other organizations

10. Subventions - subsidies offered from the government to certain businesses to help reduce their costs of production

average cost formula + what

total cost divided by quantity shows cost per unit helps managers compare efficiecny low ac = economies of scale

break even

where total revenue = total costs shows minimum output to prevent losses helps in financial planning and pricing

total revenue formula

price x quantity sold

margincal cost

the change in total production costs that comes from making or producing 1 additonal unit important for profit maximisation