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FINANCE AND METHODS OF FINANCE
Finance means the management of the investment needed to open,run and grow a business
There are internal finance methods (investment that comes from ( within a business) and external finance methods (investment thatcomes from outside the business)
REASONS FOR RAISING FINANCE
To pay debts, this is likely to be a consolidation loan which may pay off suppliers
To help a business over a slow trading period - overdraft
To expand: a business may apply for long term finance such as a loan
To start-up a business may apply for a loan with a business plan or ask friends and family to invest
To buy stock: a business would ask a supplier for trade credit, typically 30, 60, 90 days
OWNERS CAPITAL
-This is also sometimes called owners equity
-It shows the stake the owner has in the business
-This represents the net assets of the company – if all the debts of the business were paid off how much would be owed to the owner
-The owner may have used savings or a redundancy pay out to start up the business, this is in theory still owed back to the owner, although they may never take it back out in the lifetime of the business
—> WHO? Sole traders and partnerships would be the two business forms which would mostly use owner’s capital to expand and to grow
RETAINED PROFIT
-After a year or more of trading a business may have some profits that they are able to re-invest into the business to help it grow. (the one left after paying taxes)
-The advantage of retained profits is there is no interest to pay
-The disadvantage is once retained profit is used it has gone and cannot be used elsewhere in the busines
When is NOT appropriate Retained Profit?
-If a business is in its first year of trading it will NOT have any retained profits – as it will not have made any to retain
-Also, if a business has not been profitable then there will NOT be any retained profit to spend
SALE OF ASSETS
-A business can raise finance by selling items that they already own,these are called assets
-This could be:
Machinery
Land
Premises
Vehicles
-The business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company – meaning the business will look less attractive to investors
When is the sale of assets appropriate?
-All types of business can sell their assets
-When a business is growing it may need to raise cash fast to be able to continue to trade
-Assets (like a van or an iPad) can be sold quickly (same day) for cash
Advantages of selling assets
-In a larger business which has a portfolio of products, then the sale of assets can improve efficiency and increase capacity utilisation
-Assets from one brand can be sold off to raise finance to invest in another
Disadvantages of selling assets
-This may not raise enough money for growth or expansion
-Selling assets may draw into question just how well run the business is, if it needs to sell its assets to pay bills or to continue to trade
-A new start-up would be in a lot of trouble if they needed to sell their assets. E.g. a café that has just opened could sell their coffee machine
