finance: money used to fund the business during the start-up, purchase large machinery, growth, or the running of the business

Internal sources of finance -

• Personal Funds

  • Advantages: no interest cost

  • Disadvantages: risk of personal debt

  • Limitations: limited by how much capital the individual has

• Retained Profits

  • Advantages: no interest payment

  • Disadvantages: can lead to stakeholder conflicts

  • Limitations: limited by amount of profit an individual makes

• Sale of Assets

  • Advantages: good source of finance

  • Disadvantages: Slower, can only sell it once, lose use of asset

  • Limitations: limited by value of asset

External sources of finance -

• Share capital

  • Use+Example: The money raised from selling shares in a limited liability company. (IPO or share issue/placement)

  • Advantages: Can provide a large amount of finance with no interest

  • Disadvantages: Diluting the ownership and control of the company

  • Limitations: Only applicable to corporations. Limited to the reputation of the company

• Loan capital

  • Use+Example: A medium to long source of finance by borrowing from commercial lenders such as banks, insurance companies

    • Mortgages: A loan only for property. Secured/collaterized, will seize property if you fail to pay

  • Advantages: Medium to long term source of finance (quick)

  • Disadvantages: High interest rates are imposed

  • Limitations: Bigger businesses typically have a better chance of getting loan capital

• Overdrafts

  • Use+Example: Businesses temporarily take out more money than they have in their bank account (very short term), deals with debit accounts

  • Advantages: Usually more cost-effective than loan capital since they are short-term sources of finance, convenient, large sum of cash when you are in a difficult situation, flexibility for uncertain events

  • Disadvantages: High interest rates (per day)

  • Limitations: Only useful when you know you have money coming in soon

• Trade Credit

  • Use+Example: An agreement between businesses that allows the buyer to pay the seller at a later date

  • Advantages: Provide flexibillity for a business that might ocasionally face cost flow problems. More cost effective than bank loans because red for short term sources of financed interest is charged daily only if business is over drawn on its account.

  • Disadvantages: Overdrafts are repayable on demand from lender.

  • Limitations:

• Crowdfunding

  • Use+Example: when a business venture or project is funded by a large number of people each contributing a small amount of money

  • Disadvantages: Loss of ownership and control as investors demand the right to shares in the new company

• Leasing

  • Use+Example: When the customer (lessee) pays a rental income to hire an asset from the leasing company (lessor)

    • Sale & leaseback: sale of assets on the condition that they lease it back to you

  • Advantages: cheaper to lease assets if a business does not have the capital to buy them in short-medium term, tax bill of lessee is reduced, repairs are not lessee’s problem, great for tech companies

  • Disadvantages: In the long-term, it is more expensive to lease assets than purchasing them

  • Limitations: depends on value and demand of the asset

• Microfinance Providers

  • Use+Example: institutions that provide banking services to low-income or unemployed individuals or groups who would otherwise have no other access to financial services.

• Business Angels

  • Use+Example: highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses. The wealthy indivisual invest their money in business that offer high growth potential.

Functions of a stock market:

• Provides market for second-hand shares

• Raise capital

• Regulate PLCs

Types of shares:

• Ordinary

  • Buyign ownership of the company

  • Can vote for board of directors

  • May get shares

• Preference

  • No ownership

  • No voting

  • Guaranteed dividends

  • not a big increase in value

Gearing Ratio:

• (debt capital / capital employed) x 100

• tells you what percentage of your capital comes from debt

• high ratio = owe more money, pay more interest which is coming from your profit

• capital employed = owners, share, debt

a year or less = short term

more than one year = long term

liquidation: take your assets you own and liquidate it (make it into sell by putting into sell in auction), banks get money, debentures, if anything left then goes to preferred/ordinary shareholders

capital expenditure: spend money on assets, things which are gonna stay long-term, and machinery

revenue expenditure: spend money on day to day things-

profit = total revenue - total cost

profit —> used to pay taxes, goes to owners/dividends, retained profit

within the same business, loans will always be more than retained profit

Evaluating Sources of finance for specific context-

• S

  • Size and status

• P

  • Purpose of the loan

• A

  • Amount required

• C

  • Cost of finance (for example interest rates. some have no cost such as share capital/retained profits. can also be opportunity costs.)

• E

  • External factors (economical situation, interest rates, inflation, rate of unemployment, currency, government policies)

• D

  • Duration

TC=TFC+VC(Q)

TR=P x Q

Profit = TR - TC

Average Revenue = TR/Q = P x Q / Q = P

Sales volume is the number of units you sell

Elasticity:

Elastic/Inelastic goods

price—> elasticity

growth—> economies of scale

finance—> cost and time

1. Revenue : C- Income that a firm receives from selling goods or services. Also known as “turnover” It is measured by number of units x the price

2. Price: F- The amount a business asks a customer to pay for a product or service

3. Sales: A- Refers to the number of products sold by a business

4. Costs: B- Are the spending that is necessary to set up and run the business

5. Fixed Costs: D- Costs that do not change when a business changes its level of output

6. Variable Costs: E- Costs that vary directly with the business’ level of output

7. Total Costs: G- Fixed costs plus variable costs

Break Even Analysis -

• tool used by businesses to calculate how many units it needs to sell in order to generate enough revenue to cover all its costs

• Break even point is when profit is equal to zero, when total revenue is equal to total costs