Business Finance Unit

Capital Expenditure

• Spending money on items to be used for many years - fixed assets

• Purpose: Generating long term profits

• High Initial cost

• Long term investments

• Can be used as collateral

• Examples

  • Grill at Whataburger 

  • Machinery and Equipment

  • Properties

  • Furniture

  • Computer software and hardware

  • Motor vehicles

  • Patents 

Revenue Expenditure

• Money spent on day-to-day operations

• Rent, wages, raw materials, insurance, etc

• Needs to be covered immediately

• Provides immediate benefits

• Should be limited  

Internal Sources of Finance

• Money coming from inside the company

  • Personal Funds

    • Money coming from the owner’s own pocket

    • Sole traders

    • Maximized control

    • Shows commitment

    • Great Risk, limited

  • Retained Profit (Ploughed-Back profit)

    • What u make put back into the company

    • Reinvested profit after taxes and dividends

    • How the business manages its profits

    • Cheap, permanent, flexible, controlled

    • Some Disadvantages

  • Sale of Assets

    • Selling unwanted or unused assets

    • Limited to an established business

    • Time consuming

    • Sale and Lease Back

External Sources of Finance 

• Share Capital

  • Sale of shares of a limited company- equity capital

  • Authorized share capital

  • Sale of shares of a public company- Stock Exchange

  • Permanent, no interest

  • Dividends, diluted ownership

• Crowdfunding

  • Asking a large amount of people for money

  • If u get more money, u can keep it

  • If u get less, u have to give it back 

  • ( All or nothing )

• Micro Providers

  • People who only provide a little bit of money for people who otherwise could not finance it themselves

  • Could be to people in minority groups

  • Only a little bit of money

• Loan Capital 

  • Debt Capital

  • Sourced from financial institutions

  • Repay principal plus interests

  • Fixed vs Variable interest rate

  • Accessible, quick control

• Overdrafts

  • Withdraw more than the business has in its account

  • Usually agreed on

  • Interest on the amount of overdrafts

  • Good for short term debts, flexible

  • Variable nature

• Trade Credit

  • Delayed Payment 

  • Max time period is 1-2 months

  • Better cash-flow position

  • Interest free

  • Lose out on discounts, poor relations

• Grants

  • Provided by government, foundation, trust - grant makers

  • Written proposal

  • Very Selective “strings attached”

  • Not paid back

• Subsidies 

  • Financial assistance by a government, NGO, or individual

  • Public Interest

  • Where market price is below price of production- Subvention

  • Lower prices, not repaid

  • Political Interference

• Debt Factoring

  • 3rd party collects debt owed to the business 

  • Immediate cash, less risk to business

  • Does not receive the full debt, loss of loyal customers

• Leasing

  • Agreement to use assets without purchasing them

  • Have to give it back at sometime 

  • Finance Leasing 

  • No need for high initial capital outlay, less responsibility 

  • More expensive in the long term, cannot be collateral

• Venture capital

  • High risk, high potential start 

  • Difficult to find alternate finance, provide guidance

  • Expect to benefit from profits

• Business Angles

  • Angles investors - provide finance for ownership equity

  • Basically like I’ll give u the money but then I basically own the company hahaha 

  • One time or continual investment

  • More favorable terms

  • Investor’s personal preference/type of asset under consideration

• Short, Medium, and Long Term 

  • Short term

    • Money for day to day operations

    • One year or less

    • Bank overdrafts, trade credit, debt factoring

  • Medium

    • Equipment/vehicles with specific lifespans 1-5 years

    • Leasing, medium term bank loans, grants

  • Long term

    • Long term fixed assets/expansion requirements

    • 5-30 years

    • Long term bank loans, share capital

Factors Influencing the Choice of a Source of Finance

• Purpose/Use of Funds

• Cost  (Opportunity Cost)

• Status and Size

• Amount Required

• Flexibility

• External Environment

• Gearing 

  • High Geared

  • Low Geared

Final Accounts

• Profit and loss account

  • AKA: Income Statement

  • Title: Statement of profit or loss for (business name), for the year ended (date)

  • All things that are negative go in ()

  • Correct order

    • Sales revenue

    • Cost of sales

    • Gross profit

    • Expenses 

    • Profit before interest and taxes

    • Interests

    • Profits before tax

    • Tax

    • Profit for period

    • Dividends

    • Retained Profit

• Balance Sheet

  • Definition: A view into a company’s asset, liabilities, and equity at a moment / snapshot in time

  • Main objective: Value of net assets must equal value of equity 

  • Assets= Liabilities + equity

  • Order of line items

    • Title: “Statement of financial position for (company name) as of (date)

    • Non-current assets (can’t be liquidated quickly)

      • Property, plant and equipment 

      • (accumulated depreciation) parenthesis bc negative

      • Total 

    • Current Assets

      • Cash

      • Debtors

      • Stock (inventory)

      • Total

    • Current liabilities

      • Overdrafts 

      • Trade credit

      • Short term loans

      • Total

    • Non-Current Liabilities

      • Long term loans

      • Totak

    • Net Assets

      • Overall value of assets after all liabilities have been pulled away

    • Equity

    • Share capital

    • Retained profits

Intangible assets

• Goodwill: The reputation of a company

  • Adds to a company’s market value

    • Value is subjective

    • Can lead to getting better employees

• Licenses: Gives consumer and businesses allowance to operate in a certain industry/ a certain product

  • No physical presence, but it has a legal and financial purpose

• Patents: official rights for a company to monetize and idea or product

  • Strictly for products as a whole

• Trademarks: official rights for a company to monetize branding

  • Catchphrases, logos, slogan, mascot, brand name, etc

  • Ex: Nike Logo

• Copyright:  gives official rights to the owner of creative intellectual property

  • Ex: Books, plays, art, academic work, songs, etc

Profitability ratio 

• 3 types

  • The Gross Profit Margin (GPM)

    • (gross profit margin / sales revenue) x 100

    • gross profit margin= sales revenue - costs

  • Profit Margin Ratio

    • (profit before interest & tax / Sales Revenue ) x 100

    • Profit before = sales revenue - cost of sales - overheads

  • Capital Employed

    • Value of the funds used to operate the business and generate financial return for the business

    • Capital return= Non-current Liabilities + Equity

  • Return on Capital Employed

    • (profit before interest and tax /  capital employed ) x 100

Efficiency Ratios

• 4 types

  • Stock Turnover

    • number of times stock is turned over:

      • Cost of sales  / average stock

    • Number of  days stock is turned over

      • (Average stock /  cost of sales ) x 365

  • Debtor Days

    • Debtor days ratio (number of days)

      • (debtors / total sales revenue ) x 365

  • Creditor Days

    • Creditor days ratio (number of days)

      • (creditors  / cost of sales) x 365

  • Gearing ratio

    • (non-current liabilities  / capital employed) x 100

Insolvency vs Bankruptcy

• Insolvency

  • Refers to a situation

  • Refers to a state of being

  • Not all insolvencies result in the declaration of bankruptcy

  • Situation that arises due to inability to pay rent

• Bankruptcy

  • Refers to a legal state

  • It is the conclusion

  • Insolvency precedes bankruptcy

  • Application is made to an authority as bankruptcy

Achieving Economies of Sale

• Lower total cost or raise total quantity

Dis Achieving Economies of scale

• Increasing total cost or decreasing total quantity

Direct costs

• Buy directly for your output. Like ingredients for a hamburger

Indirect Costs

• Not directly coordinated for the sale.  Like furniture

Depreciation

• The rate at which something loses its values. Left with residual value