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Chapter 22 Business Finance - Needs and Sources

IGCSE Business Studies Slides

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376 views16 pages

Chapter 22 Business Finance - Needs and Sources

IGCSE Business Studies Slides

Uploaded by

Riaan van der Merwe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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IGCSE Business Studies

5.22 Business finance: Needs


and sources
Why do businesses need finance?

Finance is the money required in the business.

- Start a business (buying machinery, initial inventory)


- Expansion: growth (opening a new store, takeover)
- Day-to-day operations: paying suppliers and employees
Short-term vs Long term finance

Sources of finance
can be either:

Short-term Long-term

to cover day-to-day For larger investments that


operational costs, usually for will benefit the business for
up to a year several years

Revenue expenditure Capital expenditure

paying suppliers & wages buying property, machinery,


or technology.
Internal vs External sources of finance

Sources of finance
can be either:

Internal External

● Owners’ own investment ● Issue shares


● Sale of assets ● Bank loans
● Retained earnings ● Overdraft
● Selling inventory ● Trade credit
● Hire purchase
● Leasing
Sources of finance - internal - owner’s savings

Owner’s savings: For a sole trader and partnership, since they’re unincorporated (owners
and business is not separate), any finance the owner directly invests from hos own saving
will be internal finance.

Advantages:

– Will be available to the firm quickly

– No interest has to be paid.

Disadvantages:

Increases the risk taken by the owners.


Sources of finance - internal - Retained Profit

Retained Profit: profit kept in the business after owners have been given
their share of the profit. Firms can invest this profit back in the businesses.

Advantages:
– Does not have to be repaid, unlike, a loan.
– No interest has to be paid

Disadvantages:
– A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce
owner’s share of profit and they may resist the decision.
Sources of finance - internal - sale of inventory

Sale of inventories: sell of finished goods or unwanted components in


inventory.

Advantages:

– Reduces cost of holding inventories

Disadvantages:

If not enough inventory is kept, unexpected increase


demand form customers cannot be fulfilled
Sources of finance - internal - sale of existing assets

Sale of existing assets: assets that the business doesn’t need anymore, for
example, unused buildings or spare equipment can be sold to raise finance

Advantages:

– Makes better use of capital tied up in the business

– Does not become debt for the business

Disadvantages:

Surplus assets will not be available with new businesses

Takes time to sell the asset and the expected amount may
not be gained for the asset
Sources of finance - internal vs external

Is this a short-term or long-term need? What sources of finance would be suitable


(internal or external)?

Scenario 1: Expanding a Retail Scenario 2: Purchasing Raw


Store Materials

Scenario 4: Launching a New


Scenario 3: Upgrading Machinery Product

Scenario 5: Hiring Additional Scenario 6: Relocating to a Bigger


Staff Office
Sources of finance - external - issue of shares

Issue of shares: only for limited companies.

Advantages:

● A permanent source of capital, no need to repay


the money to shareholders
● no interest has to be paid

Disadvantages:

● Dividends have to be paid to the shareholders


● Dilution of shareholding and lose control
Sources of finance - external - bank loan

Bank Loan: money borrowed from bank.

Advantages:

● Quick to arrange a loan


● Can be for varying lengths of time
● Large companies can get very low rates of
interest on their loans

Disadvantages:

● Need to pay interest on the loan periodically


● It has to be repaid after a specified length of time
● Need to give the bank a collateral security
Sources of finance - external - debentures

Debentures: loan certificates issued by companies to individuals (similar to a loan)

Advantages:

● Can be used to raise very long-term finance.


● Usually issued by large companies (trusted by public)

Disadvantages:

● Need to pay interest on the loan periodically


● It has to be repaid after a specified length of time
Sources of finance - external - Government grants

Advantages:

● Do not have to be repaid, is free

Disadvantages:

● There are usually certain conditions to fulfil to


get a grant. Example, to locate in a particular
under-developed area.
Sources of finance - external - Factoring debtors

Factoring debtors: a debtor owes the business money for goods purchased on credit. Debt
factors are specialist agents that buy these debtors (amounts owed to the business) at a
discount.

Advantages:

● Immediate cash is available to the business


● Business doesn’t have to handle the debt collecting

Disadvantages:

● A percentage of the debts collected will be lost to


debt factor.
Sources of finance - external - Leasing vs Hire
Purchase

Leasing: Same as rent. The Hire purchase: business buys an


business pays monthly to use an asset and pays for it in monthly
asset, but never owns the asset. instalments that include interest
charges.
+ No need for a large sum of
capital to use the asset + The firms doesn’t need a
+ The business is not large sum of cash to acquire
responsible for maintenance the asset
- More expensive than other - Interest payments can be
forms of finance. quite high.
Sources of finance - external - Trade credit

Trade credit: this is when a business delays paying suppliers for some time.

Advantages:

● No interests, repayments involved

Disadvantages:

● If the payments are not made quickly, suppliers


may refuse to give discounts in the future or
refuse to supply at all

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