Financial Needs of a business
Main reasons business needs finance
Start up a business
Expanding an existing business
Additional working capital
Profit kept in the business after the owners have taken their share
Retained profit
The bank gives a business the right to spend more money than is currently in the account.
Overdraft
The sums of money received by a business during
a period of time.
Cash inflows
Trade Credit
When a business delays paying its suppliers
The finance needed by a new business to pay for essential non-current (fixed) and current assets before it can begin trading.
Start-up capital
This source of funding came to be because:
- the size of the loans needed by customers (a few dollars)
-poorer groups have no assets to act as 'security'
Microfinance
A sum of money obtained from a bank which must be repaid and on which interest is payable
Bank loan
Name two common ways cash flows out of a business except:
- purchasing goods or materials for cash.
- purchasing non-current assets.
-paying creditors of the business.
Paying wages & salaries.
Repaying loans.
Long-term finance
Finance which is available for more than a year – and sometimes for very many years.
The finance needed by a business to pay its day-to-day costs.
Working Capital
Three characteristics of factoring debts
- Immediate cash is made available to the business.
- The risk of collecting the debt becomes the factor’s and not the business’s.
- The business does not receive 100 per cent of the value of its debts.
Name three characteristics of hire purchase.
- The business does not have to find a large cash sum to purchase the asset.
- A cash deposit is paid at the start of the period.
- Interest payments can be quite high.
The calculation for net cash flow.
Net cash flow= cash inflow - cash outflow
Debentures
Long-term loan certificates issued by limited companies.
Money spent on non-current (fixed) assets which will last for more than one year.
Capital Expenditure
Disadvantages of crowdfunding
- Crowdfunding platforms may reject an entrepreneur’s proposal if it is not well thought out.
- If the total amount required is not raised, the finance that has been promised will have to be repaid.
- Media interest and publicity need to be generated to increase the
chance of success.
- Publicising the new business idea or product on the crowdfunding platform could allow competitors to ‘steal’ the idea.
Name three sources of long-term finance except loans.
leasing, hire purchase, debentures & sale of shares.
When cash flow problems occur.
Giving out too much credit.
Short-term finance.
Provides the working capital needed by businesses for day-to-day operations.
Money spent on day-to-day expenses which do not involve the purchase of a long-term asset, for example, wages or rent.
Revenue Expenditure
Name 7 external sources of finance
Bank loans, debentures, micro-funding, crowdfunding, grants, debt factoring & sale of shares
Name five factors involved in choosing a source of finance.
Purpose & period of time required, amount required, risk, size of business, control over the business.
Name the five stages of the cashflow cycle.
1. cash is needed to pay for
2. materials, wages rent, etc.
3. goods produced.
4. goods sold.
5. cash payment received for goods sold.
Risk and gearing
The proportion of total capital raised from long-term loans.