Vocabulary
the capital needed to pay tor raw materials, day-to-day running costs and credit offered to customers
working capital
</= 12 months is __________ finance
>12 months is ___________ finance
short-term and long-term
someone a business owes money to
Retained profit
Sale of unwanted assets
Reductions in working capital
Sale and leaseback of non-current assets
internal sources of finance
A high level of existing debt might mean that internal sources should be considered, such as the sale of assets
Level of existing borrowing (debt)
existing shareholders are given the right to buy additional shares at a discounted price
rights issue
- Setting up a business will require cash
- All businesses need to finance their working capital
why businesses need finance
Without sufficient working capital, a business will be ________ and unable to pay its immediate or short-term ________.
illiquid / debts
This is a form of credit for purchasing an asset over a period of time. This avoids making a large initial cash payment to buy the asset
hire purchase
Retained profit may be too low to provide the finance needed for a major expansion programme. External finance may be required too.
amount required
the ability of a business to pay its short-term debts
liquidity
inadequate finance leads to _________
business failure
When businesses expand, they generally need higher inventory levels and the total value of products sold on credit will increase. Therefore the increase in working capital will likely be __________
permanent
Hire purchase
Leasing
Share capital
Debentures
Bank (long-term) loans
Business mortgage
Government grant
Venture capital
long-term external finance sources (limited companies)
Permanent capital such as issues of shares may be needed for long-term business expansion or long-term research projects
why it is needed and how long it is needed for
long-term bonds issued by companies to raise debt finance, often with a fixed rate of interest
debentures
the three stages of a business failure
administration, bankruptcy and liquidation
- delaying payments to suppliers to increase the credit period
- only buying goods from suppliers who will offer credit
ways to manage working capital
- It never has to be repaid
- Dividends do not have to be paid every year
- It lowers the indebtedness of the business
advantages of share capital
If the owners want to retain control of the business at all costs, then a sale of shares might be unwise
form of business and ownership and desire to retain control
selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in exchange for immediate liquidity
factoring
When asked about the differences between ______ and _____, always emphasise the importance of having enough cash in the short term. Profit can wait to be earned in the long term, but cash payments are always being made
profit/cash or cash/profit
A major factor influencing the finance choice is the length of time each of these types of expenditure is required for
capital expenditure and revenue expenditure
- bank overdrafts and bank loans, including microfinance
- crowd funding
- credit from suppliers (trade payables)
- loans from family and friends
- owners’ investment
- taking on partners with capital to invest
sources of finance for unincorporated businesses
A Stock Exchange listing of a newly formed public limited company can cost millions of dollars in fees and promotion of the share sale
cost of finance