Financing Business

Finance decisions are probably one of the most important decisions managers have to make decisions on If financing is wrong then consequences can be disastrous Shortage of liquid funds is one of main reasons for business failure There are different ranges and choices of finance available and manages have to choose the appropriate one depending on the needs of the business

Financing Business Why might business activity require finance ?

Financing Business Why might business activity require finance ? Setting up Finance their working capital (day-to-day finance needed) Help fund growth i.e.. Buy the assets, takeover other firms Special situations like recession – loss in revenue may require firm needing finance to help keep the business going Finance for research into new products or markets

Financing Business Some of these cases are long term and some short term. Some even permanent Short term is usually about a year, medium term 1-5 yrs and long term 5 + Important to remember that all instances are of requiring finance are different. By this I mean that no source of finance is going to be suitable for all situations Managers have to decide what is most suitable

Financing Business Capital and Revenue Expenditure

Financing Business Capital and Revenue Expenditure Capital expenditure is the purchasing of assets – that usually last more than a year Revenue is spending on all costs and assets other than fixed assets and includes wages, salaries and materials bought Important to remember the difference between the two Financing these two expenditures differs in terms of the length of time the financing is required.

Financing Business Working Capital What do we understand by this term ?

Financing Business Working Capital What do we understand by this term ? Means the finance available within the company to pay for everyday things such as wages and stock. To work out what working capital is we:

Financing Business Working Capital What do we understand by this term ? Means the finance available within the company to pay for everyday things such as wages and stock. To work out what working capital is we: Current assets – current liabilities Current assets are:

Financing Business Working Capital What do we understand by this term ? Means the finance available within the company to pay for everyday things such as wages and stock. To work out what working capital is we: Current assets – current liabilities Current assets are: Stocks, debtors and cash in the bank Business cant really survive without these three Current liabilities are:

Financing Business Working Capital What do we understand by this term ? Means the finance available within the company to pay for everyday things such as wages and stock. To work out what working capital is we: Current assets – current liabilities Current assets are: Stocks, debtors and cash in the bank Business cant really survive without these three Current liabilities are: Creditors and overdrafts

Financing Business How much working capital is needed ? Having enough working capital is essential in preventing the company from becoming illiquid and not being able to pay debts. Why might it be a disadvantage to have too much working capital ?

Financing Business How much working capital is needed ? Having enough working capital is essential in preventing the company from becoming illiquid and not being able to pay debts. Why might it be a disadvantage to have too much working capital ? Having cash tied up somewhere else may prevent it being used better elsewhere in the business The actual working capital requirement for a business depends on the length of time taken to complete the working capital cycle. What do we think this is ? (p393)

Financing Business Where does finance come from ?

Financing Business Where does finance come from ? Internal and external source Internal

Financing Business Where does finance come from ? Internal and external source Internal Retained profits – lose some profit to tax and shareholder dividends. Anything left over is retained and becomes a future source of income. New businesses obviously will not have access to such funds Sale of asserts – established companies sometimes find that they have assets that are not being fully used so they decide to sell them and raise some cash. Some might be sold on leaseback which means they sell the asset and then lease it back. Reduction in working capital – when a business increases its stocks or sells on credit it uses sources of finance. When they reduce these assets – reducing working capital – you release capital which is another source of finance.

Financing Business External

Financing Business External Bank overdraft – the most flexible type of all the sources of finance. The amount raised varies day-to-day depending on the needs of the business. The amount that you can overdraw should be agreed in advance. This source carries high interest charges. Trade credit – by delaying payment you are effectively raising finance Debt factoring – selling your debtors to a debt factoring company. The longer you have a debtor the less amount finance can be raised. So you sell the debt for less than the original amount so you can raise finance. The other company makes a profit when the original debtor pays in full.

Financing Business Medium term finance

Financing Business Medium term finance Hire purchase – used to buy fixed assets with a life span of 1-5 yrs. Form of credit purchasing. Med – term bank loan – these are offered at either a fixed or variable rate. Fixed guarantees a certain amount of repayment. Can be expensive though if agreed at a high interest rate time. Variable obviously moves along with the interest rate. Long Term Finance Bank loan – same benefits and drawbacks as med-term Debentures – a company will issue or sell these to investors. They agree to pay a fixed rate of interest for each year of life of the debenture. If the investor wants a quicker return he can sell to other investor. If that’s part of the agreement then its called a mortgage debenture. Sale of shares – all limited companies can issue shares up to the limit of their authorised share capital. This type of capital doesn’t have to be repaid unless the company is completely wound up and ceases to trade.

Financing Business Private companies can sell further shares to existing shareholders. The advantage being that ownership doesn’t change as along as the shareholders buy shares in the same proportion to those already owned. Private companies also have the option of going public to raise a lot more capital This can be done two ways: AIM – Alternative Investment Market, which is part of the stock exchange but is concerned with smaller companies that only want to raise a limited amount of capital Apply for full listing – they must agree to selling a certain worth of shares and have a satisfactory trading record to offer security to investors.

Financing Business For revision help – Draw a table listing all the types of finance available, list whether they are short, middle or long term and list their advantages and disadvantages.