Chapter 26 – Cambridge Tutorial Business Finance Chapter 26 – Cambridge Tutorial

Learning Objectives Understand why business activity requires finance Recognise the difference between capital revenue expenditures and different needs for finance these creates Understand the importance of working capital to a business and how this can be managed Analyse the different sources of long, medium and short term finance both internal and external Select and justify appropriate sources of finance for different business needs

Why business activity requires finance Start-up capital: money needed to set up a business To finance working capital: the money needed to pay for raw materials, day-to-day running cost of the business For explanation Special situations like declines in sales many consumer default on their loans For R&D

Capital and revenue expenditure Capital expenditure: involves the purchase of assets that are expected to last for more than one year, such as building and machinery Revenue expenditure: is spending on other items than fixed assets that includes wages, materials…

Working capital Working capital allows business to day liquid Liquidity: the ability of a company to be able to pay its short-term debts. Current assets – current liabilities Liquidation is when companies stop business activities and sell it’s assets for cash to pay suppliers and other creditors.

How much working capital is needed? Materials and stock Production Sell on credit Cash Will depend on the working capital cycle the longer the cycle is the more working capital is needed

Where does finance come from? $ Internal: money raised from the business's own assets or from profits left in the business External: money raised from sources outside the business

External Sources of Finance Short term sources bank overdraft Trade credit (buying on credit) Debt factoring (selling receivables) Medium term sources Lease purchases Medium term loan Long term sources Long term bank loan Issuing bonds Issue shares Grants Venture capital

Chapter 27 - Cambridge Tutorial Forecasting Cash flow Chapter 27 - Cambridge Tutorial

Learning goals Understand the importance of cash to business Explain the difference between a firm’s cash flow and it’s profit Structure a cash-flow forecast and understand the sources of information needed for this Evaluate the problems of cash-flow forecasting Analyse the different causes of cash-flow problems Evaluate different methods of solving cash-flow problems

Importance of cash flow Paying bills and expenses of running a business New business are often offered much less time to pay suppliers

Forecasting cash flow Cash inflow Cash outflow Owner’s capital investments Customers’ cash purchases Debtors’ payments (debtors: customers who have bought products on credit and will pay cash at an agreed date in the future) Lease payment for premises Annual rent payment Electricity, gas, water and telephone bills Labour cost payments Variable cost payments such as cleaning materials

Key definitions on page 496 Cash-flow forecast: estimate of a firm’s future cash inflows and outflows. Net monthly cash flow: estimated difference between monthly cash inflows and outflows Opening cash balance: cash held by the business at the start of the month. Closing cash balance: cash held at the end of the month becomes next month’s opening balance.

What uses does this type of financial planning have? Can plan to raise money for times of negative cash flow Plan can be made to manage and reduce cash outflow if it lead to negative cash flow Cash flow statement is necessary to secure any debt.

The causes of cash-flow problems Lack of planning Poor credit control: not keep proper record of which customer paid and which need to pay Allowing customers too long to pay debt Expanding too quickly: expenses increase faster than revenue can be generated Unexpected events: such as breakdown in equipment

Ways to improve cash flow Lets look at page 501 together.