IB Business and Management 3.1 Sources of Finance

Learning Outcomes Role of Finance for Businesses (AO2) Capital Expenditure Revenue Expenditure Internal Sources of finance (AO2) Personal funds (for sole traders) Retained profit Sale of Assets External Sources of finance (AO2) Share capital Loan capital Overdrafts Trade Credit Grant Subsidies Debt Factoring Leasing Venture Capital Business Angels

Capital Vs Revenue Expenditure What is the difference? Capital Vs Revenue Expenditure

What would be the capital expenditures and revenue expenditures here?

What does the this mean? Sources Of Finance

Finance Businesses need money. This money can come from a range of different sources. These are known as ‘Sources of Finance’ What do businesses need money for? Brainstorm some ideas. Can these be grouped into categories?

4 key reasons why businesses need finance…. Start-up Working Capital Renewal Expansion Would these be revenue/capital expenditure?

Task – Brain storming Using the Mini-whiteboards….. Where do businesses get finance from? Write down a list of where you think this ‘money’ can come from

Internal V External Sources What is the difference? Internal V External Sources

Internal Vs External Sources Internal Sources of Finance External Sources of Finance Finance from within the business Usually involve no cost However…. Are finite and will not always be sufficient Finance from organisations outside of the business Usually involve paying interest OR selling part of the business Can be Short-term, medium term or long-term depending on the pay back period What organisations might provide external finance for businesses?

2 Types of Finance External Sources Internal Sources Factoring Company Banks Factoring Company External Sources Government Internal Sources Profits Assets Business Angels Creditors Owners/ shareholders Venture Capitalists Charities

Personal Funds (sole traders/partnerships) Sources of Finance Internal Retained Profit Sale of Fixed Assets Personal Funds (sole traders/partnerships) Sale and Leaseback External Short Term Overdraft Trade Credit Debt Factoring Medium Term Loan Capital Hire Purchase Leasing Long Term Share Issue Rights Issue Venture Capital Business Angels Grants and Subsidies Sell equity Increase Debt Lets be questioning….. What questions do you want to ask about this diagram?

Task Fill in the sources of finance table. The ‘How it works…’ column has already been filled in You need to match up the correct source of finance and then fill in the advantages and disadvantages columns. Feel free to use discussion and internet research to help you.

Choosing the right source of finance

Making the right choice…. In any given situation, businesses will have to make a choice about which source of finance to use (And so will you in your IB exam!!) Two things have to be considered…. What sources are available Which is the best option What factors are likely to affect the availability of finance in a given situation? What factors would a firm consider when deciding which is the best option?

Factors to consider - Choosing a source of finance Availability may be affected by: What the finance is needed for The ownership type/size of the business State of the economy Level of risk involved Business would then consider: How and when repayments will have to be made The level of the repayment How quickly the finance is needed The overall cost of borrowing the money The amount of finance needed Attitude towards diluting ownership 17

Task For each of these scenarios….. write a list of the options likely to be available Pick which you think is the BEST option 3. CAN YOU JUSTIFY YOUR ANSWER? Why is it better then other options? Why is it still the best option despite the downsides? Are there any conditions on your recommendation? Is there any other information you need to know? Task

Sandwich Delivery – Sole Trader The owner would like to replace his motor bike with a small van so he can transport a greater quantity of sandwiches

Clothing Manufacturer – Public Limited Company A successful clothing manufacturer needs finance to build an additional factory

Accountants- Partnership The firm are finding that their existing computers are difficult to maintain and are too slow. It needs ten new computers and software

Plumbers – Partnership The partners have recently expanded and need money to cover materials and additional running costs until they get paid by their customers

Farm – Private Limited Company The owners have decided to buy the vacant farm next to theirs, they need money to buy the land and also for farm machinery

Team Challenge The worksheet contains 14 different scenarios. For each scenario you should identify the best source of finance . There is a maximum of 5 points for correctly identifying the most appropriate source. House points for the winning team

IB Questions May 2014 Q1(e) Examine two appropriate sources of finance for AH Ltd to fund the replacement of the old equipment. [6 marks] Nov 2013 Q1(b) Explain two appropriate sources of finance that SF could use to purchase the 20 new scooters. [4 marks] Nov 2012 Q5(e) Discuss two possible medium- to long-term external sources of finance that IM could use to help solve its financial problems. [10 marks]